The Marxist-Leninist Daily

A remarkable economic exposure has been published in McClatchy Newspapers in a series of articles and videos. Describing its series McClatchy writes, "A five-month McClatchy investigation reveals how Wall Street colossus Goldman Sachs peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst."

TML readers may well wonder why a media "colossus" such as McClatchy would engage in such a devastating exposure of the failure of U.S. state monopoly capitalism. McClatchy is an ardent member of the U.S. Empire, the second-largest newspaper publisher in the U.S. with thirty newspapers including the arch-reactionary Miami Herald plus websites and television news outlets. The answer to this conundrum is found in a contradiction within monopoly capitalism that consists of contending groups of owners of capital competing against each other. The ruling monopoly capitalist class is not monolithic given every owner's aim to expand their own capital as much and as quickly as possible in competition with other owners of capital and in antagonistic contradiction with the U.S. working class and middle strata.

Millions of pensioners and others around the world, including many owners of capital, have lost their savings or investments in this economic crisis. Certain owners of capital have on the contrary emerged during the crisis with greater capital and more control over the wealth of the Empire. According to the McClatchy exposure, Goldman Sachs Group Inc has manipulated the crisis to its advantage and to the detriment of many around the globe. Goldman did not accomplish this by chance alone as the series shows but through guile and its political connections within the executive branch of the U.S. government, especially President Bush's appointment of Goldman CEO Henry Paulson as U.S. Treasury Secretary and President Obama's appointment of other leading Goldman executives to powerful political offices (see graph in this issue). Notable Goldman executives that hold or have held authoritative positions within the U.S. Empire include Robert Zoellick, now president of the World Bank, Robert Rubin, assistant to President Clinton for economic policy and U.S. Treasury Secretary from 1995 to 1999, Mark A. Patterson who is Obama's Chief of staff for the U.S. Treasury and William C. Dudley current president of the New York Federal Reserve.

As the McClatchy exposure reveals, Goldman used its political power to funnel money from the public treasury to itself, especially using the Bush and Obama "Troubled Asset Relief Program" (TARP) funds that went to it both directly and indirectly through the bailout of insurance monopoly AIG. Not only did it use its influence to funnel public money to itself but blocked the bailout of a competing New York investment monopoly Lehman Brothers, which filed for bankruptcy in September, 2008 during the reign of former Goldman CEO Paulson as U.S. Treasury Secretary.

As early as 2006, Goldman began to unload its ownership of mortgage derivatives onto pension and other funds and to take other insurance measures to protect itself. Goldman knew the bad quality of these derivatives as it was one of the principals in concocting the scheme yet it continued to create them and sell them to pension and other savings funds. Most damning of all, not only did Goldman sell off most of the mortgage derivatives it owned directly and continue creating and selling new ones as extremely sound "triple A" bonds, it participated heavily in secretly "hedging" its remaining ownership of mortgage derivatives through the creation of yet another level of derivatives called "credit-default swaps" (CDS), an insurance hedge that would generate a payment if insured bonds dropped in market value. The insurance monopoly AIG sold billions of dollars of these CDS derivatives, which were presented as a "hedge" or insurance against the failure of other derivatives or bonds. These CDS derivatives were soon being traded widely throughout the imperialist system of states similar to bundled mortgage, credit card, car loans and other derivatives. When mortgage derivatives began to fail spectacularly in early autumn 2008, Goldman and others demanded insurance payments from AIG, and any other financial institution that owned the CDS derivatives, to cover their losses. AIG did not have enough reserve capital to make the insured bonds whole and was about to declare bankruptcy, which would have meant the counterparties, such as Goldman would have received very little. The Bush and Obama executives bailed out AIG so that it could in turn pay billions to Goldman and others who were the beneficiaries of AIG's credit default swaps. Billions of dollars from the public treasury went to AIG and then directly to Goldman and other monopolies as payouts for "losses" on mortgage derivative bonds. Subsequently in a cynical turn of events, Goldman is now one of the most active participants in the current wave of mortgage foreclosures, seizing property throughout the United States. All these assertions are well documented in the McClatchy series of articles and videos available at mcclatchydc.com/goldman/.

The direct losses for pension and other savings funds have been enormous during the crisis with many of the losses attributable to Goldman Sachs. Workers, the middle strata and small family business owners should think deeply on the most current failure of the capitalist system and discuss alternatives on every front. Vague remedies suggested by the McClatchy Group for more federal regulation of the financial services sector will not solve the problems of a pensions, savings and banking and financial sector that is dominated by the narrow aim of expanding capital. McClatchy plays safe with suggestions of mild regulations because it is part of the system of U.S. monopoly capitalism and its global empire. Exposure of the actions of one monopoly or sector of the economic system is meant to save other monopolies and sectors from losses and rescue the system from further collapse but does not want to lead to profound conclusions that capitalism itself has failed and has become obsolete and a victim of its irreconcilable internal contradictions and parasitic aim. McClatchy exposes the system in a manner that lays the blame on one important actor but does not want to investigate and expose the root cause of the problem within the capitalist system. The corruption at Goldman and within the state machine and financial sector reflects the unresolved contradiction between an economy that is socialized yet divided into separately owned competing parts, and the contradiction between owners of capital and the working class. Both contradictions must be resolved with new arrangements if society is to move forward and finally overcome and not repeat the corruption and crises described in part by McClatchy.

Retirement at an acceptable standard must become a right guaranteed by the government. Banks and the entire financial sector including the insurance industry should be regarded as an essential public service. A modern socialized economy needs a human-centred financial sector consisting of not-for-profit public enterprises where the people's savings are used for collective nation-building not manipulated for the narrow interests and private gain of this or that member of the financial oligarchy. These are reforms that restrict monopoly right and hold some meaning and would make a difference, but they will only come into being with the organization of an effective working class political movement. In Canada, this means Canadians must take up the challenge of the battle of democracy, which requires Committees for Democratic Renewal to forge the working class and its allies into an effective political force that can exercise decision-making power on such matters as the organization of the financial sector in a manner that favours the people.

Reference Material

Goldman Denial

McClatchy reports that Goldman Sachs sent it the following short statement, which is simply an indignant denial without any proof that the facts presented in the series are wrong.

Your recent series of articles on Goldman Sachs (Goldman Sachs' Secret Bets) is filled with unsubstantiated claims, innuendo and outright falsehoods. This is not investigative journalism but, rather, poorly researched and sensationalist fabrications presented as facts.

As your reporter knows, there is no factual basis for the theories put forward in the articles, and your claim that we misled investors is untrue.

Lucas van Praag
Managing Director
Goldman, Sachs & Co.
85 Broad Street
New York, NY 10004

(McClatchy Editor's note: Van Praag is the chief spokesman for Goldman Sachs. McClatchy stands by its reporting, and rejects as untrue his allegation that the reporter knows "there is no factual basis" for the articles.)

How Goldman Secretly Bet on the U.S. Housing Crash
- McClatchy, November 16, 2009 -

(Excerpts from one article in the series available at mcclatchydc.com/goldman/)

In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

John Coffee, a Columbia University law professor [said], "It would look much more damaging, if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."

A Goldman spokesman, Michael DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.

To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.

* Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.

* Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.

* Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.

* Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.

The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group while in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.

These decisions preserved billions of dollars in value for Goldman's executives and shareholders. For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have lost more than $150 million if his firm had gone bankrupt.

With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion.

Washington, DC, November 16, 2009: Hundreds of U.S. workers rallied outside Goldman Sachs DC office to
deliver a letter to CEO Lloyd Blankfein demanding he forgo paying out its multi-billion dollar bonus pool
and instead use that money to help the millions of families facing foreclosure. (Photo: SEIU)

Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.

For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated an elite reputation as home to the best and brightest and a tradition of urging its executives to take turns at public service.

As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson, as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008, and former Goldman employees populate some of the most demanding and powerful posts in Washington. Savvy federal regulators have migrated from their Washington jobs to Goldman.

On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement division.

Goldman's financial panache made its sales pitches irresistible to policymakers and investors alike, and may help explain why so few of them questioned the risky securities that Goldman sold off in a 14-month period that ended in February 2007.

Since the collapse of the economy, however, some of those investors have changed their opinions of Goldman.

Several pension funds, including Mississippi's Public Employees' Retirement System, have filed suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently made "false and misleading" representations of the bonds' true risks.

Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds of millions of dollars" on those and similar bonds.

Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."

California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.

In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.

Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate, cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office focused on investment banks because they provided a market for loans that mortgage lenders "knew or should have known were destined for failure."

New Orleans' public employees' retirement system, an electrical workers union and the New Jersey carpenters union also are suing Goldman and other Wall Street firms over their losses.

The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively paid $2 billion for Goldman's risky high-yield bonds.

Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70 million; and Allstate, $40.5 million, according to the data from the National Association of Insurance Commissioners.

In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million.

Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted most traditional lending criteria in favor of loans that required little or no documentation of borrowers' incomes or assets.

While Goldman was far from the biggest player in the risky mortgage securitization business, neither was it small.

From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.

In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007, Goldman marketed at least $17 billion more for others.

It also was the lead firm in marketing about $83 billion in complex securities, many of them backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished industry data by Gary Kopff, a securitization expert.

In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the U.S. they were marketed with lower grades.

Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because the borrowers had high credit scores.

Goldman's securities came in two varieties: those tied to subprime mortgages and those backed by a slightly higher grade of loans known as Alt-A's.

Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans, which began to rocket upward this year, are causing a new round of defaults.

Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference, avoiding any images of employees flashing wads of bonus cash at casinos.

More recently, the firm has launched a public relations campaign to answer the criticism of its huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that Goldman's activities serve "an important social purpose" by channeling pools of money held by pension funds and others to companies and governments around the world.

For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime game before getting burned.

New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told Congress that his researchers discovered by early 2006 that many subprime loans covered the homes' entire value, with no down payments, and so he figured that the bonds "would become worthless."

He soon began placing exotic bets -- credit-default swaps -- against the housing market. His firm, Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared in 2007 and 2008. (He isn't related to Henry Paulson.)

At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky mortgages, the first of multiple strategies it would employ to reduce its subprime risk.

The company has closely guarded the details of most of its swaps trades, except for $20 billion in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults or ratings downgrades on subprime-related securities it offered offshore.

In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman DuVally said.

Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling off its inventory of bonds and betting against those classes of securities in secretive swaps markets.

DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing or financial market conditions would become."

In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old subprime index on a private London swap exchange, said several Wall Street figures familiar with those dealings, who declined to be identified because the transactions were confidential.

The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5 billion, Viniar disclosed last spring.

As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September 2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included more than $8 billion to settle swaps contracts.

DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure its own subprime risks and to take positions against the housing market for its clients. Until the end of 2006, he said, Goldman was still betting on a strong housing market.

However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February 2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages after the December meeting, though DuVally declined to say when.

Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret wagers.

Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the company's mortgage business "has extensive barriers designed to keep information within its proper confines."

However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading, also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly resigned for personal reasons.

The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities from March 2006 to February 2007.

DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional Buyers, a class of sophisticated investors that are afforded fewer protections than small investors are under federal securities laws. He said Goldman made all the required disclosures about risks.

Whether companies are obliged to inform investors about such contrary trades, or "hedges," is "a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of San Diego law professor who specializes in securities. One issue is how specific companies must be in disclosing potential risks to investors, he said.

Coffee, the Columbia University law professor, said that any potential violations of securities laws would depend on what Goldman executives knew about the risks ahead.

"The critical moment when Goldman would have the highest liability and disclosure obligations is when they are serving as an underwriter on a registered public offering," he said. "If they are at the same time desperately seeking to get out of the field, that kind of bailout does look far more dubious than just trading activities."

Another question is whether, by keeping the trades secret, the company withheld material information that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a Duke University law professor who also has served on the NYSE advisory panel.

If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational investor would not only consider Goldman's conduct material, but likely compelling a decision to take a pass on the recommendation to purchase."

Suits filed by the pension funds allege that Goldman made materially false or misleading statements in its public offerings, failing to disclose that many loans were based on inflated appraisals and were bought from firms with poor lending practices.

Close Relationship Between Goldman Sachs
and U.S. Federal Government

TML Comment: The graph below prepared by McClatchy depicts the close relationship between Goldman Sachs and the U.S. Federal government. The graph erroneously describes work in the New York Federal Reserve as a "government job." The U.S. Federal Reserve System and its twelve regional privately-owned Federal Reserve Banks is a financial institution of the state monopoly capitalist system and is owned, controlled and directed by members of the financial oligarchy directly affiliated with its private member banks. The U.S. federal and regional governments, the military and police agencies, justice system and correctional services, the monopoly-controlled mass media and various collectives of the monopoly capitalist class such as the Federal Reserve System, Boards of Trade and the monopolies themselves together make up the monopoly capitalist state.

Necessity for Change of the Financial Sector

Necessity for Change of the Financial Sector

Reference Material

Goldman Denial

How Goldman Secretly Bet on the U.S. Housing Crash
- McClatchy, November 16, 2009 -

Close Relationship Between Goldman Sachs
and U.S. Federal Government

Necessity for Change of the Financial Sector

Necessity for Change of the Financial Sector

Reference Material

Goldman Denial

How Goldman Secretly Bet on the U.S. Housing Crash - McClatchy, November 16, 2009 -

Close Relationship Between Goldman Sachs and U.S. Federal Government

How Goldman Secretly Bet on the U.S. Housing Crash
- McClatchy, November 16, 2009 -

Close Relationship Between Goldman Sachs
and U.S. Federal Government