In what might as well be called a perfect ending to the year – and maybe a reasonable summation of the decade – McClatchy is reporting on newly revealed documents from Goldman Sachs that point to a massive ponzi scheme by the Wall Street titan. (Credit to Truthdig for putting it on our radar.)
By now it’s clear that Goldman played the Fed and Treasury like a fiddle to reap billions of dollars through the AIG bailout, but these new documents illustrate how Wall Street’s bonus-machine also ripped off its own investors. As Greg Gordon at McClatchy reports:
In some of these transactions, investors not only bought shaky
securities backed by residential mortgages, but also took on the role
of insurers by agreeing to pay Goldman and others massive sums if risky
home loans nose-dived in value — as Goldman was effectively betting
The documents obtained by McClatchy also reveal that:
–Goldman’s Caymans deals were riddled with potential conflicts of
interest, which Goldman disclosed deep in prospectuses that typically
ran 200 pages or more. Goldman created the companies that oversaw the
deals, selected many of the securities to be peddled, including
mortgages it had securitized, and in several instances placed huge bets
against similar loans.
–Despite Goldman’s assertion that its top
executives didn’t decide to exit the risky mortgage securities market
until December 2006, the documents indicate that Goldman secretly bet
on a sharp housing downturn much earlier than that.
pegged at least 11 of its Caymans deals in 2006 and 2007 on swaps tied
in some cases to the performance of a bundle of securities that it
neither owned nor sold, but used as markers to coax investors into
covering its bets on a housing downturn…
[Financial Services consultant Gary] Kopff said, Goldman appears to have
created "mini-AIGs in the Caymans," arranging for investors to post the
money that would cover the bets up front.
Kopff charged that
Goldman inserted the credit-default swaps into CDO deals "like a Trojan
Horse — secret bets that the same types of bonds that they were selling
to their clients would in fact fail."
It’s an elaborate game of taking securities overseas and creating shells that look like legitimate, if complex, investment vehicles that Goldman knew couldn’t sustain themselves and was privately betting to fail. Except for that last part – the hedging against the products it was selling to investors – Goldman’s scheme brings back memories of Enron’s "partnerships." But Goldman’s twist, essentially betting on their investors to lose money, is what makes these revelations a scary capstone to the 2000s.
A decade that began with the collosal failure of Enron’s indescribably complex, greed-driven and self-destructive schemes that cost taxpyers and investors billions ended with revelations of Goldman’s indescribably complex, greed-driven and hugely profitable schemes that cost taxpayers and investors billions.
So is that it? Is Wall Street’s big lesson of the decade of the Aughts that you ought to bet against the people you’re telling to trust you? You can’t win just by suckering people to follow you down your perverted path; you also have to avoid being suckered by your own scam.