Is What`s Good For Goldman Sachs Good For America?
November 25, 2008, 03:52 PM
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Treasury Secretary Hank Paulson (former Goldman Sachs CEO) has bailed out Citi-whatever, whose "consigliere" is former Treasury Secretary Robert Rubin, (a former co-CEO of Goldman Sachs) on terms that were described in the Washington Post as:

"It strikes me as unbelievably generous," said a former Fed official who has been in touch with Citigroup.

Commercial bank Citibank`s merger with investment bank Salomon Smith Barney was illegal under the New Deal Glass-Steagall Act, but Rubin helped get it made legal in the late 1990s, just before quitting the Clinton cabinet and going to work there.

Meanwhile, AIG, a close associate of Goldman, is getting a rolling bailout that appears to be mounting to the sky.

Only one massive financial institution didn`t get a bailout and been allowed to fail: the investment bank Lehman Brothers. After it went bankrupt, the economy fell off the edge of the world.

Is it just a coincidence that Lehman Brothers was a rival of Goldman Sachs?

Ironically, just as Rubin`s reputation for genius is is being flushed away, three of his proteges—Geithner, Summers, and Orzag—are getting top economic jobs in the Obama Administration. Funny how that works...

For some long term perspective on a dress rehearsal for what`s happening now on much more massive scale, here are John Brimelow`s reviews from 2000-01 in of two books on the collapse of Long-Term Capital Management (LTCM) in 1998 (first and second):

LTCM was set up to profit from irrational disparities in valuation between similar financial assets, primarily bonds. The assumption that these occurred randomly in a normal distribution pattern had become an article of religious faith at U.S. Business Schools in the previous 20 years. Two of the progenitors of the view, Robert Merton of Harvard, and Myron Scholes of Stanford (and of the Black/Scholes option valuation model) were LTCM partners. (Fischer Black had had the judgment to die an untimely death previously.) Careful reading of their work reveals that they assumed continuous markets and stable volatility ranges (neither always present in reality) and they acknowledged but ignored the fact that probability distributions in financial markets often show "fat tails" — in other words that extreme events occur far more frequently than a normal curve would predict. But they nonetheless built a "school" of like-minded thinkers and disciples. This group had become very influential on Wall Street by the late 90s.

Wall Street, in a sense, became a victim of the principal vice of the U.S. academic profession: the eagerness to set up introspective communities, dedicated to a dogma, which insulate themselves from fact-based criticism by exclusion and intimidation rather than argument. ...

Given that LTCM`s "stunning losses betrayed the flaw at the very heart - the very brain - of modern finance" and that the concept it used "prevails at virtually every investment bank and trading desk," it is very strange to find Greenspan and Rubin (when Secretary of the Treasury) blocking all efforts to improve transparency and improve regulation even to the extent of forcing out the former CFTC head, Brooksley Born. ...

The saga of the Long Term Capital Management hedge fund - its rise, fall, and the peculiar circumstances surrounding its rescue in September 1998 - more and more appears paradigmatic of Clinton Era finance. Esoteric and secretive in action, operating through special relationships and understandings, involving greed and ambition on astonishingly uninhibited scale, and ultimately giving rise to suspicions of ominous fusion between private commercial objectives and the formulation of public policy, it lays out a pattern likely to become all too familiar as documentation of the period becomes more available.

[ note: The AIG Bailout in particular is supposed to have saved Goldman Sachs $20 billion. ]