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Goldman announces record profits in an economy that has been crushed and now lies bleeding, half dead, gasping for breath. Setting aside the government interventions that made this possible, this would raise some eyebrows, even if they weren’t in a government protected monopoly? I mean how can they possibly have record-breaking profits in this economy?
First, it’s a simple truth that there will always be winners and losers in a free market. So one has to be careful not to get caught up in the class-warfare rhetoric our ‘dear leader’ is spewing. I would rather provide a righteous, free market reason for disgust with Goldman and its ilk, one based on a desire for free people and free markets, which is the last thing Goldman Sachs represents. Put another way, I want you to be angry for the right reasons.
My background selling derivatives trading systems and risk management systems (I actually sold AIG trading and risk management software over a 10 yr period of time – they deserve exactly what they got, btw), as well as other technologies to Wall Street had me regularly interacting with Goldman folks over the years. One thing that is absolutely clear is that they are the A team in today’s global financial markets. They hire the best and pay the best. They do things well and are amongst the smartest folks in the business. Goldman’s business is global and diversified, participating in many businesses that would surprise you. I shared a flight with a Goldman banker once and he put it this way. “Goldman will buy anything it can sell at a profit.” This reveals what is important to Goldman – profit, no matter what. It’s their mantra and their singular focus. In and of itself, there is nothing wrong with profit, which comes from pursuing one’s self interest, and it is our right to do so as free people, but there is nothing else before or after it for these guys. They are the quintessential soulless bankers, making nothing, serving no one above themselves, dedicated only to profit. They are essentially the biggest, baddest sharks in the tanks, continuously searching for their next meal. So perhaps they are just better, right, and deserve those profits by just being the best capitalists, right?
Wrong! First, Goldman engages in what is arguably the most unethical trading practice of our time, High Frequency Trading. Reliable estimates put the profit from this activity at about four billion dollars per year. Goldman is able to take advantage of its privileged position on the New York Stock Exchange (and other exchanges) to in essence, legally front-run customer orders. Using arcane computer algorithms, they skim very minute sums trillions of times, which add up to billions for them. Other firms do this, but Goldman is the king of this practice, running 50-60 percent of program trading on the NYSE by some estimates. This is a morally reprehensible practice and adds up to a rent Goldman et al are able to collect on all firms buying and selling securities. You know, idiots like you an me, who try and pick a stock that might be a good company or pension funds, mutual funds – any market participant. Oh yeah, did I forget to mention this practice is nearly riskless for them? Nice work if you can get it, and the idiots in our government (both on the left and the right) are bamboozled by these clowns into believing that the liquidity this activity provides is a good thing for markets. One has to ask how we got along before it? Answer, just fine. In the indictment against Goldman Sachs, this is “Count 1″. In and of itself, it should be enough to fine them, sue them and perhaps even arrest some folks who work there. Besides all that legal and regulatory stuff, lets be clear about one thing that is certain. This is not free market activity: they are leveraging a privilege they are granted by government to trade securities. In other words, the privilege they and a small number of other firms enjoy is not something any other market participant has. This is the antithesis of free markets and is much better described as crony-capitalism. I don’t blame them for doing it – they are programmed to exploit every opportunity they find. I blame our regulators for creating this opportunity for them. There is a move afoot to end it, but they are fighting it tooth and nail.
Count 2. Goldman Sachs may very well have committed securities fraud by selling mortgage related securities to investors as sound investments while its proprietary trading operations were getting rid of its mortgage exposure in every way possible. In other words – they lied to their customers. This case is foundering around right now and may never get to a courthouse, but two facts are undeniable. One, they used an offshore entity they created to deal in the mortgage markets, selling products in a way that gave them some legal protection from fraud, which if they had done this in their U.S. subsidiaries it would be an open and shut case. This is evidence of their consciousness of guilt. Two, their proprietary activities reflected the exact opposite view. Whether it’s ultimately found to be technically illegal or not – they are scum and deserve our moral outrage.
Count 3. Backroom deals with between the Fed and AIG hedged every penny of counterparty credit risk it had with AIG in its derivatives business, which was very significant (over ten billion usd). Goldman Sachs (and others) were protected in a way that only privileged entities in our economy are. Separately they benefited from other government interventions, but this single action insulated them from the bad decision they made in assessing AIG’s credit worthiness, giving them something from government that very few other free market participants ever have – a free ride at the expense of the tax payers. There is ample evidence that Geithner et al connived to hide these actions, and that Goldman actively sought these protections – again, they knew exactly what they were doing. This too is morally reprehensible.
I’m trying not to be overly technical here because that is a weapon that these kinds of hucksters use to bully many folks into submission while they rob us blind. You know in your gut that this is rotten business, even in if you can’t keep track of the shell game these guys play. Trust your gut, these guys are at a minimum, morally corrupt. Whether they are criminals or not is an entirely different question because that’s the way these guys play. They use different jurisdictions, legal constructs and entities to do one thing brilliantly – create profit themselves obscenely while maintaining the pretense of complying with the rules of the road. They intentionally arbitrage regulatory authorities and structures with their business model and strategies. They are not daring capitalists, competing on some open field and winning by dint of their innovation and efficiency, no, they are rent seeking, arbitrage playing, scalping animals who should be reviled only a little less than the feckless regulators and politicians who do their bidding.
