Tuesday, July 21, 2009

the Matt Taibi article you have probably heard about

..can be found here or here. If you haven't heard about it, you should have. And you should definitely read it. I nearly failed economics in high school, and almost nothing about the market makes any sense to me, but this is important. In very brief and inadequate summary, Goldman Sachs has been intimately involved in:

1) The Great Stock Market Crash by setting up "investments trusts". "The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund — which in turn sponsored yet another trust called the Blue Ridge Corporation."

2) Creating the Internet Bubble by laddering. "Say you're Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual terms: You'll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a "road show" to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price — let's say Bullshit.com's starting share price is $15 — in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO's future, knowledge that wasn't disclosed to the daytrader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond."

3) Creating the Housing Bubble: "Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK." But there were regulations to protect against such things so "In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 11,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity."

4) The $4 per gallon gas last year was not supply/demand, but speculation. "Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date." And why were they allowed to do this? The Commodity Futures Trading Commission "issued the bank a free pass, called the "Bona Fide Hedging" exemption, allowing Goldman's subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies."

5) The Bail Out - Goldman gets money from tax payers (13 billion through AIG alone) and "pays back it's debt", a mere 14 million dollars, to the American people. Why so little? "According to Goldman's annual report, the low taxes are due in large part to changes in the bank's "geographic earnings mix." In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates."

6) Future bubble yet to come - cap and trade, making money off carbon credits.

Obviously this does not read like much in my post, it's just a copy paste of the article, and you should really just go read the thing for yourself. I really hope you do...

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