Taibbi: How Goldman Sachs Profited from the Economic Meltdown
Goldman Sachs, the nation’s most powerful financial company, has reported the richest quarterly profit in its 140-year history: $3.44 billion between April and June. Goldman’s record profits come just one month after it repaid $10 billion of TARP money to the US Treasury, freeing itself from restrictions on year-end bonuses. We speak to Matt Taibbi, whose new Rolling Stone article argues that “Goldman Sachs has engineered every major market manipulation since the Great Depression.”
Amy Goodman: We turn now to the situation right down the street here, on Wall Street. While the US deficit topped one trillion dollars for the first time in the nation’s history, the blowout bonuses are back on Wall Street. Well, not all of Wall Street, just at Goldman Sachs, the nation’s most powerful financial company, which reported the richest quarterly profit in its 140-year history: $3.44 billion between April and June.
Goldman Sachs announced Tuesday that it would set aside nearly $11.4 billion from its profits to pay bonuses. If Goldman continues to earn profits at the same level, its employees could each earn, on average, close to $770,000 this year, with senior executives and bankers being paid much more. The average compensation amount is close to what it was during the boom in 2007, when Goldman set a Wall Street pay record.
Goldman’s record profits come just one month after it repaid $10 billion of TARP money to the US Treasury, and in so doing, freed itself from restrictions on year-end bonuses. Last year the firm also received $13 billion as part of the bailout of the failed insurance giant AIG and $28 billion in low-interest loans.
Well, we’re joined right now by Matt Taibbi. He’s a contributing editor at Rolling Stone and author of the new article “The Great American Bubble Machine.” The article examines Goldman Sachs’s role in the current economic crisis.
So, welcome to Democracy Now!, Matt.
Matt Taibbi: Thanks for having me back.
AG: Were you surprised when the profits were posted of Goldman Sachs?
MT: I was a little surprised that the number is a little higher than everybody expected, but I wasn’t surprised that they made an enormous profit. They had—they were the beneficiaries of massive government subsidies in the last year or so. And it would be actually kind of a surprise if they didn’t come out with a big number in this quarter, just because they’ve had such an enormous advantage. Not just this bank, but all the banks on Wall Street have had so much access to cheap money since the bailouts have started that it would be a surprise if they didn’t start making money.
AG: So, let’s talk about the bailouts and the bonuses and how this happened for Goldman Sachs. That’s what you lay out in a remarkable article that you’ve just written.
MT: Right. Well, one of the things that people have to remember is, how do banks make their money? They have to pay depositors, normally, to get their money, and then they try to invest that money and make money, make their profits on the spread between those two costs.
Goldman has access to an enormous amount of cheap money from the government, because they have asked—because they converted to a bank holding company status last year. That made them eligible for about $28 billion in federally backed loans, as you—sorry, in federally backed debt, as you mentioned in your intro, which means that they have access to money that is incredibly cheap, so their cost of capital is incredibly low. And they take that cheap money, and they lend it back to the economy at higher rates, and they make money on the spread. And because so many of their competitors, like Lehman Brothers and Bear Stearns, are now no longer in existence, they’re able to dominate the market in ways that they never were before.
So they’re taking all these advantages, and instead of—you know, the implicit idea last year with the bailouts was that these banks would take these advantages and that they would use that money to kickstart the economy. Instead, they’ve just decided to keep all the money and turn it into bonuses. And I think that’s something that everybody has to examine now.
AG: Talk about how Goldman Sachs played what you call the key role in the bubble, in the financial bubble.
MT: Well, in the housing/credit bubble, they played a key role. They may not have played the key role. But they—it’s important to remember that the last, the current—that disaster with housing would not have taken place had not investment banks like Goldman Sachs found a way to take bad mortgages, subprime mortgages and non-prime mortgages, dice them up into securities, and sell them off to secondary investors in a process called securitization. Without that process, there would not have been a market for those bad mortgages. And Goldman Sachs, at the height of the boom, was underwriting between seven and eight percent of those non-prime mortgages. So they were a major player in the mortgage market.
And what’s important to remember about Goldman, in particular, is they were alone on Wall Street in appearing to know that what they were selling was toxic and was bad, because they were betting heavily against this stuff as they were selling it on the market. And they made an enormous profit, whereas Bear and Lehman thought they had something good, and they ended up being taken down by their own investments.
AG: One of the most riveting parts of your article, Matt, are your descriptions of the Goldman Sachs alum and the role they played in determining the government response to the crisis.
MT: Right. Well, the number of Goldman Sachs—former Goldman Sachs employees who are in the government is so—it’s so enormous that it would be impossible to list on this program. But just briefly, you know, there were two Treasury secretaries who were very important: Bob Rubin during the Clinton administration and Hank Paulson during the Bush administration. Bush’s Chief of Staff, Josh Bolten, was a former Goldman Sachs banker. The guy who administered TARP, Neel Kashkari, was a Goldman banker. The current head of the NYSE, the World Bank, the Canadian National Bank, the number two guy at the Treasury, the head of the Commodity Futures Exchange Commission, which regulates the commodities market—all these people are ex-Goldman bankers. And because of that, they have access to these, you know, contacts in government, and they’ve always been able to get whatever they want from government, whenever they want, the key example being the AIG bailout last year, when they got so much money through that.
AG: Explain that.
MT: Well, when—if AIG had been allowed to proceed to an ordinary bankruptcy without government intervention, Goldman Sachs might actually have gone out of business, because AIG owed Goldman about $20 billion at the time. But what happened instead, you know, Goldman was able to appeal to its former chief, Hank Paulson in the Treasury, who engineered an $80 billion taxpayer-funded bailout of AIG, and immediately about 13 billion or 14 billion of those dollars went directly to Goldman Sachs. So this was really Goldman Sachs bailing out Goldman Sachs in the middle of the bailout.
What’s important to remember is that that same week that the AIG bailout happened, Hank Paulson elected not to rescue Lehman Brothers. So Goldman Sachs went from facing almost certain disaster to seeing their primary competitor leave the market and getting $13 billion in money from the taxpayer.
AG: How much money did Goldman Sachs pay in taxes in 2008?
MT: They paid $14 million in taxes last year, which is an effective tax rate of about one percent, which means that they paid in taxes about a third of what CEO Lloyd Blankfein actually made in compensation last year. And that sounds like an amazing number. And if you—their excuse for why that is is because they had changes in their so-called geographic earnings mix, which basically means that they moved all their revenues to foreign countries, where the tax rates were lower. And so, Goldman, which was, again, the beneficiary of massive subsidies during the bailouts, you know, paid really just a pittance in taxes last year.
AG: Goldman Sachs’s Lucas van Praag, the global head of Corporate Communications, responded to your article, said your “bubble case doesn’t stand up to serious scrutiny…[To give just] two examples, even with the worst will in the world, the blame for creating the internet bubble cannot credibly be laid at our door, and we could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors.”
MT: Well, as to the former—I mean, I’m sorry, as to the latter, I mean, again, I mentioned at the height of the boom they were underwriting seven to eight percent of the non-prime market, which, to me, sounds like a major player.
As to the internet business, they underwrote about one our of every five internet IPOs throughout that entire period, and they were the single largest underwriter of internet and tech IPOs. So it would be impossible to imagine who would be a bigger contributor to the internet mess than Goldman Sachs, since they were the major player [inaudible].
AG: How might Goldman Sachs profit off global warming?
MT: Well, Goldman Sachs is positioned in a number of different ways. They are a part owner of the Chicago Climate Exchange, which is where the carbon credits will be traded if this legislation goes through. They’re also heavily invested in a number of companies that deal in carbon credits. And again, this is another kind of commodities market, like the oil commodities market, which exploded last summer and is exploding again now. And Goldman and banks like Morgan Stanley are poised to make an enormous amount of money if these carbon credits end up getting traded.
AG: Finally, Matt Taibbi, explain the latest news about Stephen Friedman and how he did, one of the former heads of Goldman Sachs, also a director, chair of the New York Federal Reserve Bank, in which he helped work out the deal for the Wall Street bailout.
MT: Well, Stephen Friedman last year was the chairman of the New York Fed when Goldman Sachs converted to bank holding company status, which again made—when Goldman did that, when they changed their status, it made the New York Federal Reserve their primary supervisor, which meant that Stephen Friedman would have been regulating Goldman Sachs. The former head of Goldman Sachs would have been regulating Goldman Sachs. Friedman asked for a waiver to keep his shares in Goldman Sachs, even as he was regulating Goldman Sachs, and he actually got that waiver, because, again—
MT: From—actually, I’m not really sure who it’s from. From the board, I believe. And—
AG: But didn’t Tim Geithner—
MT: Right, from Geithner. That’s right. That’s right. It was from Geithner. But then he went out again, and he bought more shares in Goldman, even after he got that waiver, without permission, and he eventually had to step down from his role as chairman of the New York Fed. But what’s interesting about that is that the guy who is now the president of the New York Fed, Dudley, is another former Goldman Sachs banker. So it’s like, you know, you can’t get rid of these guys.
AG: Well, Matt Taibbi, I want to thank you very much for being with us, editor at Rolling Stone. His latest piece in Rolling Stone, “The Great American Bubble Machine.”