our greatest blessings come to us by way of madness Phaedr. 244a


ok. here's what we do. get a big bottle of cognac and drink it, NEAT...

Today's follow up here


From tech stocks to high gas prices, Goldman Sachs has engineered every
major market manipulation since the Great Depression - and they're about to
do it again

By MATT TAIBBI Rolling Stone

The first thing you need to know about Goldman Sachs is that it's
everywhere. The world's most powerful investment bank is a great vampire
squid wrapped around the face of humanity, relentlessly jamming its blood
funnel into anything that smells like money. In fact, the history of the
recent financial crisis, which doubles as a history of the rapid decline and
fall of the suddenly swindled-dry American empire, reads like a Who's Who of
Goldman Sachs graduates.

By now, most of us know the major players. As George Bush's last Treasury
secretary, former Goldman CEO Henry Paulson was the architect of the
bailout, a suspiciously self-serving plan to funnel trillions of Your
Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill
Clinton's former Treasury secretary, spent 26 years at Goldman before
becoming chairman of Citigroup - which in turn got a $300 billion taxpayer
bailout from Paulson. There's John Thain, the rear end in a top hat chief of
Merrill Lynch who bought an $87,000 area rug for his office as his company
was imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar
handout from Paulson, who used billions in taxpayer funds to help Bank of
America rescue Thain's sorry company. And Robert Steel, the former
Goldmanite head of Wachovia, scored himself and his fellow executives $225
million in golden parachute payments as his bank was self-destructing.
There's Joshua Bolten, Bush's chief of staff during the bailout, and Mark
Patterson, the current Treasury chief of staff, who was a Goldman lobbyist
just a year ago, and Ed Liddy, the former Goldman director whom Paulson put
in charge of bailed-out insurance giant AIG, which forked over $13 billion
to Goldman after Liddy came on board. The heads of the Canadian and Italian
national banks are Goldman alums, as is the head of the World Bank, the head
of the New York Stock Exchange, the last two heads of the Federal Reserve
Bank of New York - which, incidentally, is now in charge of overseeing
Goldman - not to mention ...

But then, any attempt to construct a narrative around all the former
Goldmanites in influential positions quickly becomes an absurd and pointless
exercise, like trying to make a list of everything. What you need to know is
the big picture: If America is circling the drain, Goldman Sachs has found a
way to be that drain - an extremely unfortunate loophole in the system of
Western democratic capitalism, which never foresaw that in a society
governed passively by free markets and free elections, organized greed
always defeats disorganized democracy.

The bank's unprecedented reach and power have enabled it to turn all of
America into a giant pump-and-dump scam, manipulating whole economic sectors
for years at a time, moving the dice game as this or that market collapses,
and all the time gorging itself on the unseen costs that are breaking
families everywhere - high gas prices, rising consumer-credit rates,
half-eaten pension funds, mass layoffs, future taxes to pay off bailouts.
All that money that you're losing, it's going somewhere, and in both a
literal and a figurative sense, Goldman Sachs is where it's going: The bank
is a huge, highly sophisticated engine for converting the useful, deployed
wealth of society into the least useful, most wasteful and insoluble
substance on Earth - pure profit for rich individuals.

They achieve this using the same playbook over and over again. The formula
is relatively simple: Goldman positions itself in the middle of a
speculative bubble, selling investments they know are crap. Then they hoover
up vast sums from the middle and lower floors of society with the aid of a
crippled and corrupt state that allows it to rewrite the rules in exchange
for the relative pennies the bank throws at political patronage. Finally,
when it all goes bust, leaving millions of ordinary citizens broke and
starving, they begin the entire process over again, riding in to rescue us
all by lending us back our own money at interest, selling themselves as men
above greed, just a bunch of really smart guys keeping the wheels greased.
They've been pulling this same stunt over and over since the 1920s - and now
they're preparing to do it again, creating what may be the biggest and most
audacious bubble yet.

If you want to understand how we got into this financial crisis, you have to
first understand where all the money went - and in order to understand that,
you need to understand what Goldman has already gotten away with. It is a
history exactly five bubbles long - including last year's strange and
seemingly inexplicable spike in the price of oil. There were a lot of losers
in each of those bubbles, and in the bailout that followed. But Goldman
wasn't one of them.


Goldman wasn't always a too-big-to-fail Wall Street behemoth, the ruthless
face of kill-or-be-killed capitalism on steroids - just almost always. The
bank was actually founded in 1869 by a German immigrant named Marcus
Goldman, who built it up with his son-in-law Samuel Sachs. They were
pioneers in the use of commercial paper, which is just a fancy way of saying
they made money lending out short-term IOUs to small-time vendors in
downtown Manhattan.

You can probably guess the basic plotline of Goldman's first 100 years in
business: plucky, immigrant-led investment bank beats the odds, pulls itself
up by its bootstraps, makes shitloads of money. In that ancient history
there's really only one episode that bears scrutiny now, in light of more
recent events: Goldman's disastrous foray into the speculative mania of
pre-crash Wall Street in the late 1920s.

This great Hindenburg of financial history has a few features that might
sound familiar. Back then, the main financial tool used to bilk investors
was called an "investment trust." Similar to modern mutual funds, the trusts
took the cash of investors large and small and (theoretically, at least)
invested it in a smorgasbord of Wall Street securities, though the
securities and amounts were often kept hidden from the public. So a regular
guy could invest $10 or $100 in a trust and feel like he was a big player.
Much as in the 1990s, when new vehicles like day trading and e-trading
attracted reams of new suckers from the sticks who wanted to feel like big
shots, investment trusts roped a new generation of regular-guy investors
into the speculation game.

Beginning a pattern that would repeat itself over and over again, Goldman
got into the investment-trust game late, then jumped in with both feet and
went hog-wild. 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. In this way, each investment trust
served as a front for an endless investment pyramid: Goldman hiding behind
Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue
Ridge, 6,250,000 were actually owned by Shenandoah - which, of course, was
in large part owned by Goldman Trading.

The end result (ask yourself if this sounds familiar) was a daisy chain of
borrowed money, one exquisitely vulnerable to a decline in performance
anywhere along the line; The basic idea isn't hard to follow. You take a
dollar and borrow nine against it; then you take that $10 fund and borrow
$90; then you take your $100 fund and, so long as the public is still
lending, borrow and invest $900. If the last fund in the line starts to lose
value, you no longer have the money to pay back your investors, and everyone
gets massacred.

In a chapter from The Great Crash, 1929 titled "In Goldman Sachs We Trust,"
the famed economist John Kenneth Galbraith held up the Blue Ridge and
Shenandoah trusts as classic examples of the insanity of leverage-based
investment. The trusts, he wrote, were a major cause of the market's
historic crash; in today's dollars, the losses the bank suffered totaled
$475 billion. "It is difficult not to marvel at the imagination which was
implicit in this gargantuan insanity," Galbraith observed, sounding like
Keith Olbermann in an ascot. "If there must be madness, something may be
said for having it on a heroic scale."

Fast-Forward about 65 years. Goldman not only survived the crash that wiped
out so many of the investors it duped, it went on to become the chief
underwriter to the country's wealthiest and most powerful corporations.
Thanks to Sidney Weinberg, who rose from the rank of janitor's assistant to
head the firm, Goldman became the pioneer of the initial public offering,
one of the principal and most lucrative means by which companies raise
money. During the 1970s and 1980s, Goldman may not have been the
planet-eating Death Star of political influence it is today, but it was a
top-drawer firm that had a reputation for attracting the very smartest
talent on the Street.

It also, oddly enough, had a reputation for relatively solid ethics and a
patient approach to investment that shunned the fast buck; its executives
were trained to adopt the firm's mantra, "long-term greedy." One former
Goldman banker who left the firm in the early Nineties recalls seeing his
superiors give up a very profitable deal on the grounds that it was a
long-term loser. "We gave back money to 'grownup' corporate clients who had
made bad deals with us," he says. "Everything we did was legal and fair -
but 'long-term greedy' said we didn't want to make such a profit at the
clients' collective expense that we spoiled the marketplace."

But then, something happened. It's hard to say what it was exactly; it might
have been the fact that Goldman's co-chairman in the early Nineties, Robert
Rubin, followed Bill Clinton to the White House, where he directed the
National Economic Council and eventually became Treasury secretary. While
the American media fell in love with the story line of a pair of
baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White
House, it also nursed an undisguised crush on Rubin, who was hyped as
without a doubt the smartest person ever to walk the face of the Earth, with
Newton, Einstein, Mozart and Kant running far behind.

Rubin was the prototypical Goldman banker. He was probably born in a $4,000
suit, he had a face that seemed permanently frozen just short of an apology
for being so much smarter than you, and he exuded a Spock-like,
emotion-neutral exterior; the only human feeling you could imagine him
experiencing was a nightmare about being forced to fly coach. It became
almost a national cliche that whatever Rubin thought was best for the
economy - a phenomenon that reached its apex in 1999, when Rubin appeared on
the cover of Time with his Treasury deputy, Larry Summers, and Fed chief
Alan Greenspan under the headline THE COMMITTEE TO SAVE THE WORLD. And "what
Rubin thought," mostly, was that the American economy, and in particular the
financial markets, were over-regulated and needed to be set free. During his
tenure at Treasury, the Clinton White House made a series of moves that
would have drastic consequences for the global economy - beginning with
Rubin's complete and total failure to regulate his old firm during its first
mad dash for obscene short-term profits.

The basic scam in the Internet Age is pretty easy even for the financially
illiterate to grasp. Companies that weren't much more than pot-fueled ideas
scrawled on napkins by up-too-late bong-smokers were taken public via IPOs,
hyped in the media and sold to the public for megamillions. It was as if
banks like Goldman were wrapping ribbons around watermelons, tossing them
out 50-story windows and opening the phones for bids. In this game you were
a winner only if you took your money out before the melon hit the pavement.

It sounds obvious now, but what the average investor didn't know at the time
was that the banks had changed the rules of the game, making the deals look
better than they actually were. They did this by setting up what was, in
reality, a two-tiered investment system - one for the insiders who knew the
real numbers, and another for the lay investor who was invited to chase
soaring prices the banks themselves knew were irrational. While Goldman's
later pattern would be to capitalize on changes in the regulatory
environment, its key innovation in the Internet years was to abandon its own
industry's standards of quality control.

"Since the Depression, there were strict underwriting guidelines that Wall
Street adhered to when taking a company public," says one prominent
hedge-fund manager. "The company had to be in business for a minimum of five
years, and it had to show profitability for three consecutive years. But
Wall Street took these guidelines and threw them in the trash." Goldman
completed the snow job by pumping up the sham stocks: "Their analysts were
out there saying Bullshit.com is worth $100 a share."

The problem was, nobody told investors that the rules had changed. "Everyone
on the inside knew," the manager says. "Bob Rubin sure as hell knew what the
underwriting standards were. They'd been intact since the 1930s."

Jay Ritter, a professor of finance at the University of Florida who
specializes in IPOs, says banks like Goldman knew full well that many of the
public offerings they were touting would never make a dime. "In the early
Eighties, the major underwriters insisted on three years of profitability.
Then it was one year, then it was a quarter. By the time of the Internet
bubble, they were not even requiring profitability in the foreseeable

Goldman has denied that it changed its underwriting standards during the
Internet years, but its own statistics belie the claim. Just as it did with
the investment trust in the 1920s, Goldman started slow and finished crazy
in the Internet years. After it took a little-known company with weak
financials called Yahoo! public in 1996, once the tech boom had already
begun, Goldman quickly became the IPO king of the Internet era. Of the 24
companies it took public in 1997, a third were losing money at the time of
the IPO. In 1999, at the height of the boom, it took 47 companies public,
including stillborns like Webvan and eToys, investment offerings that were
in many ways the modern equivalents of Blue Ridge and Shenandoah. The
following year, it underwrote 18 companies in the first four months, 14 of
which were money losers at the time. As a leading underwriter of Internet
stocks during the boom, Goldman provided profits far more volatile than
those of its competitors: In 1999, the average Goldman IPO leapt 281 percent
above its offering price, compared to the Wall Street average of 181

How did Goldman achieve such extraordinary results? One answer is that they
used a practice called "laddering," which is just a fancy way of saying they
manipulated the share price of new offerings. Here's how it works: 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
day-trader 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. In this way, Goldman could artificially jack
up the new company's price, which of course was to the bank's benefit - a
six percent fee of a $500 million IPO is serious money.

Goldman was repeatedly sued by shareholders for engaging in laddering in a
variety of Internet IPOs, including Webvan and NetZero. The deceptive
practices also caught the attention of Nichol as Maier, the syndicate
manager of Cramer & Co., the hedge fund run at the time by the now-famous
chattering television rear end in a top hat Jim Cramer, himself a Goldman
alum. Maier told the SEC that while working for Cramer between 1996 and
1998, he was repeatedly forced to engage in laddering practices during IPO
deals with Goldman.

"Goldman, from what I witnessed, they were the worst perpetrator," Maier
said. "They totally fueled the bubble. And it's specifically that kind of
behavior that has caused the market crash. They built these stocks upon an
illegal foundation - manipulated up - and ultimately, it really was the
small person who ended up buying in." In 2005, Goldman agreed to pay $40
million for its laddering violations - a puny penalty relative to the
enormous profits it made. (Goldman, which has denied wrongdoing in all of
the cases it has settled, refused to respond to questions for this story.)

Another practice Goldman engaged in during the Internet boom was "spinning,"
better known as bribery. Here the investment bank would offer the executives
of the newly public company shares at extra-low prices, in exchange for
future underwriting business. Banks that engaged in spinning would then
undervalue the initial offering price - ensuring that those "hot" opening
price shares it had handed out to insiders would be more likely to rise
quickly, supplying bigger first-day rewards for the chosen few. So instead
of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO
and offer him a million shares of his own company at $18 in exchange for
future business - effectively robbing all of Bullshit's new shareholders by
diverting cash that should have gone to the company's bottom line into the
private bank account of the company's CEO.

In one case, Goldman allegedly gave a multimillion-dollar special offering
to eBay CEO Meg Whitman, who later joined Goldman's board, in exchange for
future i-banking business. According to a report by the House Financial
Services Committee in 2002, Goldman gave special stock offerings to
executives in 21 companies that it took public, including Yahoo! co-founder
Jerry Yang and two of the great slithering villains of the financial-scandal
age - Tyco's Dennis Kozlowski and Enron's Ken Lay. Goldman angrily denounced
the report as "an egregious distortion of the facts" - shortly before paying
$110 million to settle an investigation into spinning and other
manipulations launched by New York state regulators. "The spinning of hot
IPO shares was not a harmless corporate perk," then-attorney general Eliot
Spitzer said at the time. "Instead, it was an integral part of a fraudulent
scheme to win new investment-banking business."

Such practices conspired to turn the Internet bubble into one of the
greatest financial disasters in world history: Some $5 trillion of wealth
was wiped out on the NASDAQ alone. But the real problem wasn't the money
that was lost by shareholders, it was the money gained by investment
bankers, who received hefty bonuses for tampering with the market. Instead
of teaching Wall Street a lesson that bubbles always deflate, the Internet
years demonstrated to bankers that in the age of freely flowing capital and
publicly owned financial companies, bubbles are incredibly easy to inflate,
and individual bonuses are actually bigger when the mania and the
irrationality are greater.


Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid
out $28.5 billion in compensation and benefits - an average of roughly
$350,000 a year per employee. Those numbers are important because the key
legacy of the Internet boom is that the economy is now driven in large part
by the pursuit of the enormous salaries and bonuses that such bubbles make
possible. Goldman's mantra of "long-term greedy" vanished into thin air as
the game became about getting your check before the melon hit the pavement.

The market was no longer a rationally managed place to grow real, profitable
businesses: It was a huge ocean of Someone Else's Money where bankers hauled
in vast sums through whatever means necessary and tried to convert that
money into bonuses and payouts as quickly as possible. If you laddered and
spun 50 Internet IPOs that went bust within a year, so what? By the time the
Securities and Exchange Commission got around to fining your firm $110
million, the yacht you bought with your IPO bonuses was already six years
old. Besides, you were probably out of Goldman by then, running the U.S.
Treasury or maybe the state of New Jersey. (One of the truly comic moments
in the history of America's recent financial collapse came when Gov. Jon
Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320
million in IPO-fattened stock, insisted in 2002 that "I've never even heard
the term 'laddering' before.")

For a bank that paid out $7 billion a year in salaries, $110 million fines
issued half a decade late were something far less than a deterrent - they
were a joke. Once the Internet bubble burst, Goldman had no incentive to
reassess its new, profit-driven strategy; it just searched around for
another bubble to inflate. As it turns out, it had one ready, thanks in
large part to Rubin.

Goldman's role in the sweeping disaster that was the housing bubble is not
hard to trace. Here again, the basic trick was a decline in underwriting
standards, although in this case the standards weren't in IPOs but in
mortgages. By now almost everyone knows that for decades mortgage dealers
insisted that home buyers be able to produce a down payment of 10 percent or
more, show a steady income and good credit rating, and possess a real first
and last name. Then, at the dawn of the new millennium, they suddenly threw
all that poo poo out the window and started writing mortgages on the backs
of napkins to cocktail waitresses and ex-cons carrying five bucks and a
Snickers bar.

None of that would have been possible without investment bankers like
Goldman, who created vehicles to package those lovely mortgages and sell
them en masse to unsuspecting insurance companies and pension funds. This
created a mass market for toxic debt that would never have existed before;
in the old days, no bank would have wanted to keep some addict ex-con's
mortgage on its books, knowing how likely it was to fail. You can't write
these mortgages, in other words, unless you can sell them to someone who
doesn't know what they are.

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, there was no
reason to worry so much about the lovely ones: The CDO, as a whole, was
sound. Thus, junk-rated mortgages were turned into AAA-rated investments.
Second, to hedge its own bets, Goldman got companies like AIG to provide
insurance - known as credit-default swaps - on the CDOs. The swaps were
essentially a racetrack bet between AIG and Goldman: Goldman is betting the
ex-cons will default, AIG is betting they won't.

There was only one problem with the deals: All of the wheeling and dealing
represented exactly the kind of dangerous speculation that federal
regulators are supposed to rein in. Derivatives like CDOs and credit swaps
had already caused a series of serious financial calamities: Procter &
Gamble and Gibson Greetings both lost fortunes, and Orange County,
California, was forced to default in 1994. A report that year by the
Government Accountability Office recommended that such financial instruments
be tightly regulated - and in 1998, the head of the Commodity Futures
Trading Commission, a woman named Brooksley Born, agreed. That May, she
circulated a letter to business leaders and the Clinton administration
suggesting that banks be required to provide greater disclosure in
derivatives trades, and maintain reserves to cushion against losses.

More regulation wasn't exactly what Goldman had in mind. "The banks go
crazy - they want it stopped," says Michael Greenberger, who worked for Born
as director of trading and markets at the CFTC and is now a law professor at
the University of Maryland. "Greenspan, Summers, Rubin and [SEC chief
Arthur] Levitt want it stopped."

Clinton's reigning economic foursome - "especially Rubin," according to
Greenberger - called Born in for a meeting and pleaded their case. She
refused to back down, however, and continued to push for more regulation of
the derivatives. Then, in June 1998, Rubin went public to denounce her move,
eventually recommending that Congress strip the CFTC of its regulatory
authority. In 2000, on its last day in session, Congress passed the
now-notorious Commodity Futures Modernization Act, which had been inserted
into an 1l,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

But the story didn't end there. AIG, a major purveyor of default swaps,
approached the New York State Insurance Department in 2000 and asked whether
default swaps would be regulated as insurance. At the time, the office was
run by one Neil Levin, a former Goldman vice president, who decided against
regulating the swaps. Now freed to underwrite as many housing-based
securities and buy as much credit-default protection as it wanted, Goldman
went berserk with lending lust. By the peak of the housing boom in 2006,
Goldman was underwriting $76.5 billion worth of mortgage-backed securities -
a third of which were subprime - much of it to institutional investors like
pensions and insurance companies. And in these massive issues of real estate
were vast swamps of crap.

Take one $494 million issue that year, GSAMP Trust 2006-S3. Many of the
mortgages belonged to second-mortgage borrowers, and the average equity they
had in their homes was 0.71 percent. Moreover, 58 percent of the loans
included little or no documentation - no names of the borrowers, no
addresses of the homes, just zip codes. Yet both of the major ratings
agencies, Moody's and Standard & Poor's, rated 93 percent of the issue as
investment grade. Moody's projected that less than 10 percent of the loans
would default. In reality, 18 percent of the mortgages were in default
within 18 months.

Not that Goldman was personally at any risk. The bank might be taking all
these hideous, completely irresponsible mortgages from
beneath-gangster-status firms like Countrywide and selling them off to
municipalities and pensioners - old people, for God's sake - pretending the
whole time that it wasn't grade-D horseshit. But even as it was doing so, it
was taking short positions in the same market, in essence betting against
the same crap it was selling. Even worse, Goldman bragged about it in
public. "The mortgage sector continues to be challenged," David Viniar, the
bank's chief financial officer, boasted in 2007. "As a result, we took
significant markdowns on our long inventory positions .... However, our risk
bias in that market was to be short, and that net short position was
profitable." In other words, the mortgages it was selling were for chumps.
The real money was in betting against those same mortgages.

"That's how audacious these assholes are," says one hedge-fund manager. "At
least with other banks, you could say that they were just dumb - they
believed what they were selling, and it blew them up. Goldman knew what it
was doing." I ask the manager how it could be that selling something to
customers that you're actually betting against - particularly when you know
more about the weaknesses of those products than the customer - doesn't
amount to securities fraud.

"It's exactly securities fraud," he says. "It's the heart of securities

Eventually, lots of aggrieved investors agreed. In a virtual repeat of the
Internet IPO craze, Goldman was hit with a wave of lawsuits after the
collapse of the housing bubble, many of which accused the bank of
withholding pertinent information about the quality of the mortgages it
issued. New York state regulators are suing Goldman and 25 other
underwriters for selling bundles of crappy Countrywide mortgages to city and
state pension funds, which lost as much as $100 million in the investments.
Massachusetts also investigated Goldman for similar misdeeds, acting on
behalf of 714 mortgage holders who got stuck ho1ding predatory loans. But
once again, Goldman got off virtually scot-free, staving off prosecution by
agreeing to pay a paltry $60 million - about what the bank's CDO division
made in a day and a half during the real estate boom.

The effects of the housing bubble are well known - it led more or less
directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose
toxic portfolio of credit swaps was in significant part composed of the
insurance that banks like Goldman bought against their own housing
portfolios. In fact, at least $13 billion of the taxpayer money given to AIG
in the bailout ultimately went to Goldman, meaning that the bank made out on
the housing bubble twice: It hosed the investors who bought their horseshit
CDOs by betting against its own crappy product, then it turned around and
hosed the taxpayer by making him payoff those same bets.

And once again, while the world was crashing down all around the bank,
Goldman made sure it was doing just fine in the compensation department. In
2006, the firm's payroll jumped to $16.5 billion - an average of $622,000
per employee. As a Goldman spokesman explained, "We work very hard here."

But the best was yet to come. While the collapse of the housing bubble sent
most of the financial world fleeing for the exits, or to jail, Goldman
boldly doubled down - and almost single-handedly created yet another bubble,
one the world still barely knows the firm had anything to do with.

By the beginning of 2008, the financial world was in turmoil. Wall Street
had spent the past two and a half decades producing one scandal after
another, which didn't leave much to sell that wasn't tainted. The terms junk
bond, IPO, subprime mortgage and other once-hot financial fare were now
firmly associated in the public's mind with scams; the terms credit swaps
and CDOs were about to join them. The credit markets were in crisis, and the
mantra that had sustained the fantasy economy throughout the Bush years -
the notion that housing prices never go down - was now a fully exploded
myth, leaving the Street clamoring for a new bullshit paradigm to sling.

Where to go? With the public reluctant to put money in anything that felt
like a paper investment, the Street quietly moved the casino to the
physical-commodities market - stuff you could touch: corn, coffee, cocoa,
wheat and, above all, energy commodities, especially oil. In conjunction
with a decline in the dollar, the credit crunch and the housing crash caused
a "flight to commodities." Oil futures in particular skyrocketed, as the
price of a single barrel went from around $60 in the middle of 2007 to a
high of $147 in the summer of 2008.

That summer, as the presidential campaign heated up, the accepted
explanation for why gasoline had hit $4.11 a gallon was that there was a
problem with the world oil supply. In a classic example of how Republicans
and Democrats respond to crises by engaging in fierce exchanges of moronic
irrelevancies, John McCain insisted that ending the moratorium on offshore
drilling would be "very helpful in the short term," while Barack Obama in
typical liberal-arts yuppie style argued that federal investment in hybrid
cars was the way out.


But it was all a lie. While the global supply of oil will eventually dry up,
the short-term flow has actually been increasing. In the six months before
prices spiked, according to the U.S. Energy Information Administration, the
world oil supply rose from 85.24 million barrels a day to 85.72 million.
Over the same period, world oil demand dropped from 86.82 million barrels a
day to 86.07 million. Not only was the short-term supply of oil rising, the
demand for it was falling - which, in classic economic terms, should have
brought prices at the pump down.

So what caused the huge spike in oil prices? Take a wild guess. Obviously
Goldman had help - there were other players in the physical-commodities
market - but the root cause had almost everything to do with the behavior of
a few powerful actors determined to turn the once-solid market into a
speculative casino. 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. The push transformed oil from a physical
commodity, rigidly subject to supply and demand, into something to bet on,
like a stock. Between 2003 and 2008, the amount of speculative money in
commodities grew from $13 billion to $317 billion, an increase of 2,300
percent. By 2008, a barrel of oil was traded 27 times, on average, before it
was actually delivered and consumed.

As is so often the case, there had been a Depression-era law in place
designed specifically to prevent this sort of thing. The commodities market
was designed in large part to help farmers: A grower concerned about future
price drops could enter into a contract to sell his corn at a certain price
for delivery later on, which made him worry less about building up stores of
his crop. When no one was buying corn, the farmer could sell to a middleman
known as a "traditional speculator," who would store the grain and sell it
later, when demand returned. That way, someone was always there to buy from
the farmer, even when the market temporarily had no need for his crops.

In 1936, however, Congress recognized that there should never be more
speculators in the market than real producers and consumers. If that
happened, prices would be affected by something other than supply and
demand, and price manipulations would ensue. A new law empowered the
Commodity Futures Trading Commission - the very same body that would later
try and fail to regulate credit swaps - to place limits on speculative
trades in commodities. As a result of the CFTC's oversight, peace and
harmony reigned in the commodities markets for more than 50 years.

All that changed in 1991 when, unbeknownst to almost everyone in the world,
a Goldman-owned commodities-trading subsidiary called J. Aron wrote to the
CFTC and made an unusual argument. Farmers with big stores of corn, Goldman
argued, weren't the only ones who needed to hedge their risk against future
price drops - Wall Street dealers who made big bets on oil prices also
needed to hedge their risk, because, well, they stood to lose a lot too.

This was complete and utter crap - the 1936 law, remember, was specifically
designed to maintain distinctions between people who were buying and selling
real tangible stuff and people who were trading in paper alone. But the
CFTC, amazingly, bought Goldman's argument. It 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.

Now Goldman and other banks were free to drive more investors into the
commodities markets, enabling speculators to place increasingly big bets.
That 1991 letter from Goldman more or less directly led to the oil bubble in
2008, when the number of speculators in the market - driven there by fear of
the falling dollar and the housing crash - finally overwhelmed the real
physical suppliers and consumers. By 2008, at least three quarters of the
activity on the commodity exchanges was speculative, according to a
congressional staffer who studied the numbers - and that's likely a
conservative estimate. By the middle of last summer, despite rising supply
and a drop in demand, we were paying $4 a gallon every time we pulled up to
the pump.

What is even more amazing is that the letter to Goldman, along with most of
the other trading exemptions, was handed out more or less in secret. "I was
the head of the division of trading and markets, and Brooksley Born was the
chair of the CFTC," says Greenberger, "and neither of us knew this letter
was out there." In fact, the letters only came to light by accident. Last
year, a staffer for the House Energy and Commerce Committee just happened to
be at a briefing when officials from the CFTC made an offhand reference to
the exemptions.

"1 had been invited to a briefing the commission was holding on energy," the
staffer recounts. "And suddenly in the middle of it, they start saying,
'Yeah, we've been issuing these letters for years now.' I raised my hand and
said, 'Really? You issued a letter? Can I see it?' And they were like, 'Duh,
duh.' So we went back and forth, and finally they said, 'We have to clear it
with Goldman Sachs.' I'm like, 'What do you mean, you
have to clear it with Goldman Sachs?'"

The CFTC cited a rule that prohibited it from releasing any information
about a company's current position in the market. But the staffer's request
was about a letter that had been issued 17 years earlier. It no longer had
anything to do with Goldman's current position. What's more, Section 7 of
the 1936 commodities law gives Congress the right to any information it
wants from the commission. Still, in a classic example of how complete
Goldman's capture of government is, the CFTC waited until it got clearance
from the bank before it turned the letter over.

Armed with the semi-secret government exemption, Goldman had become the
chief designer of a giant commodities betting parlor. Its Goldman Sachs
Commodities Index - which tracks the prices of 24 major commodities but is
overwhelmingly weighted toward oil - became the place where pension funds
and insurance companies and other institutional investors could make massive
long-term bets on commodity prices. Which was all well and good, except for
a couple of things. One was that index speculators are mostly "long only"
bettors, who seldom if ever take short positions - meaning they only bet on
prices to rise. While this kind of behavior is good for a stock market, it's
terrible for commodities, because it continually forces prices upward. "If
index speculators took short positions as well as long ones, you'd see them
pushing prices both up and down," says Michael Masters, a hedge-fund manager
who has helped expose the role of investment banks in the manipulation of
oil prices. "But they only push prices in one direction: up."

Complicating matters even further was the fact that Goldman itself was
cheerleading with all its might for an increase in oil prices. In the
beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an "oracle of
oil" by The New York Times, predicted a "super spike" in oil prices,
forecasting a rise to $200 a barrel. At the time Goldman was heavily
invested in oil through its commodities-trading subsidiary, J. Aron; it also
owned a stake in a major oil refinery in Kansas, where it warehoused the
crude it bought and sold. Even though the supply of oil was keeping pace
with demand, Murti continually warned of disruptions to the world oil
supply, going so far as to broadcast the fact that he owned two hybrid cars.
High prices, the bank insisted, were somehow the fault of the piggish
American consumer; in 2005, Goldman analysts insisted that we wouldn't know
when oil prices would fall until we knew "when American consumers will stop
buying gas-guzzling sport utility vehicles and instead seek fuel-efficient

But it wasn't the consumption of real oil that was driving up prices - it
was the trade in paper oil. By the summer of2008, in fact, commodities
speculators had bought and stockpiled enough oil futures to fill 1.1 billion
barrels of crude, which meant that speculators owned more future oil on
paper than there was real, physical oil stored in all of the country's
commercial storage tanks and the Strategic Petroleum Reserve combined. It
was a repeat of both the Internet craze and the housing bubble, when Wall
Street jacked up present-day profits by selling suckers shares of a
fictional fantasy future of endlessly rising prices.

In what was by now a painfully familiar pattern, the oil-commodities melon
hit the pavement hard in the summer of 2008, causing a massive loss of
wealth; crude prices plunged from $147 to $33. Once again the big losers
were ordinary people. The pensioners whose funds invested in this crap got
massacred: CalPERS, the California Public Employees' Retirement System, had
$1.1 billion in commodities when the crash came. And the damage didn't just
come from oil. Soaring food prices driven by the commodities bubble led to
catastrophes across the planet, forcing an estimated 100 million people into
hunger and sparking food riots throughout the Third World.

Now oil prices are rising again: They shot up 20 percent in the month of May
and have nearly doubled so far this year. Once again, the problem is not
supply or demand. "The highest supply of oil in the last 20 years is now,"
says Rep. Bart Stupak, a Democrat from Michigan who serves on the House
energy committee. "Demand is at a 10-year low. And yet prices are up."

Asked why politicians continue to harp on things like drilling or hybrid
cars, when supply and demand have nothing to do with the high prices, Stupak
shakes his head. "I think they just don't understand the problem very well,"
he says. "You can't explain it in 30 seconds, so politicians ignore it."

After the oil bubble collapsed last fall, there was no new bubble to keep
things humming - this time, the money seems to be really gone, like
worldwide-depression gone. So the financial safari has moved elsewhere, and
the big game in the hunt has become the only remaining pool of dumb,
unguarded capital left to feed upon: taxpayer money. Here, in the biggest
bailout in history, is where Goldman Sachs really started to flex its

It began in September of last year, when then-Treasury secretary Paulson
made a momentous series of decisions. Although he had already engineered a
rescue of Bear Stearns a few months before and helped bail out quasi-private
lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers -
one of Goldman's last real competitors - collapse without intervention.
("Goldman's superhero status was left intact," says market analyst Eric
Salzman, "and an investment-banking competitor, Lehman, goes away.") The
very next day, Paulson greenlighted a massive, $85 billion bailout of AIG,
which promptly turned around and repaid $13 billion it owed to Goldman.
Thanks to the rescue effort, the bank ended up getting paid in full for its
bad bets: By contrast, retired auto workers awaiting the Chrysler bailout
will be lucky to receive 50 cents for every dollar they are owed.

Immediately after the AIG bailout, Paulson announced his federal bailout for
the financial industry, a $700 billion plan called the Troubled Asset Relief
Program, and put a heretofore unknown 35-year-old Goldman banker named Neel
Kashkari in charge of administering the funds. In order to qualify for
bailout monies, Goldman announced that it would convert from an investment
bank to a bankholding company, a move that allows it access not only to $10
billion in TARP funds, but to a whole galaxy of less conspicuous, publicly
backed funding - most notably, lending from the discount window of the
Federal Reserve. By the end of March, the Fed will have lent or guaranteed
at least $8.7 trillion under a series of new bailout programs - and thanks
to an obscure law allowing the Fed to block most congressional audits, both
the amounts and the recipients of the monies remain almost entirely secret.

Converting to a bank-holding company has other benefits as well: Goldman's
primary supervisor is now the New York Fed, whose chairman at the time of
its announcement was Stephen Friedman, a former co-chairman of Goldman
Sachs. Friedman was technically in violation of Federal Reserve policy by
remaining on the board of Goldman even as he was supposedly regulating the
bank; in order to rectify the problem, he applied for, and got, a
conflict-of-interest waiver from the government. Friedman was also supposed
to divest himself of his Goldman stock after Goldman became a bank-holding
company, but thanks to the waiver, he was allowed to go out and buy 52,000
additional shares in his old bank, leaving him $3 million richer. Friedman
stepped down in May, but the man now in charge of supervising Goldman - New
York Fed president William Dudley - is yet another former Goldmanite.

The collective message of all this - the AIG bailout, the swift approval for
its bank-holding conversion, the TARP funds - is that when it comes to
Goldman Sachs, there isn't a free market at all. The government might let
other players on the market die, but it simply will not allow Goldman to
fail under any circumstances. Its edge in the market has suddenly become an
open declaration of supreme privilege. "In the past it was an implicit
advantage," says Simon Johnson, an economics professor at MIT and former
official at the International Monetary Fund, who compares the bailout to the
crony capitalism he has seen in Third World countries. "Now it's more of an
explicit advantage."

Once the bailouts were in place, Goldman went right back to business as
usual, dreaming up impossibly convoluted schemes to pick the American
carcass clean of its loose capital. One of its first moves in the
post-bailout era was to quietly push forward the calendar it uses to report
its earnings, essentially wiping December 2008 - with its $1.3 billion in
pretax losses - off the books. At the same time, the bank announced a highly
suspicious $1.8 billion profit for the first quarter of 2009 - which
apparently included a large chunk of money funneled to it by taxpayers via
the AIG bailout. "They cooked those first-quarter results six ways from
Sunday," says one hedge-fund manager. "They hid the losses in the orphan
month and called the bailout money profit."

Two more numbers stand out from that stunning first-quarter turnaround. The
bank paid out an astonishing $4.7 billion in bonuses and compensation in the
first three months of this year, an 18 percent increase over the first
quarter of 2008. It also raised $5 billion by issuing new shares almost
immediately after releasing its first-quarter results. Taken together, the
numbers show that Goldman essentially borrowed a $5 billion salary payout
for its executives in the middle of the global economic crisis it helped
cause, using half-baked accounting to reel in investors, just months after
receiving billions in a taxpayer bailout.

Even more amazing, Goldman did it all right before the government announced
the results of its new "stress test" for banks seeking to repay TARP money -
suggesting that Goldman knew exactly what was coming. The government was
trying to carefully orchestrate the repayments in an effort to prevent
further trouble at banks that couldn't pay back the money right away. But
Goldman blew off those concerns, brazenly flaunting its insider status.
"They seemed to know everything that they needed to do before the stress
test came out, unlike everyone else, who had to wait until after," says
Michael Hecht, a managing director of JMP Securities. "The government came
out and said, 'To pay back TARP, you have to issue debt of at least five
years that is not insured by FDIC - which Goldman Sachs had already done, a
week or two before."

And here's the real punch line. After playing an intimate role in four
historic bubble catastrophes, after helping $5 trillion in wealth disappear
from the NASDAQ, after pawning off thousands of toxic mortgages on
pensioners and cities, after helping to drive the price of gas up to $4 a
gallon and to push 100 million people around the world into hunger, after
securing tens of billions of taxpayer dollars through a series of bailouts
overseen by its former CEO, what did Goldman Sachs give back to the people
of the United States in 2008?

Fourteen million dollars.

That is what the firm paid in taxes in 2008, an effective tax rate of
exactly one, read it, one percent. The bank paid out $10 billion in
compensation and benefits that same year and made a profit of more than $2
billion - yet it paid the Treasury less than a third of what it forked over
to CEO Lloyd Blankfein, who made $42.9 million last year.

How is this possible? 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. Thanks to our completely
hosed corporate tax system, companies like Goldman can ship their revenues
offshore and defer taxes on those revenues indefinitely, even while they
claim deductions upfront on that same untaxed income. This is why any
corporation with an at least occasionally sober accountant can usually find
a way to zero out its taxes. A GAO report, in fact, found that between 1998
and 2005, roughly two-thirds of all corporations operating in the U.S. paid
no taxes at all.

This should be a pitchfork-level outrage - but somehow, when Goldman
released its post-bailout tax profile, hardly anyone said a word. One of the
few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas
who serves on the House Ways and Means Committee. "With the right hand out
begging for bailout money," he said, "the left is hiding it offshore."

Fast-Forward to today. It's early June in Washington, D.C. Barack Obama, a
popular young politician whose leading private campaign donor was an
investment bank called Goldman Sachs - its employees paid some $981,000 to
his campaign - sits in the White House. Having seamlessly navigated the
political minefield of the bailout era, Goldman is once again back to its
old business, scouting out loopholes in a new government-created market with
the aid of a new set of alumni occupying key government jobs.


Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief
of staff Mark Patterson and CFTC chief Gary Gensler, both former
Goldmanites. (Gensler was the firm's co-head of finance) And instead of
credit derivatives or oil futures or mortgage-backed CDOs, the new game in
town, the next bubble, is in carbon credits - a booming trillion-dollar
market that barely even exists yet, but will if the Democratic Party that it
gave $4,452,585 to in the last election manages to push into existence a
groundbreaking new commodities bubble, disguised as an "environmental plan,"
called cap-and-trade.

The new carbon-credit market is a virtual repeat of the commodities-market
casino that's been kind to Goldman, except it has one delicious new wrinkle:
If the plan goes forward as expected, the rise in prices will be
government-mandated. Goldman won't even have to rig the game. It will be
rigged in advance.

Here's how it works: If the bill passes; there will be limits for coal
plants, utilities, natural-gas distributors and numerous other industries on
the amount of carbon emissions (a.k.a. greenhouse gases) they can produce
per year. If the companies go over their allotment, they will be able to buy
"allocations" or credits from other companies that have managed to produce
fewer emissions. President Obama conservatively estimates that about $646
billions worth of carbon credits will be auctioned in the first seven years;
one of his top economic aides speculates that the real number might be twice
or even three times that amount.

The feature of this plan that has special appeal to speculators is that the
"cap" on carbon will be continually lowered by the government, which means
that carbon credits will become more and more scarce with each passing year.
Which means that this is a brand-new commodities market where the main
commodity to be traded is guaranteed to rise in price over time. The volume
of this new market will be upwards of a trillion dollars annually; for
comparison's sake, the annual combined revenues of an electricity suppliers
in the U.S. total $320 billion.

Goldman wants this bill. The plan is (1) to get in on the ground floor of
paradigm-shifting legislation, (2) make sure that they're the profit-making
slice of that paradigm and (3) make sure the slice is a big slice. Goldman
started pushing hard for cap-and-trade long ago, but things really ramped up
last year when the firm spent $3.5 million to lobby climate issues. (One of
their lobbyists at the time was none other than Patterson, now Treasury
chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he
personally helped author the bank's environmental policy, a document that
contains some surprising elements for a firm that in all other areas has
been consistently opposed to any sort of government regulation. Paulson's
report argued that "voluntary action alone cannot solve the climate-change
problem." A few years later, the bank's carbon chief, Ken Newcombe, insisted
that cap-and-trade alone won't be enough to fix the climate problem and
called for further public investments in research and development. Which is
convenient, considering that 'Goldman made early investments in wind power
(it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is
an investor in a firm called Changing World Technologies) and solar power
(it partnered with BP Solar), exactly the kind of deals that will prosper if
the government forces energy producers to use cleaner energy. As Paulson
said at the time, "We're not making those investments to lose money."

The bank owns a 10 percent stake in the Chicago Climate Exchange, where the
carbon credits will be traded. Moreover, Goldman owns a minority stake in
Blue Source LLC, a Utah-based firm that sells carbon credits of the type
that will be in great demand if the bill passes. Nobel Prize winner Al Gore,
who is intimately involved with the planning of cap-and-trade, started up a
company called Generation Investment Management with three former bigwigs
from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter
Harris. Their business? Investing in carbon offsets. There's also a $500
million Green Growth Fund set up by a Goldmanite to invest in green-tech ...
the list goes on and on. Goldman is ahead of the headlines again, just
waiting for someone to make it rain in the right spot. Will this market be
bigger than the energy-futures market?

"Oh, it'll dwarf it," says a former staffer on the House energy committee.

Well, you might say, who cares? If cap-and-trade succeeds, won't we all be
saved from the catastrophe of global warming? Maybe - but cap-and-trade, as
envisioned by Goldman, is really just a carbon tax structured so that
private interests collect the revenues. Instead of simply imposing a fixed
government levy on carbon pollution and forcing unclean energy producers to
pay for the mess they make, cap-and trade will allow a small tribe of
greedy-as-hell Wall Street swine to turn yet another commodities market into
a private tax-collection scheme. This is worse than the bailout: It allows
the bank to seize taxpayer money before it's even collected.

"If it's going to be a tax, I would prefer that Washington set the tax and
collect it," says Michael Masters, the hedge fund director who spoke out
against oil-futures speculation. "But we're saying that Wall Street can set
the tax, and Wall Street can collect the tax. That's the last thing in the
world I want. It's just asinine."

Cap-and-trade is going to happen. Or, if it doesn't, something like it will.
The moral is the same as for all the other bubbles that Goldman helped
create, from 1929 to 2009. In almost every case, the very same bank that
behaved recklessly for years, weighing down the system with toxic loans and
predatory debt, and accomplishing nothing but massive bonuses for a few
bosses, has been rewarded with mountains of virtually free money and
government guarantees - while the actual victims in this mess, ordinary
taxpayers, are the ones paying for it.

It's not always easy to accept the reality of what we now routinely allow
these people to get away with; there's a kind of collective denial that
kicks in when a country goes through what America has gone through lately,
when a people lose as much prestige and status as we have in the past few
years. You can't really register the fact that you're no longer a citizen of
a thriving first-world democracy, that you're no longer above getting robbed
in broad daylight, because like an amputee, you can still sort of feel
things that are no longer there.

But this is it. This is the world we live in now. And in this world, some of
us have to play by the rules, while others get a note from the principal
excusing them from homework till the end of time, plus 10 billion free
dollars in a paper bag to buy lunch. It's a gangster state, running on
gangster economics, and even prices can't be trusted anymore; there are
hidden taxes in every buck you pay. And maybe we can't stop it, but we
should at least know where it's all going.

ok. here's what we do. get a big bottle of cognac and drink it, NEAT... 2:10 pm