FINANCIAL REFORM NEWSLETTER: Sept. 20, 2018
Goldman Sachs Failed 10 Years Ago Today
Email Shows Goldman Admitted It Was “Toast”, Only Survived Due to Government Bailouts
While many are remembering the 10th anniversary of the collapse of Lehman Brothers and the onset of the worse financial crash since 1929, there is too much spin, self-congratulation and omission or denial of the actual facts. You know the leading examples. Everywhere you look, former policymakers and regulators are patting themselves on the back for their “courage” or industry titans are pointing fingers of fault at everyone but themselves.
Less obvious has been Goldman Sachs’ relentless attempt to rewrite the history of the 2008 crash, primarily pretending that it was never at risk of failure. That is simply false. As proved by the email reproduced above from ten years ago today, Goldman Sachs was “toast” and would have gone bankrupt but for being bailed out by the United States government and taxpayers.
Those bailouts saved the bank and the jobs, status and wealth of all the Goldman bankers. For example, the astronomical wealth of CEO Lloyd Blankfein, former President Gary Cohn and all the other Goldman partners only exists today because they were bailed out. Just like the shareholders in bankrupt Lehman Brothers, their stock and options would have been worthless, including the recently reported $3 billion ‘Goldman partners’ haul on crisis-era options.
We know this because, ten years ago today, just five days after Lehman Brothers filed for bankruptcy, four days after the $85 billion bailout of AIG, and days after Treasury Secretary Paulson effectively nationalized the $3.7 trillion money market industry via a guaranty program, Morgan Stanley called New York Fed President Tim Geithner to inform him that it would not be able to open its doors on Monday and Goldman admitted that, if that happened, it was “toast,” as reflected in the internal Fed email.
As we have detailed, the crash had many causes, but a big one was the reckless and illegal activities of Wall Street’s too-big-to-fail firms, which were nonetheless bailed out without any accountability, humility or remorse.
On this 10th anniversary, it is important to remember that Goldman Sachs and the other too-big-to-fail financial firms only exist today due to the generosity and decisive role of the U.S. government and taxpayers in stopping the crisis and saving those Wall Street giants with trillions of dollars in bailouts. Spin, self-justification, blaming others, false narratives, forgetting or ignoring those facts and so many others may be comforting to those on Wall Street and their allies, but it blinds them to what is happening in the country and why. That blindness also prevents them from a clear-eyed assessment of what really caused the last crash, which is essential to trying to prevent the next crash as well as preparing for it.
What’s Wrong with a Little De-regulation?
A financial deregulation bill recently signed by President Trump ended many of the key financial protection rules on 21 of the 40 biggest banks in the country, those with $100-$250 billion in assets. On top of that legislative deregulation, there has been significant and broad-based deregulation at the financial agencies, from the Federal Reserve and the CFTC to the SEC and the CFPB.
Making George Orwell proud, they claim to be merely “right-sizing” and “tweaking” the rules for simplicity and efficiency. However, they are undermining the central pillars that protect hardworking Americans on Main Street and our economy from another Wall Street crash and financial predators. But, it’s difficult to understand what is happening in so many places at the same time and in so many different ways, particularly when so many of their activities are wrapped in unintelligible legalese, spin and PR.
One way to think about it is death by 1,000 cuts. While one, a dozen, a hundred or a couple of hundred little cuts won’t kill you, 1,000 will. Another way to think about it is like the safety features in a car or the fire protection features in a building. For example, would you get in a car with bumpers but no seat belts, air bags, shatterproof windshields or a collapsible steering wheel? Would you work at the top of a skyscraper with a fire alarm, but no sprinklers, fire stairs, fire extinguishers or an escape plan?
No one in their right mind would choose to ride in that car or work in that building. But, that’s what the Trump administration and his financial deregulators are doing to our financial system: they are leaving a few protections while stripping and hollowing out many others. Sure, there’s still some protection, but no one in the right mind should accept it.
A leading example is the Consumer Financial Protection Bureau (CFPB). While it is still doing many things to protect consumers, Trump’s acting director has taken numerous anti-consumer actions trying to transform it into the Financial Predator Protection Bureau. Another example is the Volcker Rule prohibition on speculative proprietary trading with taxpayer backed deposits, which the financial regulators just proposed to weaken. The ban is still there, but they are putting in loopholes and exclusions. Bumpers, yes; air bags, no. Fire alarm, yes; fire exits, no.
Why is this so important? Because, as Jonathan Ford of the Financial Times perceptively writes, the “Financial sector remains an impenetrable black box.” He notes, for example, “balance sheet capital ratios may have risen, from 8 percent before the crisis to 12 percent now….[But] apply market values to banks’ unweighted total assets – the so-called leverage ratio – and you see a very different picture. This stands at a lower level than in 2006.” This should be alarming to everyone. The capital at a bank is the only thing standing between a bank failing and taxpayer bailouts. The lower the capital, the higher the risk of failure and bailouts. That’s why hardworking Americans on Main Street need multiple layers of protection of different kinds so they don’t have to suffer another economic catastrophe caused by Wall Street. Bumpers, air bags and more. Fire alarm, fire exits and more.
The Media’s Role in the 2008 Crash Included Enriching Itself Rather than Informing the Public
There was a terrific book a couple of years ago entitled “The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism” by Dean Starkman. It’s an incisive analysis of how the media failed to sound the alarm before the crash and became lapdogs, cheerleaders and ad revenue dependents on finance. He breaks it down into “access” vs. “accountability” journalism. It remains a book well worth reading.
I was reminded of that book when I read John Authers’ recent column “In a crisis, sometimes you don’t’ tell the whole story.” He is the Chief Markets Commentator and Associate Editor at the Financial Times. Rather than discussing lessons learned in the ten years since the collapse of Lehman Brothers or the progress made in strengthening and stabilizing the financial system, he instead used the 10th anniversary of the financial crisis to make a startling confession, although he clearly does not understand the import of his confession.
Authers discloses that not only did he know things about the imminent crash of the financial system that he didn’t tell his readers, but he took immediate direct action to use that withheld information to protect his own wealth. Rather than reporting the information to the public, he went to his bank to divide up his money into multiple accounts in the names of his family members to maximize Federal deposit insurance in the event that his bank failed. To make matters worse, he also disclosed in this column ten years later that lots of other in-the-know Wall Streeters were with him at his bank branch in New York doing the same thing.
The only people who didn’t know were his readers because he didn’t tell them. He decided it was better for them not to know what he knew, which deprived them of taking action to protect themselves like he did. (Sure, he justifies it ten years later because the financial system didn’t collapse, but no one knew that then as evidenced by his own actions.)
And worse still, what he and the rest of the Wall Streeters in his story did was to shift their potential losses to the US government and US taxpayers. Think about that for a minute.
The 10th anniversary of the financial crisis has provided ample opportunity to reflect on the mistakes made a decade ago. To that end, Authers deserves some credit for publicly confessing (albeit ten years later), but he doesn’t evince any awareness of how inappropriate his actions were and, in fact, suggests he’d do it again: better not let the great unwashed know what’s going on, lest they panic and cause problems. Meantime, he rushes to protect himself and his family. This confession should cause some deep self-reflection on his decisions and his actions.