Is Goldman fulfilling its public purpose?

Look back at the prepared testimony that Lloyd Blankfein, Goldman’s CEO offered to the US Senate two days ago.  In it he clearly defines what Goldman Sachs public purpose is – what its societal function is.  Are they fulfilling that role and if not what do we do about it?  To me this is the debate now being waged in Washington over financial regulation as brought home in the Goldman Sachs fraud allegations made by the SEC.

Here’s what Blankfein said:

The 35,000 people who work at Goldman Sachs, the majority of whom work in the United States, are hard-working, diligent and thoughtful. Through them, we help governments raise capital to fund schools and roads. We advise companies and provide them funds to invest in their growth. We work with pension funds, labor unions and university endowments to help build and secure their assets for generations to come. And, we connect buyers and sellers in the securities markets, contributing to the liquidity and vitality of our financial system.

These functions are important to economic growth and job creation. I recognize, however, that many Americans are skeptical about the contribution of investment banking to our economy and understandably angry about how Wall Street contributed to the financial crisis. As a firm, we are trying to deal with the implications of the crisis for ourselves and for the system.

What we and other banks, rating agencies and regulators failed to do was sound the alarm that there was too much lending and too much leverage in the system — that credit had become too cheap.

No, what you stand accused of in the court of public opinion is duplicity.

Remember the film Duplicity with Clive Owen and Julia Roberts where they act like good corporate citizens but secretly collude to con their respective bosses for their own private gain? That’s what’s many believe Goldman was up to: making clients believe one thing but then doing something different.


–noun,plural-ties for 1.

1. deceitfulness in speech or conduct; speaking or acting in two different ways concerning the same matter with intent to deceive; double-dealing.

1400–50; late ME duplicite < MF < ML, LL duplicitās, with -ite r. -itās; see duplex, -ity

—Related forms

non·du·plic·i·ty, noun

1. deception, dissimulation. See deceit.

1. straightforwardness.

Here are a few examples from the case at hand via the emails unearthed by the SEC as reported by the Financial Times:

Goldman Sachs officials privately disparaged a complex $1bn mortgage security that the Wall Street bank sold to investors, according to e-mails released by Senate investigators on the eve of hearings on Tuesday on the bank’s role in the financial crisis….

The Goldman communications released on Monday involve Timberwolf, another so-called “collateralised debt obligation”, or CDO, which was structured by the bank to give investors a chance to bet on subprime mortgages.

Tom Montag, then a senior Goldman executive and now head of corporate and investment banking at Bank of America, was quoted as describing the deal in an e-mail as follows: “Boy that timeberwof (sic) was one shi**y (sic) deal,” according to the Senate subcommittee.

The subcommittee said that Matthew Bieber, the Goldman trader responsible for managing the deal, later described the day that the Timberwolf security was issued as “a day that will live in infamy”, recalling the language President Franklin Roosevelt used for the Japanese attack against Pearl Harbour.

This sounds very duplicitous indeed. 

There was one exchange during the hearings that certainly left me with the impression that Goldman was in fact being duplicitous. Andrew Leonard of Salon sums it well, when he writes:

Levin’s first question, directed at Sparks, concerned Goldman’s efforts to sell to clients a security that referenced mortgage loans originated by New Century Finance — one of the most notoriously reckless subprime lenders. The loans were terrible, and Goldman knew that they were terrible — Goldman was hedging its own risk by betting that the security would decline in value.

One of Goldman’s clients asked via e-mail, "How do you get comfortable with the collateral behind those securities?" Meaning, basically: Those loans are crap, how in the world can you possibly be comfortable pushing this deal?

Levin wanted to know whether Sparks thought Goldman had a responsibility to tell its client that it was "getting comfortable" by selling the security short, by betting against it. In other words, did Goldman have a responsibility to tell its client that Goldman’s own opinion was that the security was likely a bad investment?

And Daniel Sparks simply would not answer the question. He tried delaying tactics. He tried to pretend that he did not understand the question. He tried to wiggle by citing Goldman’s favorite defense: that any investor Goldman made a deal for was "sophisticated" and fully understood what it was getting into. But a relentless Levin kept pressing the point, which boiled down to something very simple: Did Goldman have a responsibility to its client to indicate its own evaluation of the securities it was pushing?

The Goldman men from the mortgage department refused to answer this question. So Senator Levin put the question to Lloyd Blankfein. And he answered it. The Telegraph quotes:

Senator Carl Levin told the veteran banker that he "wouldn’t trust" Goldman as he repeatedly asked whether the bank would disclose its position "when they’re buying something you solicit them to buy, and then you’re taking a position against them?"

"I don’t believe there is any obligation" to tell investors, Mr Blankfein responded. "I don’t think we’d have to tell them, I don’t think we’d even know ourselves."

Parse this however you want but Blankfein and everyone at Goldman is saying we trade with qualified institutional buyers ONLY – the big boys.  They know what they’re doing because they swim in the deep end of the pool for a living, folks.  They do their own research. they have their own risk management teams. They take their own market views. We don’t have to tell them squat.

And there’s a lot of truth to that.  But here’s the narrative I think is more substantial:

Goldman Sachs – like every other large international institution – was knee deep in the selling of the  ‘garbage barges’ of mortgage backed-securities, CDOs and synthetic CDOs which were at the heart of the subprime crisis. This was a profitable business and they wanted a piece of the action.  When the mood was buoyant in 2005, all was well and Goldman was happy to ‘participate’ as well as buy this toxic stuff – drinking the Kool-Aid and all of that.

But, at some point, Goldman realized – well before the hapless Merrills and UBSs and Citis of the world did – that this sh%t stinks.  The firm didn’t realize it all at once; some people like Fabulous Fab Tourre smelled the odour well before others. But eventually, the foul smell reached the top managers of the firm and they clued in that the firm had a pile of toxic sh#t on its hands. That’s when they told the traders to sell, sell, sell. REDUCE RISK IN THE MORTGAGE BUSINESS NOW.

The question for you is what do you do now that you have decided to go the other way. After all, your bonus does depend in part on your P&L. Well, in Goldman’s mortgage department’s case, you dump the toxic assets on anyone who will take it, especially the hopeless schmucks from Germany and Holland who don’t have a clue about actual risk in US subprime. If they actually did their homework… And you help those who are ideologically aligned on the short side like John Paulson make a killing ripping the face off those Dutch and German qualified institutional buyers.  Oh, and make sure you buy protection via those idiots at AIG too.

So, is Goldman fulfilling its public purpose?  Given the drubbing they are taking in the court of public opinion, it doesn’t look like they are.  Below I give my opinion on what’s happening.

  1. Element says

    Ed, I read this exchange at zerohedge. It makes some scathing observations of what’s been going on for the past few centuries with regard to money (excuse included language/epithets). This is a system that must change, we can’t have a world where this is going on. I don’t know how we get to a better system, but if we don’t, and just launch another “debt super-cycle”, civilisation will tear itself apart.

    From zerohedge post: “What Is The Difference Between Greece And Rest Of The OECD? Only That It Is Small Enough To Be Bailed Out” –

    “All nations are in “debt” to banks beyond their ability to pay. There are those on here who say “well, if one guy is in debt, another must be in surplus.” Wrong. The fact that EVERYONE is in debt and nobody can figure out to whom proves that banks lend capital they do not have. The banking system is kiting checks against the future, lending out what they do not possess, hoping to get real assets in exchange. How else can EVERYONE be simultaneously insolvent? Even China now says they’re in trade deficit. So, who is exporting? Who is lending? The banks.” –, comment by trav7777, 04/14/2010


    The top 1% do not have $100T in wealth or whatever the aggregate debts are for all nations. That’s my point; the money that was lent never existed. There never was the capital. It was leverage. The top 1% *borrowed* the money to lend, exploiting rate arbitrage. Trace the funds back to their source, the banks. Only they have the power to create creditmoney like this. This is, in fact, the problem…the bottom 99% is insolvent, therefore the top 1%, who are still ostensibly on the hook for their debts, are too.

    Look at the banks…they were simultaneously OWED massive amounts yet still insolvent somehow. If they were actually lending money/capital that they possessed, there is no way they could have been insolvent. The point is that they borrowed and levered in order to lend and THIS is what blew them up, the imbalance between debts “owed” and the value of “assets” which were themselves chopped up slices of loans to others.

    Banks didn’t just lend out their deposits then get run on. They themselves borrowed massively from others to create leverage pyramids. All of these roads trace back to the Fed as the bank of banks. –, comment by trav7777, 04/14/2010

    Then another;

    Math [i.e. accounting balances] is a sorry reason to have armageddon. I keep trying to get people to understand that these are just numbers on paper. The money lent was never possessed; it was created. That is how we got price inflation out of it.

    It’s how the MZM and other money metrics kept increasing; they kept creating money via credit. Yet we see banks ostensibly creditors who are themselves insolvent. Everyone lent to everyone else money that they didn’t possess and now they expect repayment. And people are ready to go to war and have society actually collapse because of some shit on an accounting ledger? We need to stand up and collectively REPUDIATE this system. We can be like Bavarian Producers in the Weimar era and say take your jew confetti back to where you came from.

    Real Bills Doctrine provides us a production-backed means of exchange, a real currency, and makes banks what banks are supposed to be. The banks should not tell us that we have to give them our firstborn because they lent us money that the banker never had in the first place. Fuck that. There’s no loss to him except in his expectation of RENT. If I pulled the shit the banks do, I would get arrested and jailed for counterfeiting and fraud.

    Nevermind the Fed or the other CBs. Look into the history of the BOE…they backed out whatever initial capital they put up in that bank within an instant. Why? Because they had “assets” in the form of sovereign loans, created by lending capital THEY NEVER HAD. So, they backed out their REAL capital and left the loans on the books as assets.

    The banks are assetless; that is the big elephant in the room.

    The debt is backstopped by bullshit and smoke and mirrors. It must be rejected, along with the entire CB debtmoney FRN system. All of it. This is actually what the Founders did and were about. –, – comment by trav7777, 04/14/2010

    Then a telling reply;

    “Travis, at the risk of responding to a stale thread, I’ll make two points:

    1. Yes, you are absolutely correct that the quadrillions of debt are simply accounting ledger entries. That is, there isn’t any real capital behind the numbers – as you state, the debt came into being simply by being entered unto the books as an asset (loan) and liability (deposit). Wipe them both out and what do you have? A big fat -0-? Um, no, which brings us to point #2.

    2. All of those loans have been sold off as investment vehicles to pension funds, 401(k) retirement accounts, etc, etc. No one, and this should be emphasised, NO ONE wants to have their life savings evaporated in an instant. Now, of course they really are worth -0-, but there is a really big difference between denial & acceptance. And since these folks vote, and the entire machine is dependent on the illusion continuing, we will never see a voluntary recognition of the losses.

    This is why guys like Denninger are so clueless; they think the system is actually fundamentally honest. They just can’t square the fact that it’s being manipulated to such radical degrees because of national security concerns. They will keep on keeping on until they can’t keep on any longer. How long that is is anyones guess, but the building volcano of compounding principle+interest in both private and sovereign debt will blow sky high unless some type of productive miracle comes along, pronto.

    At this point, it’s hard to see anything short of putting water in your gas tank. I mean, it has to be a real game changer. Otherwise, the cascade begins and everyone, everywhere finds out they really are worth -0-. That’s when the riots, random social chaos and world war(s) begin.” – zerohedge, reply comment by B9K9, 04/14/2010.

    – quotes end –

    Obviously we could just yell ‘vive-la-revolution’ and go chop and burn ~50,000 bank executives, but then what? After a cathartic bank-holiday BBQ we still have the problem of imaginary credit dollars, interest rates, dollar printing and inflation, constantly ablating buying-power, and real-wages, and stupidly making asset prices higher (material assets, not mere abstractions).

    Ed, you recently indicated gave up on policy-makers. Join the club I did that 25 years ago.

    But personally I can not take seriously the physical metals as currency. That seems to be a fringe-view of the sellers and owners of rare metals (even though I respect a lot of their viewpoints and historical arguments). It just isn’t going to work with a huge population that has used paper and plastic, all their lives, as a medium of exchange. I think exchanging metals as currency is just too alien now.

    It seems clear to me that fiat money must be made to work fairly and with long term stability (somehow) and not just inflate, be created by mere bankers via loans, and blow up the entire economy. Frankly, I don’t mind if the financial sector disappears up its own hind-quarter, I don’t care if insurance companies have to actually make real and intelligible policies, and I don’t care if GDP falls 25% in the process of cleaning up this credit-ballooning of GDP, and its legalised crime. GDP levels are simply fraudulent, inflated by on bad loans – why pretend it can be maintained or propped-up at these levels?

    It will fall anyway, and the TBTFs will fail, they are currently making 80% of the trades on the DOW, so who do you think will go broke next 40% DOW downturn?

    What’s the big deal if they do? The loans go away (you don’t think anyone is going to buy these ‘assets’, right?). The abstract ‘assets’ go away, and what’s left is what you really had all along. If that material actuality is unattractive, whose fault is it that that’s what you really have?

    And why isn’t that enough anyway? Why does anyone think they deserve more? Because advertisers said they did perhaps, and everyone happily agreed with them?

    Private banks can not be allowed to steal assets and enforce debt slavery and rob from everyone. That has to be the end result of all this, or its failure time, for all of civilisation.

    What I’m sure is we can not run the risk of more “debt super-cycles” – a way too nice term for something so contemptible.

    People forget, or more likely just don’t realise that the UN Declaration of Human Rights 1948 was the direct product of WWII. An attempt to build a developed global society in which the chances of WWIII occurring would be an ever diminishing risk. That was the whole point of it, and the people who compiled the 30-Articles knew why it mattered so much – they weren’t spruiking cute impractical platitudes. It was specifically written for the world of 2010 when nuclear munition proliferation had effectively occurred in scores of countries and when inequalities mistreatment and anger was accentuated.

    We are right back doing exactly the things that Declaration warned us to not do, or to permit to occur and spread. Meanwhile, the next (delusional) aspiring ‘great-power’ is virulently anti-human rights, yet gets to sit on the UN Security Council. What a farce, they’ve had 62 years and this is the status quo?

    We’re in it deep. We’re either going to insist on full observance of Human Rights globally, and live up to it, for mutual global security and fairness, or we are going to go down shooting.

    “Article 4. No one shall be held in slavery or servitude; slavery and the slave trade shall be prohibited in all their forms.” – Universal Declaration of Human Rights – adopted and proclaimed by General Assembly – 10 December 1948.

    Google it, read it’s thirty articles, then look around you. Debt slavery is rampant.

    You can’t have a sustainable economy if you don’t have an orderly functional civilisation. Civilisation implies the existence of mutual civility, and our system is dieing due to the systemic destruction of trust and over-extension, required for civility to exist. Greece is a really good example of the destruction of trust, and Wall Street and Washington are two others.

    My final comment quotation, it hit-home for me about how unreal is the global discussion of the crisis of wealth and capitalism. When I awoke the next day after reading it, it was still resounding;

    egomaniac says: April 11, 2010 – “What is it that we just don’t yet get after 6,000+ years of ‘recorded’ history? Have many of you westerners studied these 6,000+ year history. You would shocked at just how good you have it, financial crises and all. Like the two books, and every comment on here, a good insight into a vast complex layer of driving forces. In this case the predominance of “Psychology” is taken to an extreme.

    I’ve been working with cultures and peoples that have changed little in the last 600 years, and the brutish threadbare nature of their lives, makes these discussion here unbearable. The hyper liquidity spoken of the books is mirrored by a hyper inflation of exaggeration. The ego inflation is present in all the comments in all the blogs on the right hand side of this screen. Nobody, including me obviously, can simply make a simple comment” Source: in post: Liquid in Every Sense, April 11, 2010.

    It’s our privilege to make sure “the brutish threadbare nature of their lives” does change, or else what is it human civilisation is doing? Buying consumer credit garbage-in-waiting for no reason than advertisers creating a want and Govts ‘stimulating’ to enable credit access?

    Is that what we are doing with all this technology and money? Because if it is then I hope this culture totally fails, well, indeed, it has. And I hope no one is silly enough to fight and die to ‘save it’ for the bankers from the dustbin of history where it belongs.

    Anyway enjoy the roller-coaster ride down the other side of our fake global GDP Ed. I bet we still enjoy life down the other side.

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