The first thing you need to know about Goldman Sachs is that it's

> everywhere. The world's most powerful investment bank is a great vampire

> squid wrapped around the face of humanity, relentlessly jamming its blood

> funnel into anything that smells like money. In fact, the history of the

> recent financial crisis, which doubles as a history of the rapid decline and

> fall of the suddenly swindled dry American empire, reads like a Who's Who of

> Goldman Sachs graduates.

>

> By now, most of us know the major players. As George Bush's last Treasury

> secretary, former Goldman CEO Henry Paulson was the architect of the

> bailout, a suspiciously self-serving plan to funnel trillions of Your

> Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill

> Clinton's former Treasury secretary, spent 26 years at Goldman before

> becoming chairman of Citigroup — which in turn got a $300 billion taxpayer

> bailout from Paulson. There's John Thain, the chief of Merrill Lynch who

> bought an $87,000 area rug for his office as his company was imploding; a

> former Goldman banker, Thain enjoyed a multibilliondollar handout from

> Paulson, who used billions in taxpayer funds to help Bank of America rescue

> Thain's sorry company. And Robert Steel, the former Goldmanite head of

> Wachovia, scored himself and his fellow executives $225 million in

> goldenparachute payments as his bank was selfdestructing. There's Joshua

> Bolten, Bush's chief of staff during the bailout, and Mark Patterson, the

> current Treasury chief of staff, who was a Goldman lobbyist just a year ago,

> and Ed Liddy, the former Goldman director whom Paulson put in charge of

> bailedout insurance giant AIG, which forked over $13 billion to Goldman

> after Liddy came on board. The heads of the Canadian and Italian national

> banks are Goldman alums, as is the head of the World Bank, the head of the

> New York Stock Exchange, the last two heads of the Federal Reserve Bank of

> New York — which, incidentally, is now in charge of overseeing Goldman.

>

> But then, any attempt to construct a narrative around all the former

> Goldmanites in influential positions quickly becomes an absurd and pointless

> exercise, like trying to make a list of everything. What you need to know is

> the big picture: If America is circling the drain, Goldman Sachs has found a

> way to be that drain — an extremely unfortunate loophole in the system of

> Western democratic capitalism, which never foresaw that in a society

> governed passively by free markets and free elections, organized greed

> always defeats disorganized democracy.

>

> The bank's unprecedented reach and power have enabled it to turn all of

> America into a giant pumpanddump scam, manipulating whole economic sectors

> for years at a time, moving the dice game as this or that market collapses,

> and all the time gorging itself on the unseen costs that are breaking

> families everywhere — high gas prices, rising consumercredit rates,

> halfeaten pension funds, mass layoffs, future taxes to pay off bailouts. All

> that money that you're losing, it's going somewhere, and in both a literal

> and a figurative sense, Goldman Sachs is where it's going: The bank is a

> huge, highly sophisticated engine for converting the useful, deployed wealth

> of society into the least useful, most wasteful and insoluble substance on

> Earth — pure profit for rich individuals.

>

> They achieve this using the same playbook over and over again. The formula

> is relatively simple: Goldman positions itself in the middle of a

> speculative bubble, selling investments they know are crap. Then they hoover

> up vast sums from the middle and lower floors of society with the aid of a

> crippled and corrupt state that allows it to rewrite the rules in exchange

> for the relative pennies the bank throws at political patronage. Finally,

> when it all goes bust, leaving millions of ordinary citizens broke, they

> begin the entire process over again, riding in to rescue us all by lending

> us back our own money at interest, selling themselves as men above greed,

> just a bunch of really smart guys keeping the wheels greased. They've been

> pulling this same stunt over and over since the 1920s — and now they're

> preparing to do it again, creating what may be the biggest and most

> audacious bubble yet.

>

> If you want to understand how we got into this financial crisis, you have to

> first understand where all the money went — and in order to understand that,

> you need to understand what Goldman has already gotten away with. It is a

> history exactly five bubbles long — including last year's strange and

> seemingly inexplicable spike in the price of oil. There were a lot of losers

> in each of those bubbles, and in the bailout that followed. But Goldman

> wasn't one of them.

>

> BUBBLE #1 The Great Depression

>

> Goldman wasn't always a too-big-to-fail Wall Street behemoth, the ruthless

> face of kill-or-be-killed capitalism on steroids — just almost always. The

> bank was actually founded in 1869 by a German immigrant named Marcus

> Goldman, who built it up with his soninlaw Samuel Sachs. They were pioneers

> in the use of commercial paper, which is just a fancy way of saying they

> made money lending out shortterm IOUs to smalltime vendors in downtown

> Manhattan.

>

> You can probably guess the basic plotline of Goldman's first 100 years in

> business: plucky, immigrantled investment bank beats the odds, pulls itself

> up by its bootstraps, makes loads of money. In that ancient history there's

> really only one episode that bears scrutiny now, in light of more recent

> events: Goldman's disastrous foray into the speculative mania of precrash

> Wall Street in the late 1920s.

>

> This great Hindenburg of financial history has a few features that might

> sound familiar. Back then, the main financial tool used to bilk investors

> was called an "investment trust." Similar to modern mutual funds, the trusts

> took the cash of investors large and small and (theoretically, at least)

> invested it in a smorgasbord of Wall Street securities, though the

> securities and amounts were often kept hidden from the public. So a regular

> guy could invest $10 or $100 in a trust and feel like he was a big player.

> Much as in the 1990s, when new vehicles like day trading and etrading

> attracted reams of new suckers from the sticks who wanted to feel like big

> shots, investment trusts roped a new generation of regular guy investors

> into the speculation game.

>

> Beginning a pattern that would repeat itself over and over again, Goldman

> got into the investmenttrust game late, then jumped in with both feet and

> went hogwild. The first effort was the Goldman Sachs Trading Corporation;

> the bank issued a million shares at $100 apiece, bought all those shares

> with its own money and then sold 90 percent of them to the hungry public at

> $104. The trading corporation then relentlessly bought shares in itself,

> bidding the price up further and further. Eventually it dumped part of its

> holdings and sponsored a new trust, the Shenandoah Corporation, issuing

> millions more in shares in that fund — which in turn sponsored yet another

> trust called the Blue Ridge Corporation. In this way, each investment trust

> served as a front for an endless investment pyramid: Goldman hiding behind

> Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue

> Ridge, 6,250,000 were actually owned by Shenandoah — which, of course, was

> in large part owned by Goldman Trading.

>

> The end result (ask yourself if this sounds familiar) was a daisy chain of

> borrowed money, one exquisitely vulnerable to a decline in performance

> anywhere along the line. The basic idea isn't hard to follow. You take a

> dollar and borrow nine against it; then you take that $10 fund and borrow

> $90; then you take your $100 fund and, so long as the public is still

> lending, borrow and invest $900. If the last fund in the line starts to lose

> value, you no longer have the money to pay back your investors, and everyone

> gets massacred.

>

> In a chapter from The Great Crash, 1929 titled "In Goldman Sachs We Trust,"

> the famed economist John Kenneth Galbraith held up the Blue Ridge and

> Shenandoah trusts as classic examples of the insanity of leverage based

> investment. The trusts, he wrote, were a major cause of the market's

> historic crash; in today's dollars, the losses the bank suffered totaled

> $475 billion. "It is difficult not to marvel at the imagination which was

> implicit in this gargantuan insanity," Galbraith observed, sounding like

> Keith Olbermann in an ascot. "If there must be madness, something may be

> said for having it on a heroic scale."

>

> BUBBLE #2 Tech Stocks

>

> Fast-forward about 65 years. Goldman not only survived the crash that wiped

> out so many of the investors it duped, it went on to become the chief

> underwriter to the country's wealthiest and most powerful corporations.

> Thanks to Sidney Weinberg, who rose from the rank of janitor's assistant to

> head the firm, Goldman became the pioneer of the initial public offering,

> one of the principal and most lucrative means by which companies raise

> money. During the 1970s and 1980s, Goldman may not have been the

> planet-eating Death Star of political influence it is today, but it was a

> topdrawer firm that had a reputation for attracting the very smartest talent

> on the Street.

>

> It also, oddly enough, had a reputation for relatively solid ethics and a

> patient approach to investment that shunned the fast buck; its executives

> were trained to adopt the firm's mantra, "longterm greedy." One former

> Goldman banker who left the firm in the early Nineties recalls seeing his

> superiors give up a very profitable deal on the grounds that it was a

> longterm loser. "We gave back money to 'grownup' corporate clients who had

> made bad deals with us," he says. "Everything we did was legal and fair —

> but 'longterm greedy' said we didn't want to make such a profit at the

> clients' collective expense that we spoiled the marketplace."

>

> But then, something happened. It's hard to say what it was exactly; it might

> have been the fact that Goldman's cochairman in the early Nineties, Robert

> Rubin, followed Bill Clinton to the White House, where he directed the

> National Economic Council and eventually became Treasury secretary. While

> the American media fell in love with the story line of a pair of babyboomer,

> Sixtieschild, Fleetwood Mac yuppies nesting in the White House, it also

> nursed an undisguised crush on Rubin, who was hyped as without a doubt the

> smartest person ever to walk the face of the Earth, with Newton, Einstein,

> Mozart and Kant running far behind.

>

> Rubin was the prototypical Goldman banker. He was probably born in a $4,000

> suit, he had a face that seemed permanently frozen just short of an apology

> for being so much smarter than you, and he exuded a Spock-like,

> emotion-neutral exterior; the only human feeling you could imagine him

> experiencing was a nightmare about being forced to fly coach. It became

> almost a national clichè that whatever Rubin thought was best for the

> economy

—

a phenomenon that reached its apex in 1999, when Rubin appeared on

> the cover of Time with his Treasury deputy, Larry Summers, and Fed chief

> Alan Greenspan under the headline The Committee To Save The World. And "what

> Rubin thought," mostly, was that the American economy, and in particular the

> financial markets, were over-regulated and needed to be set free. During his

> tenure at Treasury, the Clinton White House made a series of moves that

> would have drastic consequences for the global economy

—

beginning with

> Rubin's complete and total failure to regulate his old firm during its first

> mad dash for obscene short-term profits.

>

> The basic scam in the Internet Age is pretty easy even for the financially

> illiterate to grasp. Companies that weren't much more than potfueled ideas

> scrawled on napkins by uptoolate bongsmokers were taken public via IPOs,

> hyped in the media and sold to the public for mega-millions. It was as if

> banks like Goldman were wrapping ribbons around watermelons, tossing them

> out 50-story windows and opening the phones for bids. In this game you were

> a winner only if you took your money out before the melon hit the pavement.

>

> It sounds obvious now, but what the average investor didn't know at the time

> was that the banks had changed the rules of the game, making the deals look

> better than they actually were. They did this by setting up what was, in

> reality, a two-tiered investment system

—

one for the insiders who knew the

> real numbers, and another for the lay investor who was invited to chase

> soaring prices the banks themselves knew were irrational. While Goldman's

> later pattern would be to capitalize on changes in the regulatory

> environment, its key innovation in the Internet years was to abandon its own

> industry's standards of quality control.

>

> "Since the Depression, there were strict underwriting guidelines that Wall

> Street adhered to when taking a company public," says one prominent

> hedge-fund manager. "The company had to be in business for a minimum of five

> years, and it had to show profitability for three consecutive years. But

> Wall Street took these guidelines and threw them in the trash." Goldman

> completed the snow job by pumping up the sham stocks: "Their analysts were

> out there saying Bullshit.com is worth $100 a share."

>

> The problem was, nobody told investors that the rules had changed. "Everyone

> on the inside knew," the manager says. "Bob Rubin sure as hell knew what the

> underwriting standards were. They'd been intact since the 1930s."

>

> Jay Ritter, a professor of finance at the University of Florida who

> specializes in IPOs, says banks like Goldman knew full well that many of the

> public offerings they were touting would never make a dime. "In the early

> Eighties, the major underwriters insisted on three years of profitability.

> Then it was one year, then it was a quarter. By the time of the Internet

> bubble, they were not even requiring profitability in the foreseeable

> future."

>

> Goldman has denied that it changed its underwriting standards during the

> Internet years, but its own statistics belie the claim. Just as it did with

> the investment trust in the 1920s, Goldman started slow and finished crazy

> in the Internet years. After it took a littleknown company with weak

> financials called Yahoo! public in 1996, once the tech boom had already

> begun, Goldman quickly became the IPO king of the Internet era. Of the 24

> companies it took public in 1997, a third were losing money at the time of

> the IPO. In 1999, at the height of the boom, it took 47 companies public,

> including stillborns like Webvan and eToys, investment offerings that were

> in many ways the modern equivalents of Blue Ridge and Shenandoah. The

> following year, it underwrote 18 companies in the first four months, 14 of

> which were money losers at the time. As a leading underwriter of Internet

> stocks during the boom, Goldman provided profits far more volatile than

> those of its competitors: In 1999, the average Goldman IPO leapt 281 percent

> above its offering price, compared to the Wall Street average of 181

> percent.

>

> How did Goldman achieve such extraordinary results? One answer is that they

> used a practice called "laddering," which is just a fancy way of saying they

> manipulated the share price of new offerings. Here's how it works: Say

> you're Goldman Sachs, and Bullshit.com comes to you and asks you to take

> their company public. You agree on the usual terms: You'll price the stock,

> determine how many shares should be released and take the Bullshit.com CEO

> on a "road show" to schmooze investors, all in exchange for a substantial

> fee (typically six to seven percent of the amount raised). You then promise

> your best clients the right to buy big chunks of the IPO at the low offering

> price

— let's say Bullshit.com's starting share price is $15 —

in exchange

> for a promise that they will buy more shares later on the open market. That

> seemingly simple demand gives you inside knowledge of the IPO's future,

> knowledge that wasn't disclosed to the daytrader schmucks who only had the

> prospectus to go by: You know that certain of your clients who bought X

> amount of shares at $15 are also going to buy Y more shares at $20 or $25,

> virtually guaranteeing that the price is going to go to $25 and beyond. In

> this way, Goldman could artificially jack up the new company's price, which

> of course was to the bank's benefit

—

a six percent fee of a $500 million

> IPO is serious money.

>

> Goldman was repeatedly sued by shareholders for engaging in laddering in a

> variety of Internet IPOs, including Webvan and NetZero. The deceptive

> practices also caught the attention of Nicholas Maier, the syndicate manager

> of Cramer & Co., the hedge fund run at the time by the now-famous chattering

> television host Jim Cramer, himself a Goldman alum. Maier told the SEC that

> while working for Cramer between 1996 and 1998, he was repeatedly forced to

> engage in laddering practices during IPO deals with Goldman.

>

> "Goldman, from what I witnessed, they were the worst perpetrator," Maier

> said. "They totally fueled the bubble. And it's specifically that kind of

> behavior that has caused the market crash. They built these stocks upon an

> illegal foundation

— manipulated up —

and ultimately, it really was the

> small person who ended up buying in." In 2005, Goldman agreed to pay $40

> million for its laddering violations

—

a puny penalty relative to the

> enormous profits it made. (Goldman, which has denied wrongdoing in all of

> the cases it has settled, refused to respond to questions for this story.)

>

> Another practice Goldman engaged in during the Internet boom was "spinning,"

> better known as bribery. Here the investment bank would offer the executives

> of the newly public company shares at extra-low prices, in exchange for

> future underwriting business. Banks that engaged in spinning would then

> undervalue the initial offering price

—

ensuring that those "hot"

> opening-price shares it had handed out to insiders would be more likely to

> rise quickly, supplying bigger firstday rewards for the chosen few. So

> instead of Bullshit.com opening at $20, the bank would approach the

> Bullshit.com CEO and offer him a million shares of his own company at $18 in

> exchange for future business

—

effectively robbing all of Bullshit's new

> shareholders by diverting cash that should have gone to the company's bottom

> line into the private bank account of the company's CEO.

>

> In one case, Goldman allegedly gave a multimillion-dollar special offering

> to eBay CEO Meg Whitman, who later joined Goldman's board, in exchange for

> future i-banking business. According to a report by the House Financial

> Services Committee in 2002, Goldman gave special stock offerings to

> executives in 21 companies that it took public, including Yahoo! cofounder

> Jerry Yang and two of the great slithering villains of the financial-scandal

> age

—

Tyco's Dennis Kozlowski and Enron's Ken Lay. Goldman angrily denounced

> the report as "an egregious distortion of the facts"

—

shortly before paying

> $110 million to settle an investigation into spinning and other

> manipulations launched by New York state regulators. "The spinning of hot

> IPO shares was not a harmless corporate perk," then-attorney general Eliot

> Spitzer said at the time. "Instead, it was an integral part of a fraudulent

> scheme to win new investment-banking business."

>

> Such practices conspired to turn the Internet bubble into one of the

> greatest financial disasters in world history: Some $5 trillion of wealth

> was wiped out on the NASDAQ alone. But the real problem wasn't the money

> that was lost by shareholders, it was the money gained by investment

> bankers, who received hefty bonuses for tampering with the market. Instead

> of teaching Wall Street a lesson that bubbles always deflate, the Internet

> years demonstrated to bankers that in the age of freely flowing capital and

> publicly owned financial companies, bubbles are incredibly easy to inflate,

> and individual bonuses are actually bigger when the mania and the

> irrationality are greater.

>

> Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid

> out $28.5 billion in compensation and benefits

—

an average of roughly

> $350,000 a year per employee. Those numbers are important because the key

> legacy of the Internet boom is that the economy is now driven in large part

> by the pursuit of the enormous salaries and bonuses that such bubbles make

> possible. Goldman's mantra of "long-term greedy" vanished into thin air as

> the game became about getting your check before the melon hit the pavement.

>

> The market was no longer a rationally managed place to grow real, profitable

> businesses: It was a huge ocean of Someone Else's Money where bankers hauled

> in vast sums through whatever means necessary and tried to convert that

> money into bonuses and payouts as quickly as possible. If you laddered and

> spun 50 Internet IPOs that went bust within a year, so what? By the time the

> Securities and Exchange Commission got around to fining your firm $110

> million, the yacht you bought with your IPO bonuses was already six years

> old. Besides, you were probably out of Goldman by then, running the U.S.

> Treasury or maybe the state of New Jersey. (One of the truly comic moments

> in the history of America's recent financial collapse came when Gov. Jon

> Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320

> million in IPO-fattened stock, insisted in 2002 that "I've never even heard

> the term 'laddering' before.")

>

> For a bank that paid out $7 billion a year in salaries, $110 million fines

> issued half a decade late were something far less than a deterrent

—

they

> were a joke. Once the Internet bubble burst, Goldman had no incentive to

> reassess its new, profit-driven strategy; it just searched around for

> another bubble to inflate. As it turns out, it had one ready, thanks in

> large part to Rubin.

>

> BUBBLE #3 The Housing Craze

>

> Goldman's role in the sweeping global disaster that was the housing bubble

> is not hard to trace. Here again, the basic trick was a decline in

> underwriting standards, although in this case the standards weren't in IPOs

> but in mortgages. By now almost everyone knows that for decades mortgage

> dealers insisted that home buyers be able to produce a down payment of 10

> percent or more, show a steady income and good credit rating, and possess a

> real first and last name. Then, at the dawn of the new millennium, they

> suddenly threw all that out the window and started writing mortgages on the

> backs of napkins to cocktail waitresses and excons carrying five bucks and a

> Snickers bar.

>

> None of that would have been possible without investment bankers like

> Goldman, who created vehicles to package those mortgages and sell them en

> masse to unsuspecting insurance companies and pension funds. This created a

> mass market for toxic debt that would never have existed before; in the old

> days, no bank would have wanted to keep some addict ex-con's mortgage on its

> books, knowing how likely it was to fail. You can't write these mortgages,

> in other words, unless you can sell them to someone who doesn't know what

> they are.

>

> Goldman used two methods to hide the mess they were selling. First, they

> bundled hundreds of different mortgages into instruments called

> Collateralized Debt Obligations. Then they sold investors on the idea that,

> because a bunch of those mortgages would turn out to be OK, there was no

> reason to worry so much about the bad ones: The CDO, as a whole, was sound.

> Thus, junkrated mortgages were turned into AAArated investments. Second, to

> hedge its own bets, Goldman got companies like AIG to provide insurance

—

> known as creditdefault swaps

—

on the CDOs. The swaps were essentially a

> racetrack bet between AIG and Goldman: Goldman is betting the excons will

> default, AIG is betting they won't.

>

> There was only one problem with the deals: All of the wheeling and dealing

> represented exactly the kind of dangerous speculation that federal

> regulators are supposed to rein in. Derivatives like CDOs and credit swaps

> had already caused a series of serious financial calamities: Procter &

> Gamble and Gibson Greetings both lost fortunes, and Orange County,

> California, was forced to default in 1994. A report that year by the

> Government Accountability Office recommended that such financial instruments

> be tightly regulated

—

and in 1998, the head of the Commodity Futures

> Trading Commission, a woman named Brooksley Born, agreed. That May, she

> circulated a letter to business leaders and the Clinton administration

> suggesting that banks be required to provide greater disclosure in

> derivatives trades, and maintain reserves to cushion against losses.

>

> More regulation wasn't exactly what Goldman had in mind. "The banks go

> crazy

—

they want it stopped," says Michael Greenberger, who worked for Born

> as director of trading and markets at the CFTC and is now a law professor at

> the University of Maryland. "Greenspan, Summers, Rubin and [SEC chief

> Arthur] Levitt want it stopped."

>

> Clinton's reigning economic foursome

—

"especially Rubin," according to

> Greenberger

—

called Born in for a meeting and pleaded their case. She

> refused to back down, however, and continued to push for more regulation of

> the derivatives. Then, in June 1998, Rubin went public to denounce her move,

> eventually recommending that Congress strip the CFTC of its regulatory

> authority. In 2000, on its last day in session, Congress passed the

> now-notorious Commodity Futures Modernization Act, which had been inserted

> into an 11,000-page spending bill at the last minute, with almost no debate

> on the floor of the Senate. Banks were now free to trade default swaps with

> impunity.

>

> But the story didn't end there. AIG, a major purveyor of default swaps,

> approached the New York State Insurance Department in 2000 and asked whether

> default swaps would be regulated as insurance. At the time, the office was

> run by one Neil Levin, a former Goldman vice president, who decided against

> regulating the swaps. Now freed to underwrite as many housingbased

> securities and buy as much credit-default protection as it wanted, Goldman

> went berserk with lending lust. By the peak of the housing boom in 2006,

> Goldman was underwriting $76.5 billion worth of mortgagebacked securities

—

> a third of which were subprime

—

much of it to institutional investors like

> pensions and insurance companies. And in these massive issues of real estate

> were vast swamps of crap.

>

> Take one $494 million issue that year, GSAMP Trust 2006S3. Many of the

> mortgages belonged to secondmortgage borrowers, and the average equity they

> had in their homes was 0.71 percent. Moreover, 58 percent of the loans

> included little or no documentation

—

no names of the borrowers, no

> addresses of the homes, just zip codes. Yet both of the major ratings

> agencies, Moody's and Standard & Poor's, rated 93 percent of the issue as

> investment grade. Moody's projected that less than 10 percent of the loans

> would default. In reality, 18 percent of the mortgages were in default

> within 18 months.

>

> Not that Goldman was personally at any risk. The bank might be taking all

> these hideous, completely irresponsible mortgages from

> beneath-gangster-status firms like Countrywide and selling them off to

> municipalities and pensioners

— old people, for God's sake —

pretending the

> whole time that it wasn't gradeD. But even as it was doing so, it was taking

> short positions in the same market, in essence betting against the same crap

> it was selling. Even worse, Goldman bragged about it in public. "The

> mortgage sector continues to be challenged," David Viniar, the bank's chief

> financial officer, boasted in 2007. "As a result, we took significant

> markdowns on our long inventory positions … However, our risk bias in that

> market was to be short, and that net short position was profitable." In

> other words, the mortgages it was selling were for chumps. The real money

> was in betting against those same mortgages.

>

> "That's how audacious these people are," says one hedgefund manager. "At

> least with other banks, you could say that they were just dumb

—

they

> believed what they were selling, and it blew them up. Goldman knew what it

> was doing."

>

> I ask the manager how it could be that selling something to customers that

> you're actually betting against

—

particularly when you know more about the

> weaknesses of those products than the customer

—

doesn't amount to

> securities fraud.

>

> "It's exactly securities fraud," he says. "It's the heart of securities

> fraud."

>

> Eventually, lots of aggrieved investors agreed. In a virtual repeat of the

> Internet IPO craze, Goldman was hit with a wave of lawsuits after the

> collapse of the housing bubble, many of which accused the bank of

> withholding pertinent information about the quality of the mortgages it

> issued. New York state regulators are suing Goldman and 25 other

> underwriters for selling bundles of crappy Countrywide mortgages to city and

> state pension funds, which lost as much as $100 million in the investments.

> Massachusetts also investigated Goldman for similar misdeeds, acting on

> behalf of 714 mortgage holders who got stuck holding predatory loans. But

> once again, Goldman got off virtually scot-free, staving off prosecution by

> agreeing to pay a paltry $60 million

—

about what the bank's CDO division

> made in a day and a half during the real estate boom.

>

> The effects of the housing bubble are well known

—

it led more or less

> directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose

> toxic portfolio of credit swaps was in significant part composed of the

> insurance that banks like Goldman bought against their own housing

> portfolios. In fact, at least $13 billion of the taxpayer money given to AIG

> in the bailout ultimately went to Goldman, meaning that the bank made out on

> the housing bubble twice: It screwed the investors who bought their CDOs by

> betting against its own crappy product, then it turned around and screwed

> the taxpayer by making him pay off those same bets.

>

> And once again, while the world was crashing down all around the bank,

> Goldman made sure it was doing just fine in the compensation department. In

> 2006, the firm's payroll jumped to $16.5 billion

—

an average of $622,000

> per employee. As a Goldman spokesman explained, "We work very hard here."

>

> But the best was yet to come. While the collapse of the housing bubble sent

> most of the financial world fleeing for the exits, or to jail, Goldman

> boldly doubled down

—

and almost single-handedly created yet another bubble,

> one the world still barely knows the firm had anything to do with.

>

> BUBBLE #4 $4 a Gallon

>

> By the beginning of 2008, the financial world was in turmoil. Wall Street

> had spent the past two and a half decades producing one scandal after

> another, which didn't leave much to sell that wasn't tainted. The terms junk

> bond, IPO, subprime mortgage and other once-hot financial fare were now

> firmly associated in the public's mind with scams; the terms credit swaps

> and CDOs were about to join them. The credit markets were in crisis, and the

> mantra that had sustained the fantasy economy throughout the Bush years

—

> the notion that housing prices never go down

—

was now a fully exploded

> myth, leaving the Street clamoring for a new paradigm to sling.

>

> Where to go? With the public reluctant to put money in anything that felt

> like a paper investment, the Street quietly moved the casino to the

> physical-commodities market

—

stuff you could touch: corn, coffee, cocoa,

> wheat and, above all, energy commodities, especially oil. In conjunction

> with a decline in the dollar, the credit crunch and the housing crash caused

> a "flight to commodities." Oil futures in particular skyrocketed, as the

> price of a single barrel went from around $60 in the middle of 2007 to a

> high of $147 in the summer of 2008.

>

> That summer, as the presidential campaign heated up, the accepted

> explanation for why gasoline had hit $4.11 a gallon was that there was a

> problem with the world oil supply. In a classic example of how Republicans

> and Democrats respond to crises by engaging in fierce exchanges of moronic

> irrelevancies, John McCain insisted that ending the moratorium on offshore

> drilling would be "very helpful in the short term," while Barack Obama in

> typical liberal-arts yuppie style argued that federal investment in hybrid

> cars was the way out.

>

> But it was all a lie. While the global supply of oil will eventually dry up,

> the shortterm flow has actually been increasing. In the six months before

> prices spiked, according to the U.S. Energy Information Administration, the

> world oil supply rose from 85.24 million barrels a day to 85.72 million.

> Over the same period, world oil demand dropped from 86.82 million barrels a

> day to 86.07 million. Not only was the shortterm supply of oil rising, the

> demand for it was falling

—

which, in classic economic terms, should have

> brought prices at the pump down.

>

> So what caused the huge spike in oil prices? Take a wild guess. Obviously

> Goldman had help

—

there were other players in the physical commodities

> market

—

but the root cause had almost everything to do with the behavior of

> a few powerful actors determined to turn the once solid market into a

> speculative casino. Goldman did it by persuading pension funds and other

> large institutional investors to invest in oil futures

—

agreeing to buy oil

> at a certain price on a fixed date. The push transformed oil from a physical

> commodity, rigidly subject to supply and demand, into something to bet on,

> like a stock. Between 2003 and 2008, the amount of speculative money in

> commodities grew from $13 billion to $317 billion, an increase of 2,300

> percent. By 2008, a barrel of oil was traded 27 times, on average, before it

> was actually delivered and consumed.

>

> As is so often the case, there had been a Depression-era law in place

> designed specifically to prevent this sort of thing. The commodities market

> was designed in large part to help farmers: A grower concerned about future

> price drops could enter into a contract to sell his corn at a certain price

> for delivery later on, which made him worry less about building up stores of

> his crop. When no one was buying corn, the farmer could sell to a middleman

> known as a "traditional speculator," who would store the grain and sell it

> later, when demand returned. That way, someone was always there to buy from

> the farmer, even when the market temporarily had no need for his crops.

>

> In 1936, however, Congress recognized that there should never be more

> speculators in the market than real producers and consumers. If that

> happened, prices would be affected by something other than supply and

> demand, and price manipulations would ensue. A new law empowered the

> Commodity Futures Trading Commission

—

the very same body that would later

> try and fail to regulate credit swaps

—

to place limits on speculative

> trades in commodities. As a result of the CFTC's oversight, peace and

> harmony reigned in the commodities markets for more than 50 years.

>

> All that changed in 1991 when, unbeknownst to almost everyone in the world,

> a Goldman-owned commodities trading subsidiary called J. Aron wrote to the

> CFTC and made an unusual argument. Farmers with big stores of corn, Goldman

> argued, weren't the only ones who needed to hedge their risk against future

> price drops

—

Wall Street dealers who made big bets on oil prices also

> needed to hedge their risk, because, well, they stood to lose a lot too.

>

> This was complete and utter crap

—

the 1936 law, remember, was specifically

> designed to maintain distinctions between people who were buying and selling

> real tangible stuff and people who were trading in paper alone. But the

> CFTC, amazingly, bought Goldman's argument. It issued the bank a free pass,

> called the "Bona Fide Hedging" exemption, allowing Goldman's subsidiary to

> call itself a physical hedger and escape virtually all limits placed on

> speculators. In the years that followed, the commission would quietly issue

> 14 similar exemptions to other companies.

>

> Now Goldman and other banks were free to drive more investors into the

> commodities markets, enabling speculators to place increasingly big bets.

> That 1991 letter from Goldman more or less directly led to the oil bubble in

> 2008, when the number of speculators in the market

—

driven there by fear of

> the falling dollar and the housing crash

—

finally overwhelmed the real

> physical suppliers and consumers. By 2008, at least three quarters of the

> activity on the commodity exchanges was speculative, according to a

> congressional staffer who studied the numbers

—

and that's likely a

> conservative estimate. By the middle of last summer, despite rising supply

> and a drop in demand, we were paying $4 a gallon every time we pulled up to

> the pump.

>

> What is even more amazing is that the letter to Goldman, along with most of

> the other trading exemptions, was handed out more or less in secret. "I was

> the head of the division of trading and markets, and Brooksley Born was the

> chair of the CFTC," says Greenberger, "and neither of us knew this letter

> was out there." In fact, the letters only came to light by accident. Last

> year, a staffer for the House Energy and Commerce Committee just happened to

> be at a briefing when officials from the CFTC made an offhand reference to

> the exemptions.

>

> "I had been invited to a briefing the commission was holding on energy," the

> staffer recounts. "And suddenly in the middle of it, they start saying,

> 'Yeah, we've been issuing these letters for years now.' I raised my hand and

> said, 'Really? You issued a letter? Can I see it?' And they were like, 'Duh,

> duh.' So we went back and forth, and finally they said, 'We have to clear it

> with Goldman Sachs.' I'm like, 'What do you mean, you have to clear it with

> Goldman Sachs?'"

>

> The CFTC cited a rule that prohibited it from releasing any information

> about a company's current position in the market. But the staffer's request

> was about a letter that had been issued 17 years earlier. It no longer had

> anything to do with Goldman's current position. What's more, Section 7 of

> the 1936 commodities law gives Congress the right to any information it

> wants from the commission. Still, in a classic example of how complete

> Goldman's capture of government is, the CFTC waited until it got clearance

> from the bank before it turned the letter over.

>

> Armed with the semi-secret government exemption, Goldman had become the

> chief designer of a giant commodities betting parlor. Its Goldman Sachs

> Commodities Index

—

which tracks the prices of 24 major commodities but is

> overwhelmingly weighted toward oil

—

became the place where pension funds

> and insurance companies and other institutional investors could make massive

> longterm bets on commodity prices. Which was all well and good, except for a

> couple of things. One was that index speculators are mostly "long only"

> bettors, who seldom if ever take short positions

—

meaning they only bet on

> prices to rise. While this kind of behavior is good for a stock market, it's

> terrible for commodities, because it continually forces prices upward. "If

> index speculators took short positions as well as long ones, you'd see them

> pushing prices both up and down," says Michael Masters, a hedgefund manager

> who has helped expose the role of investment banks in the manipulation of

> oil prices. "But they only push prices in one direction: up."

>

> Complicating matters even further was the fact that Goldman itself was

> cheerleading with all its might for an increase in oil prices. In the

> beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an "oracle of

> oil" by The New York Times, predicted a "super spike" in oil prices,

> forecasting a rise to $200 a barrel. At the time Goldman was heavily

> invested in oil through its commodities trading subsidiary, J. Aron; it also

> owned a stake in a major oil refinery in Kansas, where it warehoused the

> crude it bought and sold. Even though the supply of oil was keeping pace

> with demand, Murti continually warned of disruptions to the world oil

> supply, going so far as to broadcast the fact that he owned two hybrid cars.

> High prices, the bank insisted, were somehow the fault of the piggish

> American consumer; in 2005, Goldman analysts insisted that we wouldn't know

> when oil prices would fall until we knew "when American consumers will stop

> buying gas-guzzling sport utility vehicles and instead seek fuel-efficient

> alternatives."

>

> But it wasn't the consumption of real oil that was driving up prices

—

it

> was the trade in paper oil. By the summer of 2008, in fact, commodities

> speculators had bought and stockpiled enough oil futures to fill 1.1 billion

> barrels of crude, which meant that speculators owned more future oil on

> paper than there was real, physical oil stored in all of the country's

> commercial storage tanks and the Strategic Petroleum Reserve combined. It

> was a repeat of both the Internet craze and the housing bubble, when Wall

> Street jacked up present day profits by selling suckers shares of a

> fictional fantasy future of endlessly rising prices.

>

> In what was by now a painfully familiar pattern, the oil-commodities melon

> hit the pavement hard in the summer of 2008, causing a massive loss of

> wealth; crude prices plunged from $147 to $33. Once again the big losers

> were ordinary people. The pensioners whose funds invested in this crap got

> massacred: CalPERS, the California Public Employees' Retirement System, had

> $1.1 billion in commodities when the crash came. And the damage didn't just

> come from oil. Soaring food prices driven by the commodities bubble led to

> catastrophes across the planet, forcing an estimated 100 million people into

> hunger and sparking food riots throughout the Third World.

>

> Now oil prices are rising again: They shot up 20 percent in the month of May

> and have nearly doubled so far this year. Once again, the problem is not

> supply or demand. "The highest supply of oil in the last 20 years is now,"

> says Rep. Bart Stupak, a Democrat from Michigan who serves on the House

> energy committee. "Demand is at a 10-year low. And yet prices are up."

>

> Asked why politicians continue to harp on things like drilling or hybrid

> cars, when supply and demand have nothing to do with the high prices, Stupak

> shakes his head. "I think they just don't understand the problem very well,"

> he says. "You can't explain it in 30 seconds, so politicians ignore it."

>

> BUBBLE #5 Rigging the Bailout

>

> After the oil bubble collapsed last fall, there was no new bubble to keep

> things humming

—

this time, the money seems to be really gone, like

> worldwide-depression gone. So the financial safari has moved elsewhere, and

> the big game in the hunt has become the only remaining pool of dumb,

> unguarded capital left to feed upon: taxpayer money. Here, in the biggest

> bailout in history, is where Goldman Sachs really started to flex its

> muscle.

>

> It began in September of last year, when then-Treasury secretary Paulson

> made a momentous series of decisions. Although he had already engineered a

> rescue of Bear Stearns a few months before and helped bail out quasi-private

> lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers

—

> one of Goldman's last real competitors

—

collapse without intervention.

> ("Goldman's superhero status was left intact," says market analyst Eric

> Salzman, "and an investment banking competitor, Lehman, goes away.") The

> very next day, Paulson greenlighted a massive, $85 billion bailout of AIG,

> which promptly turned around and repaid $13 billion it owed to Goldman.

> Thanks to the rescue effort, the bank ended up getting paid in full for its

> bad bets: By contrast, retired auto workers awaiting the Chrysler bailout

> will be lucky to receive 50 cents for every dollar they are owed.

>

> Immediately after the AIG bailout, Paulson announced his federal bailout for

> the financial industry, a $700 billion plan called the Troubled Asset Relief

> Program, and put a heretofore unknown 35 yearold Goldman banker named Neel

> Kashkari in charge of administering the funds. In order to qualify for

> bailout monies, Goldman announced that it would convert from an investment

> bank to a bank holding company, a move that allows it access not only to $10

> billion in TARP funds, but to a whole galaxy of less conspicuous, publicly

> backed funding

—

most notably, lending from the discount window of the

> Federal Reserve. By the end of March, the Fed will have lent or guaranteed

> at least $8.7 trillion under a series of new bailout programs

—

and thanks

> to an obscure law allowing the Fed to block most congressional audits, both

> the amounts and the recipients of the monies remain almost entirely secret.

>

> Converting to a bank-holding company has other benefits as well: Goldman's

> primary supervisor is now the New York Fed, whose chairman at the time of

> its announcement was Stephen Friedman, a former co-chairman of Goldman

> Sachs. Friedman was technically in violation of Federal Reserve policy by

> remaining on the board of Goldman even as he was supposedly regulating the

> bank; in order to rectify the problem, he applied for, and got, a conflict

> of interest waiver from the government. Friedman was also supposed to divest

> himself of his Goldman stock after Goldman became a bankholding company, but

> thanks to the waiver, he was allowed to go out and buy 52,000 additional

> shares in his old bank, leaving him $3 million richer. Friedman stepped down

> in May, but the man now in charge of supervising Goldman

—

New York Fed

> president William Dudley

—

is yet another former Goldmanite.

>

> The collective message of all this

—

the AIG bailout, the swift approval for

> its bank holding conversion, the TARP funds

—

is that when it comes to

> Goldman Sachs, there isn't a free market at all. The government might let

> other players on the market die, but it simply will not allow Goldman to

> fail under any circumstances. Its edge in the market has suddenly become an

> open declaration of supreme privilege. "In the past it was an implicit

> advantage," says Simon Johnson, an economics professor at MIT and former

> official at the International Monetary Fund, who compares the bailout to the

> crony capitalism he has seen in Third World countries. "Now it's more of an

> explicit advantage."

>

> Once the bailouts were in place, Goldman went right back to business as

> usual, dreaming up impossibly convoluted schemes to pick the American

> carcass clean of its loose capital. One of its first moves in the

> postbailout era was to quietly push forward the calendar it uses to report

> its earnings, essentially wiping December 2008

—

with its $1.3 billion in

> pretax losses

—

off the books. At the same time, the bank announced a highly

> suspicious $1.8 billion profit for the first quarter of 2009

—

which

> apparently included a large chunk of money funneled to it by taxpayers via

> the AIG bailout. "They cooked those firstquarter results six ways from

> Sunday," says one hedgefund manager. "They hid the losses in the orphan

> month and called the bailout money profit."

>

> Two more numbers stand out from that stunning first-quarter turnaround. The

> bank paid out an astonishing $4.7 billion in bonuses and compensation in the

> first three months of this year, an 18 percent increase over the first

> quarter of 2008. It also raised $5 billion by issuing new shares almost

> immediately after releasing its firstquarter results. Taken together, the

> numbers show that Goldman essentially borrowed a $5 billion salary payout

> for its executives in the middle of the global economic crisis it helped

> cause, using halfbaked accounting to reel in investors, just months after

> receiving billions in a taxpayer bailout.

>

> Even more amazing, Goldman did it all right before the government announced

> the results of its new "stress test" for banks seeking to repay TARP money

—

> suggesting that Goldman knew exactly what was coming. The government was

> trying to carefully orchestrate the repayments in an effort to prevent

> further trouble at banks that couldn't pay back the money right away. But

> Goldman blew off those concerns, brazenly flaunting its insider status.

> "They seemed to know everything that they needed to do before the stress

> test came out, unlike everyone else, who had to wait until after," says

> Michael Hecht, a managing director of JMP Securities. "The government came

> out and said, 'To pay back TARP, you have to issue debt of at least five

> years that is not insured by FDIC

—

which Goldman Sachs had already done, a

> week or two before."

>

> And here's the real punch line. After playing an intimate role in four

> historic bubble catastrophes, after helping $5 trillion in wealth disappear

> from the NASDAQ, after pawning off thousands of toxic mortgages on

> pensioners and cities, after helping to drive the price of gas up to $4 a

> gallon and to push 100 million people around the world into hunger, after

> securing tens of billions of taxpayer dollars through a series of bailouts

> overseen by its former CEO, what did Goldman Sachs give back to the people

> of the United States in 2008?

>

> Fourteen million dollars.

>

> That is what the firm paid in taxes in 2008, an effective tax rate of

> exactly one, read it, one percent. The bank paid out $10 billion in

> compensation and benefits that same year and made a profit of more than $2

> billion

—

yet it paid the Treasury less than a third of what it forked over

> to CEO Lloyd Blankfein, who made $42.9 million last year.

>

> How is this possible? According to Goldman's annual report, the low taxes

> are due in large part to changes in the bank's "geographic earnings mix." In

> other words, the bank moved its money around so that most of its earnings

> took place in foreign countries with low tax rates. Thanks to our completely

> flawed corporate tax system, companies like Goldman can ship their revenues

> offshore and defer taxes on those revenues indefinitely, even while they

> claim deductions upfront on that same untaxed income. This is why any

> corporation with an at least occasionally sober accountant can usually find

> a way to zero out its taxes. A GAO report, in fact, found that between 1998

> and 2005, roughly two thirds of all corporations operating in the U.S. paid

> no taxes at all.

>

> This should be a pitchforklevel outrage

—

but somehow, when Goldman released

> its post-bailout tax profile, hardly anyone said a word. One of the few to

> remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas who

> serves on the House Ways and Means Committee. "With the right hand out

> begging for bailout money," he said, "the left is hiding it offshore."

>

> BUBBLE #6 Global Warming

>

> Fast-forward to today. It's early June in Washington, D.C. Barack Obama, a

> popular young politician whose leading private campaign donor was an

> investment bank called Goldman Sachs

—

its employees paid some $981,000 to

> his campaign

—

sits in the White House. Having seamlessly navigated the

> political minefield of the bailout era, Goldman is once again back to its

> old business, scouting out loopholes in a new government-created market with

> the aid of a new set of alumni occupying key government jobs.

>

> Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief

> of staff Mark Patterson and CFTC chief Gary Gensler, both former

> Goldmanites. (Gensler was the firm's cohead of finance.) And instead of

> credit derivatives or oil futures or mortgage-backed CDOs, the new game in

> town, the next bubble, is in carbon credits

—

a booming trillion dollar

> market that barely even exists yet, but will if the Democratic Party that it

> gave $4,452,585 to in the last election manages to push into existence a

> groundbreaking new commodities bubble, disguised as an "environmental plan,"

> called cap-and-trade.

>

> The new carbon credit market is a virtual repeat of the commodities-market

> casino that's been kind to Goldman, except it has one delicious new wrinkle:

> If the plan goes forward as expected, the rise in prices will be

> government-mandated. Goldman won't even have to rig the game. It will be

> rigged in advance.

>

> Here's how it works: If the bill passes, there will be limits for coal

> plants, utilities, natural-gas distributors and numerous other industries on

> the amount of carbon emissions (a.k.a. greenhouse gases) they can produce

> per year. If the companies go over their allotment, they will be able to buy

> "allocations" or credits from other companies that have managed to produce

> fewer emissions. President Obama conservatively estimates that about $646

> billion worth of carbon credits will be auctioned in the first seven years;

> one of his top economic aides speculates that the real number might be twice

> or even three times that amount.

>

> The feature of this plan that has special appeal to speculators is that the

> "cap" on carbon will be continually lowered by the government, which means

> that carbon credits will become more and more scarce with each passing year.

> Which means that this is a brand new commodities market where the main

> commodity to be traded is guaranteed to rise in price over time. The volume

> of this new market will be upwards of a trillion dollars annually; for

> comparison's sake, the annual combined revenues of all electricity suppliers

> in the U.S. total $320 billion.

>

> Goldman wants this bill. The plan is (1) to get in on the ground floor of

> paradigm-shifting legislation, (2) make sure that they're the profit making

> slice of that paradigm and (3) make sure the slice is a big slice. Goldman

> started pushing hard for cap andt rade long ago, but things really ramped up

> last year when the firm spent $3.5 million to lobby climate issues. (One of

> their lobbyists at the time was none other than Patterson, now Treasury

> chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he

> personally helped author the bank's environmental policy, a document that

> contains some surprising elements for a firm that in all other areas has

> been consistently opposed to any sort of government regulation. Paulson's

> report argued that "voluntary action alone cannot solve the climate change

> problem." A few years later, the bank's carbon chief, Ken Newcombe, insisted

> that cap and trade alone won't be enough to fix the climate problem and

> called for further public investments in research and development. Which is

> convenient, considering that Goldman made early investments in wind power

> (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is

> an investor in a firm called Changing World Technologies) and solar power

> (it partnered with BP Solar), exactly the kind of deals that will prosper if

> the government forces energy producers to use cleaner energy. As Paulson

> said at the time, "We're not making those investments to lose money."

>

> The bank owns a 10 percent stake in the Chicago Climate Exchange, where the

> carbon credits will be traded. Moreover, Goldman owns a minority stake in

> Blue Source LLC, a Utah-based firm that sells carbon credits of the type

> that will be in great demand if the bill passes. Nobel Prize winner Al Gore,

> who is intimately involved with the planning of cap-and-trade, started up a

> company called Generation Investment Management with three former bigwigs

> from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter

> Harris. Their business? Investing in carbon offsets. There's also a $500

> million Green Growth Fund set up by a Goldmanite to invest in greentech …

> the list goes on and on. Goldman is ahead of the headlines again, just

> waiting for someone to make it rain in the right spot. Will this market be

> bigger than the energy futures market?

>

> "Oh, it'll dwarf it," says a former staffer on the House energy committee.

>

> Well, you might say, who cares? If cap-and-trade succeeds, won't we all be

> saved from the catastrophe of global warming? Maybe

—

but cap and trade, as

> envisioned by Goldman, is really just a carbon tax structured so that

> private interests collect the revenues. Instead of simply imposing a fixed

> government levy on carbon pollution and forcing unclean energy producers to

> pay for the mess they make, cap-and-trade will allow a small tribe of

> greedy-as-hell Wall Street swine to turn yet another commodities market into

> a private tax collection scheme. This is worse than the bailout: It allows

> the bank to seize taxpayer money before it's even collected.

>

> "If it's going to be a tax, I would prefer that Washington set the tax and

> collect it," says Michael Masters, the hedgefund director who spoke out

> against oil futures speculation. "But we're saying that Wall Street can set

> the tax, and Wall Street can collect the tax. That's the last thing in the

> world I want. It's just asinine."

>

> Cap-and-trade is going to happen. Or, if it doesn't, something like it will.

> The moral is the same as for all the other bubbles that Goldman helped

> create, from 1929 to 2009. In almost every case, the very same bank that

> behaved recklessly for years, weighing down the system with toxic loans and

> predatory debt, and accomplishing nothing but massive bonuses for a few

> bosses, has been rewarded with mountains of virtually free money and

> government guarantees

—

while the actual victims in this mess, ordinary