This article appeared previously on CounterPunch. Written by Dean Baker
Last year, Rolling Stone columnist Matt Taibbi described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” It turns out that Mr. Taibbi was far too generous in his assessment of the huge investment bank.
Since that time we have learned that Goldman played a central role in helping Greece to hide its government budget deficit from the European Union, the financial markets, and the public at large. Goldman sold complex swaps to Greece in which it paid the Greek government for future revenue streams on items like airport landing fees. This was in effect a loan, but the swap allowed the Greek government to avoid entering the borrowed money on its books as a loan, which would have raised its budget deficit above the euro zone limits. Today of course Greece’s financial meltdown is threatening the stability of the euro.
Just last month Goldman was sued for sex discrimination by a former vice-president who claims that she was put on the “mommy track” after taking a maternity leave. She was fired as she was about to start a second leave. (In fairness to Goldman, Wall Street is still for the most part an all-boys club.)
But the big news is Goldman’s indictment for putting together a collaterized debt obligation (CDO) from mortgage-backed securities that were expected to fail and then marketing it to its clients as a good investment. The central allegation is that in early 2007, hedge fund manager John Paulson recognized that the housing bubble was starting to collapse
This meant that many mortgages would go bad. The subprime mortgages, in which homeowners had little or no real collateral, and were facing resets to higher interest rates, were especially vulnerable. Paulson worked out a deal with Goldman in which he would pick the mortgage-backed securities that were put into the CDO. Paulson would then bet that the CDO would go bad, by taking out credit default swaps (CDS) on the CDO. A credit default swap is effectively an insurance policy where the issuer makes up a loss if an asset goes bad.
Goldman was left with the other side of Paulson’s deal, finding suckers to buy this huge piece of junk. It would have been hard to find buyers for this CDO if investors knew that Paulson had deliberately constructed it as a piece of junk to short. Therefore, according to the SEC charges, Goldman concealed Paulson’s role in constructing the CDO. Goldman allegedly told investors that the CDO was constructed by neutral parties, rather than letting them know that the assets were picked by a hedge fund manager who was taking a short position.
Of course Paulson won his bet, the CDO he put together really was trash. He made nearly a billion dollars on this particular bet, which involved buying CDS from AIG. AIG was unable to pay off its bet, so Paulson got his money courtesy of the taxpayers when the government stepped in to bailout AIG. Goldman was also buying CDS to bet against the CDOs it was putting together, although it is not clear that it had bet against this particular CDO. In any case, it clearly profited from the issue since Paulson paid Goldman $15 million for its services. Continue reading