As soon as I heard Part Three of CBC’s The Current on Monday I knew it deserved wide distribution. Doomers should first visit The Current’s show archive for April 27, 2009. What follows is an unauthorized Doom transcript for that third half hour, a lively interview with the prize-winning author of a new exposé on Goldman Sachs, their peer banksters and political accomplices.  Canadian Doomers especially note the references to the origins of ABCP and the Goldman alumnus presently leading our central bank.

I recommend listening to the Part Three tape to get the full flavor of the interview.  It pretty well stands alone, but I’ve taken the liberty of annotating the text with links to further information on names and terms that may not be immediately obvious to a general audience.

Unauthorized transcript for …

Monday, April 27, 2009 — Part 3: Goldman Sachs

Anna Maria Tremonti: [00:00] Hello, I’m Anna Maria Tremonti, and this is The Current.

Jon Stewart: Does anybody out there have some damn’d good economic news?

Reporter 1: A big earnings surprise from Goldman Sachs late today. The giant investment firm reported a quarterly profit more than double analysts’ estimates.

Reporter 2: The estimates were over a billion and a half dollars for Goldman.

Jon Stewart: Whoo Hooo!! Recession’s over bejins! … [laughter] … Wall Street is back!! The big dogs are out! [applause] … wait a minute, wait a minute … is this the same Goldman Sachs that took $10 billion in taxpayer bailout money less than 6 months ago? Ah, that’s amazing. Now, just a few months later, turn a $1.5 billion profit. You pull that off you’d think the Treasury Secretary who designed the bailout used to be Goldman’s CEO or some– … [laughter] … oh really, he — [laughter] … oh really, Hank Paulson literally left Goldman Sachs to take the Treasury job. Wow …

AMT: … well that was The Daily Show’s Jon Stewart riffing on Goldman Sachs right after the banking giant shocked analysts with a 1st quarter profit of $1.8 billion. More about that in a minute. But to be fair, the company also announced that it wants to pay off half of what Jon Stewart correctly identified as a $10 billion loan from the US government.

He’s right as well on another thing. The relationship between Goldman Sachs and the US federal government is tight and it pretty much has been for as long as the company has been around.

According to David Cay Johnston, that has allowed Goldman Sachs to turn itself into one of the most powerful and influential companies in the US and beyond, able to bend and shape the economic policies of one US administation after another.

David Cay Johnston is a Pulitzer Prize winning investigative reporter who teaches at Syracuse University’s Law School. He is also the author of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill). He’s in Rochester New York. Good morning.

David Cay Johnston: Good Morning Anna Maria.

AMT: Just how closely is the US government linked to Goldman Sachs?

DCJ: Oh, they’re joined at the hip.

Let’s see: the immediate previous Treasury Secretary came from Goldman Sachs, Robert Rubin, who was Clinton’s last Treasury Secretary came from Goldman Sachs. The US government is full of people from Goldman Sachs, as is a lot of the rest of corporate America.

AMT: Now Goldman Sachs is consistently listed as one of the best employers to work for, it’s known for having a unique and successful corporate culture. What is it that makes Goldman Sachs stand out from its competitors?

DCJ: They pay people really, really well, and they’ve been masterful at taking the best talent, getting the most out of them, and promoting people based on their success in doing what Goldman does, which is make money.

AMT: Now what accounts for that fabled status on Wall Street, then?

DCJ: Well, Goldman is at the apex of the American Capitalist System, and it has its fingers everywhere. The Governor of New Jersey is a former Goldman Sachs person. The chief of staff to former President George W. Bush, Joshua Bolten, was from there. Erin Burnett, who you see as the host on the CNBC show, came from there. Jim Cramer came from there.

They are all over the place. People come to Goldman hoping to get rich. They make money. If they see that, for whatever reason, they’re not going to rise to the very top they move on. And people at Goldman have consistently done very well running other enterprises, because Goldman’s method of training and teaching people instills in them the judgment, the skills at deciding on priorities, and at basically cajolling people, cajolling customers so that they get what it is they’re after.

AMT: Well I want to talk more about Goldman’s political influence, but before we go to that let’s go back to the beginning. The company was set up in 1869 by a German immigrant Marcus Goldman. Who was he?

DCJ: Goldman was founded in 1869, by a Jewish immigrant named Marcus Goldman, in a period where Wall Street had very few Jews who were around. There was a great deal of anti-semitism for decades after that in the United States. And they pioneered the creation and the use of Commercial Paper. That is, you have money that you’re going to need to make payroll, or pay a vendor shortly, but you want to put it to work today. And instead of putting it in a bank, and banks were pretty much unregulated back then, you made these transactions where you would essentially loan that money out to someone else. That’s the part of the shadow banking system we have today.

And by devising this private system for allowing people to temporarily put money to work for themselves, Goldman prospered and grew and over time of course they had to be able to measure how reliable these issuers of commercial paper were, because your concern is "will I get my money back if I buy their commercial paper?"

AMT: You know, in John Kenneth Galbraith’s book about the Great Depression, there’s a whole chapter devoted to the questionable dealings that triggered the stock market bust of the ’20s. And it’s called "In Goldman Sachs We Trust." What was Goldman Sachs up to before and during The Depression?

DCJ: Well, in the 1920s, a period very much like what we’ve seen in recent history in the stock markets in the United States, [05:00] Goldman got into promoting trading, and it got into something called The Blue Ridge Corporation. It was an investment trust.

This trust, and a related company called the Shenandoah Corporation, basically went bust. And Galbraith had a great insight into this. He said that this may have marked the first time in history that stock swindlers managed to swindle themselves.

Goldman was not destroyed, its reputation was damaged, but it could have brought them down. And instead they managed to get through this and went on to do a very good job of a number of other things.

For example in the 1950s, Ford Motor Company, which had been private, became a public company. They handled that deal. Everybody in the world wanted to make Ford a public company, and they’re the ones who pulled it off.

AMT: So if we shoot ahead, over the last 60 years, Goldman Sachs has become a major global player. It’s branched out into a number of areas. Can you give us a sense of the bank’s scope?

DCJ: Name an important area of finance in the world and you will find Goldman Sachs: Russian bonds, currency trading, international arrangements between the largest companies in the world. Goldman has been involved in brokering transactions ranging from municipal sewer bonds in the Midwest to helping foreign governments raise capital so that those governments don’t collapse.

AMT: In terms of geopolitics, I’ve even heard that they watch the way of the world in terms of financial acquisitions or investments or decisions. Even things like famine.

DCJ: Yes. They’ve been very good at spotting trends, analyzing data and discovering where there are going to be opportunities, and to give you an example of how thorough they are about this — a few years ago they sold bonds for the state of California …

AMT: um hmm …

DCJ: … and then Goldman turned right around and advised clients to short these bonds [laughs] indicating they didn’t have faith the bonds would hold up.

AMT: Could they do that?

DCJ: Sure, sure. Once they’d sold the bonds there was no question they could do this. And Goldman was deeply into the securitization of things. This is perhaps the biggest influence that Goldman has had on the American economy and its current problems.

It used to be, you’d go to the bank to get a mortgage, and the bank holds that mortgage, or they maybe sold it to Fannie Mae or Freddie Mac.

Well, Goldman came along and said, "Wait a second, we can take a whole bundle of mortgages. We will sell them off to pension funds, charitable endowments, wealthy investors, and securitize them. We’ll do this with automobile loans. We’ll do this with credit card debt. We’ll do it with any kind of debt."

And this securitization opened up a lot of finance. And it’s an important reason that in the United States corporate profits from finance have gone from about 16 percent of all profits 20 years or so ago to more than 40 percent of profits in recent years.

AMT: And isn’t that securitization also the reason things have gone bad?

DCJ: Absolutely. What happened, when you create securitization, I would argue, what you’re doing is separating risk from responsibility.

Goldman would take these loans, package them, sell them off to people. And the people who originally made the loans have no responsibility for them. They no longer own them. They’ve sold them. They’ve collected their fee up front, and the more toxic the loan they sold was, the bigger the fee they got, so lots of people who should have gotten normal fixed-rate mortgages were instead funneled into these Adjustable Rate Mortgages that would go to much higher than market rates in a few years.

AMT: Now can I ask about derivatives, because their executives successfully lobbied against the regulation of complicated financial products like derivatives. What exactly are derivatives, and why was it important that they not be regulated?

DCJ: Well if you have a credit card or a loan that says the interest rate that you pay depends on some other factor, say the Canadian government’s average cost of funds, or something called LIBOR — the London Inter-Bank Overnight lending Rate — you have a derivative. It is simply something derived from another index or measure that will determine your cost of borrowing money or the price you must pay for something.

Goldman has taken this simple idea of derivatives — we’ll tie the interest rate on your credit card to the bank’s cost of raising capital, for example — and instead, created unbelievably complicated processes and math behind them, so complicated that we saw recently in the collapse of AIG insurance company, that they were willing to pay 160-some million dollars, to the executives who had created these deals, to unwind them. Because they were so complicated the fear was that unwinding them the wrong way would cost more than that enormous amount of money paid to these guys to undo these bad deals.

AMT: … and that … again, they didn’t want these deals regulated.

DCJ: Goldman fought vigorously against regulation. It was one of the major proponents of repealing something in the United States called The Glass-Steagall Act, which came from The Depression, and required that retail banks [10:00] and insurance companies and investment banks be separate businesses. One of the reasons we had The Depression in the 1930s was the mixing of the risky business of investment banking and insurance with the much more stable business of retail banking.

Now Goldman went through a big change. Just a few days after Treasury Secretary Hank Paulson, who came from Goldman, was its chief executive, announced the need for the bailouts in September, Goldman announced that it was going to transform itself, and it was going to become a Regulated Bank Holding Company.

AMT: Well when you’re talking about regulation and you mention Paulson again … You said earlier, so many people with political influence and power have gone through Goldman Sachs, worked there. Given the kind of investigative work you do, how comfortable are you with that?

DCJ: I don’t have any problem with Goldman or anybody else having their people go out in the world. Now Goldman, for example has been a principle player in the rules on international trade, and the outsourcing of manufacturing jobs in the US. And in Free Lunch … and elsewhere I have argued that the rules that were written on this were designed to benefit two groups of people: the financier class, Goldman being at the top of of that game; and the rural poor of China and a few other countries who have had their standard of living raised because of the jobs that they’ve gotten.

But, per se, there’s absolutely really nothing wrong with that. In fact, we get competent managers who come out of Goldman for government and other enterprises — that’s a social good.

AMT: Is Goldman Sachs unique when it comes to the revolving door between the bank and the government?

DCJ: No. Goldman is not at all unique. The other big investment banks, although there’s none of them left now, all produced people who went over to government. But Goldman was far more involved in this. So Goldman is, while not unique was much more in a culture of — make your money, and then do some kind of public service, or go on somewhere else.

AMT: Does anyone ever utter the phrase: Conflict of Interest?

DCJ: Yes, indeed, in the case of The Bailout, even if you believe that Hank Paulson, the last Bush administration Treasury Secretary, was operatiing with the purest heart in the world, his conduct is absolutely scandalous.

When AIG was not allowed to collapse, was propped up by the government — they’ve gotten a 170-some billion dollars at this point — the 2nd-biggest recipient of money was Goldman Sachs. And Goldman by the way recently said: "You know, we really didn’t need that money we got from AIG … ."

Really? Well then give it back!

There were other actions taken by the government, including the decision to rescue AIG where the only non-government official in the room was Blankfein, the current chairman of Goldman Sachs.

So in the bailout the defining characteristic during the Bush administration was that all cash flows and all roads somehow led to Goldman.

And this has continued, although to a lesser degree, under the current administration.

AMT: And you write about this, but … Why does this fly under the radar?

DCJ: Well, most of the news is based on the official pronouncements: "Here is what the government said … " or "… this corporation said …," and then "Here are the official criticisms of it … ."

I’ve spent my entire career dealing with the government documents, and looking at what the government does, not what politicians say.

It’s a lot more complex and difficult to get at what’s happening as opposed to just telling what was said.

AMT: Well, you know amongst the names of alumni is Mark Carney, the Governor of the Bank of Canada. Opposition Finance Critic Thomas Mulcair in Canada from the New Democratic Party is not impressed with that part of his CV. Listen to what Thomas Mulcair says.

Thomas Mulcair: That was a great preoccupation for us when Mr. Carney’s name came along as Governor of the Bank of Canada. Now I’m not taking anything away from Mark Carney in terms of his personal ability; indeed, that’s why he was hired at Goldman Sachs. He’s a very capable guy.

But there is a huge difference between the public institution that has to exist and operate in the public interest — that is, the Bank of Canada — and something as big and powerful, but with its own interests, which is Goldman Sachs.

Right now in the world the question is: Can governments actually regulate things that are the size of Goldman Sachs?

So for us it’s a source of concern, to see Goldman Sachs seeding the people in the central banks across the world.

AMT: Well David Cay Johnston, what do you think of that?

DCJ: I think that was extremely well put. You know, if you go back to when trade began to revive in Europe after the Dark Ages, business entities were created. And they were a way for the merchant classes to protect their property against the predatory instincts of the nobles.

We’ve now reached the point where instead of these entities protecting themselves from the government, they now have enormous influence over government policy. And you can make a fairly good case that in certain areas of the economy, particularly those dealing with investment banking, as you see in the bailouts, [15:00] that now we have a situation which the government is becoming subservient to those it’s supposed to regulate.

This is a problem that can be solved, but it requires understanding by the public of the enormous influence that these organizations have, and then it demands some political will to recognize that this is not a smart policy. You want government, which represents everyone, setting the rules, not investment bankers saying to the government: "these are the rules we want" and having government act at its behest.

AMT: And so Goldman Sachs is known for prospering in good times and bad. How did the company manage to make money during the subprime mortgage mess, when everyone else was reeling?

DCJ: Well, you know there’s an Eddy Murphy movie called "Trading Places," where he’s dealing with some commodities brokers, and after they explain to him what they do he looks at them and he goes: "… Oh, I gets it, you’s all bookies!"

AMT: [laughs]

DCJ: Goldman Sachs is in the business of making money whether markets go up or down, and let me give you an example of this.

About 12 or 15 years ago, an executive who had a lot of stock in his company, and who didn’t want to sell it, because that would signal to the market something was wrong with the company and drive down the price, could go to Goldman. And lets say you have $100 million. They would loan you $90 million and take your stock, it would still be technically owned by you. You could then buy a portfolio of other securities, say bonds and stocks that pay dividends, which would give you cash income in order to spend that money.

If the stock price went up, Goldman would get the first 35 percent increase, and then above that you would split the money. If the stock price fell, Goldman still made money, because they would go out in the market and short the stock. That is, sell stock they didn’t own. And if the price fell they could take your stock and replace it, and they made money on the decline in price.

And Goldman does this in all sorts of deals. They …

AMT: They work both sides against the middle. Huh!

DCJ: … That’s exactly right, and to the extent that they were successful, up until the subprime and Alt-A mortgages, they managed to "hedge" these bets.

AMT: OK, well that’s interesting, because my next question then comes to exactly what they are doing now. Last week they reported higher than expected earnings for the 1st quarter: $1.8 billion.

And so, and they want to sell off shares and all that … but let’s just talk about that $1.8 billion in the 1st quarter. They changed what the year — what the definition of a year was — they took out December.

DCJ: I think that this is an area where the United States Congress ought to be issuing subpoenas and asking questions.

When Goldman converted from an investment bank into a regulated bank holding company, they changed by one month the close-out of their year. And it created December 2008 as a Black Hole in which there is very little information.

You would think that you could compare the two reports, but because they changed the type of company Goldman is, then the accounting rules are different.

You can glean certain things, but not all of them, and I had dinner the other night with a hedge fund manager who said that in December Goldman was offering all sorts of deals to people, as it was trying to rearrange its finances during this one month.

Accounting is supposed to provide a reasonable picture of your finances. Not a perfect one, a reasonable one. Unfortunately, American accounting rules encourage and help provide an unreasonable picture from the point of view of investors.

AMT: So by shifting the year, and shifting their definition [from IB to bank holding company], $1 billion dollars kind of disappeared, went into that Black Hole.

DCJ: It may be more than that. I mean, we don’t know exactly how much, but lots of money disappeared. They rearranged the value of finances, they were selling and buying things left and right and I’m sure all of it had to do with their internal sense of the best strategy for Goldman Sachs.

AMT: And politically can you do that in a time when your government is going to the wall for hundreds of billions of dollars to help Wall Street?

DCJ: Well this, Anna Maria, is one of the great challenges in the United States right now. We seem to have an unlimited supply of money to throw at the problems of Wall Street. Not at taking care of the millions of people who are out of work through no fault of their own. You know you can get as little as $5 a week in unemployment benefits in the United States.

In New York, the highest benefit you can get is a little over $400 a week.

We are not dealing with all the people who have, because of a 2005 change in our bankruptcy law, have decided to let their house be foreclosed on and pay off their credit card debt. Remember Goldman was also selling securitized credit card debt.

Whether our Congress will be responsive to the people, or what I call the Political Donor Class, of which Goldman is a major player, we don’t know yet. The hold that campaign contributions have compared to the influence of voters is tremendously important.

AMT: I’ve got something in front of me that says $1.725 billion in political contributions. And then $3.4 billion on lobbyists. [20:00]

DCJ: Yes. And while Goldman Sachs tends to lean to the Democrats, they hedge their bets. They gave more money to Obama than to McCain, but they were I think the 2nd largest Obama backer, and the 4th largest McCain backer.

AMT: Now I want to get back to that $1.8 billion for the 1st quarter, although they got rid of the December numbers. As a result of those numbers that they have put forward publicly, the bank plans to sell off shares to pay off $5 billion of that $10 billion government loan it received last fall. Should Goldman Sachs pay back, or be allowed to pay back that TARP loan, the Troubled Asset Relief Program loan?

DCJ: Absolutely. I don’t think we should have injected that money into Goldman in the first place, and the price that we paid for the securities that the taxpayers bought from Goldman amounts to a $5 billion gift of public money, based on an analysis done for the Steelworkers Union, compared to the price paid by Warren Buffett when he invested in the company.

So by getting that money back, we are going to reduce that gift. But I think we ought to require Goldman to give all of it back right away, not keep part of it.

AMT: Why is it so eager to pay the loan back?

DCJ: Well, Goldman doesn’t want to be subject to the strictures that the American Congress has placed on those banks that have received TARP money.

Goldman reports a pretty modest profit, around 5 percent of its revenues, but the reason is that it pays out billions and billions [laughs] of dollars in bonuses to its top traders and executives.

And they don’t want to be limited in their ability to pay people. That’s one of the reasons they’ve been able to attract and keep the very best talent, by paying them enormous sums of money.

AMT: So they want to go back to business as usual, but hasn’t business as usual changed forever, whether they’ve got a little bit — because they’ve got a little — I guess in their terms it is — a little federal money in there? I mean, can they go back to the old rules?

DCJ: No. Goldman in fact has made a decision to become a regulated company, a bank holding company, and I think they’ve done that because they’ve looked at the future and said the Cowboy Capitalism we’ve seen since 1980 has come to an end. That the rules on how we are going to operate are going to have to be different and that we’re better off being under the regulatory umbrella of the government.

That’s I think a separate issue from whether the American taxpayers should be holding warrants in Goldman Sachs. Americans shouldn’t have put the money in in the first place, they should get it back as quickly as possible, because the longer Goldman holds the money, the greater the value that accrues to Goldman in the form of this gift identified by the Steelworkers in their analysis of the transaction.

AMT: But isn’t part of Cowboy Capitalism the incentive that you’ll get these massive bonuses?

DCJ: Yes. And trust me, the people at Goldman have been around now for, what, 140 years. They will figure out how to make plenty of money. When they conclude that the way to make money is by selling bonds, they’ll make money there. If they conclude that the way to do it is to become a regulated company, they will do it there. They are masterful at seeing the trends and identifying them, and they’ve clearly placed their bet. They have said that the future of banking is going to be in the regulated areas.

Because they could have chosen to stay in the unregulated environment. They are … have plenty of cash, they have a net worth of around $42 billion. They’re not hurting, they’re not one of the zombie banks that we have in the United States.

AMT: So why did they get it in the first place? Why did they take the money?

DCJ: Anna Maria! I’d like to give you $5 billion. Do you think you could take it?

If the government is standing there saying, not simply "here’s this money," but "we want you to take it because we want to hide from the public which are the bad banks from the good banks." Guess what? You are going to take the money, first of all because you would be an idiot not to take it. And secondly, because the government is saying, "We want you to take it," and you understanding government understand very well signals from the government, because those have made you very wealthy and you want to keep being wealthy.

AMT: Wow, that’s that’s even more disturbing [laughs]. I shouldn’t be laughing.

DCJ: Well, Anna Maria, I think that the interconnection here between Wall Street and Washington is finally beoming apparent to the public.

Those of us who have been writing about this for years have seen people’s eyes glaze over, they don’t understand it, it doesn’t compute with them because most people don’t have accounts at Goldman Sachs, they’ve never heard of Goldman Sachs until recently. Then they discover the reason you lost your job, the reason that your mortgage is resetting at a high price, the reason that 6 houses in your neighborhood have now been abandoned, and you’ve got crime problems resulting from it … Now they sort of begin to wake up.

We have Outsourced our Democracy.

We have created a Congress that is dependent on a very narrow group of people that I call The Political Donor Class. Because Goldman is involved in financing everybody out there. And they have an incredibly outsized influence over the government.

And the public is finally, now that they’ve seen how they’re suffering because of this, beginning to wake up. [25:00] And that’s part of the further reason I think Goldman decided to become a regulated company.

They’re getting, in effect, some refuge from the public, by coming under the umbrella of government regulation.

AMT: Given the number of Goldman Sachs alumni, past and present, in the administrations in Washington, how likely is President Obama’s team to bring in serious regulation that fundamentally changes the rules of the game?

DCJ: Not likely at all. There is no one right around President Obama who speaks for working Americans. His Chief Economic Advisor, Larry Summers, made $5.2 million last year from the 3rd biggest hedge fund, for a job that was one day a week. One day a week, five million dollars.

Clearly he has closely identified and surrounded himself with people who come from Wall Street, and who see the world’s problems in Wall Street’s terms.

Reasonably so. I mean I don’t expect somebody who came from Goldman Sachs to understand how an autoworker whose factory has been closed sees the world, he’s going to see it through the eyes of his experience at Goldman.

AMT: Lots of dots that you’ve connected for us in this conversation. Thank-you very much.

DCJ: Anna Maria, thank-you for having me on.

AMT: David Cay Johnston is an investigative reporter and the author of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill). He spoke to us from Rochester, New York.

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