A Practical Alternative To The Current Barbarism?

The Article: Karl Marx and the Global Economic Crisis by William Bowles.

The Text: I often wonder how Karl Marx would react were he to find himself here, right now? After all, he too lived through momentous and world-changing times, perhaps even more so than the changes we are experiencing, given that his was the world that gave birth to the rise of the Machine and capitalism as we know it. Born on the cusp so-to-speak and I too, was born on the cusp, 23 July, 1945, a couple of weeks before the empire showed the world that it was truly barbarian when it dropped atomic bombs on Hiroshima and Nagasaki.

I also caught the tail-end of 20th century socialist culture, warts an’ all. But I did more than just catch the tail-end, I inherited the culture of the two generations of lefties that preceded mine, one that stretched from here in the UK to the edge of the Black Sea. Worker intellectuals are a unique product of the Industrial Revolution, my father was one of them. Self-taught, multi-skilled (and talented), his father started out working for some lordship or other as a plantsman, growing orchids I think; moved to the city were he managed a Cross & Blackwell warehouse. He was a socialist by nature, a believer in ‘natural justice’ and he communicated it to all of his eight kids.

On the other side, my mother’s family were first generation immigrants from Russia who got here some time in the late 19th century and they brought with them their Russian/Jewish socialist experiences. The connection between the two families is of course politics, a shared culture of struggle and ideas. Fascinating really, and I’m really very lucky to have been born into it as it gave me a unique window through which to view the world.

The 17th century was the real incubator of capitalism, the world of Hobbes and his Leviathon, the world where the European merchants and their banker pals, fat from slavery, trade and general pillage of the known planet, were able to finance those nascent scientific/philosophical investigations that produced, amongst other things, the idea that a human being could be reduced to a mere machine, a collection of gears, pulleys, springs and levers.

“Life is but a motion of limbs… For what is the heart, but a spring; and the nerves, but so many strings; and the joints but so many wheels, giving motion to the whole body.” — Hobbes, Leviathan, 1650)

The entire period has been named the Age of Reason by our historians, though its contemporaries knew it as the Iron Century, and with good reasons all their own. It was by any standard a rapacious age and full of itself, much like the USA of today as it happens and the similarities are not coincidental.

What strikes me about the political life of the past, that is up until the 20th century, is how much more intimate and personal it was, perhaps because of the smaller scale of things. I think for example that in the latter half of the 17th century there were some 600 newspapers being printed in London. Most were a single page and some were considered subversive and could result in the publisher doing time under the Sedition laws. Nevertheless and even though it was mostly the affluent producing these ‘penny papers’, it reveals the fact that a new consciousness was emerging, one that challenged the hegemony of church and state.

Commensurately, during Marx’s time, progressive political life was truly international in scope. Marx and his peers were known and read and acted on, right across Europe and beyond. When the working class organized and they started to create their own political culture, it changed the way they thought about themselves. No longer were they the defenceless victims of a ruthless capitalism and its political class, they could organize politically and change things. They discovered that collectively, they had real power to challenge the status quo and over time they acquired the necessary skills and knowledge to formulate an alternate vision of how we should live.

I think particularly of visionaries like William Morris, whose small scale, co-operative/private ventures that fused the artist/crafts person with machine technology, looks remarkably like the kind of sustainable economy that’s being put about today, over one hundred years later.

It’s the gigantic scale of the economy that’s important here, something corporate capitalism created and it’s also where the Soviets went wrong. Instead of building a new kind of economy, they copied the capitalist industrial model and tried to make it work like a socialist one, one that ignored the natural environment and also it wasn’t very ‘efficient’. To justify such a large investment in infrastructure, factories and assembly lines are designed to maximize profit, if they didn’t—under capitalism anyway—they would go out of business. But not so in the Soviet Union, it was illegal to fire anyone and everyone was guaranteed a job for life.

The contradiction is obvious, building on such a gigantic scale, and virtually from scratch, required an immense human and material investment and one that could only work through rigid central control, the complete opposite of William Morris and his contemporaries ideas. Instead it was all about ‘competing’ with the capitalist world, and in the process democracy went out of the window. Not the most auspicious introduction to socialism it’s true but it still proved that another world was possible, else why is socialism still on the front burner, in fact more so than it has been for thirty-plus years?

But clearly something went really pear-shaped come the 20th century, the ideas that drove those early socialists were overtaken by events and sadly, instead of building on the real democratic traditions that the 19th century radicals gave birth to, we found ourselves lumbered with same old top-down, we know best setup of the ruling class, something that to this day, haunts what’s left of the left and I contend that it’s central to the dilemma that confronts us, namely how to produce a coherent and practical alternative to the current barbarism?

The first thing that strikes me is that today’s working class bears no resemblence to the working class of Marx’s time (or of my father’s for that matter) yet the left still operate as if it’s a white, male factory thing. With a handful of very large unions that have shrinking memberships, the biggest of which is the public service union (and the state is the single biggest employer in the UK), talking about them as a revolutionary working class seems lightyears away from the reality.

Yet the ‘left’ seems not to have noticed the massive transformation that has taken place. Our ruling elite by contrast seem to have a good idea of what section of the working class could possibly challenge the power of capital,

“The Middle Class Proletariat — The middle classes could become a revolutionary class, taking the role envisaged for the proletariat by Marx. The globalization of labour markets and reducing levels of national welfare provision and employment could reduce peoples’ attachment to particular states. The growing gap between themselves and a small number of highly visible super-rich individuals might fuel disillusion with meritocracy, while the growing urban under-classes are likely to pose an increasing threat to social order and stability, as the burden of acquired debt and the failure of pension provision begins to bite. Faced by these twin challenges, the world’s middle-classes might unite, using access to knowledge, resources and skills to shape transnational processes in their own class interest.”

— UK Ministry of Defence report, The DCDC Global Strategic Trends Programme 2007-2036 (Third Edition) p.81, March 2007 (for more on this see, ‘The Obama Phenom or revolving door ‘democracy’ )

Part of the problem for the left seems to be with the definition of class, the ‘middle classes’ are not considered working class, yet they sell their labour just as all working people do (at least the MoD describes its managers as members of the proletariat, which is more than the ‘left’ do). The root of this paradox lies in the fact that the ‘middle classes’ are seen as somehow in cahoots with capital, they’re not really working class, but if that’s the case, then so too were the traditional working class who benefited directly from colonialism.

As far as our ‘left’ is concerned the only ‘real’ working class people are the poor and disenfranchised embraced as the ‘underclass’, blacks, old people, manual labourers and the unemployed. How this diverse, unorganized and disempowered section of the working class are to be organized to lead a revolution is not revealed to us by those on the left in positions to articulate policies.

And of course, as the MoD paper points out, if the relative privilege of the middle classes, who are after all, the people who make corporate capitalism function, feel that their position is under threat, could they, would they organize to overthrow capitalism in an alliance with the rest of the working class? Not if our existing ‘left’ has anything to do with it.

This is not a question the ‘left’ wants to address let alone answer and the reason lies in the lock that the leading members of the ‘left’ have over debate, trapped as they are in a time warp of their own creation. In turn this brings me back to where I came in, namely the nature of democracy. The theorists on the ‘left’ invariably occupy positions of power and influence over programmes and policies, they are after all, articulate and educated. So there is more at stake here than mere reputation, you challenge them at your peril when their privilege is threatened.

An example of how this works comes to mind: not long after I returned to the UK in 2002 I went to the founding meeting of the RESPECT party at Friends House in Euston Road, hoping against hope that some new kind of structure would emerge. How wrong can one be! Deja vu in operation once again.

It was the usual suspects in control of the proceedings, mostly from the ‘Trotskyist’ Socialist Workers Party who made it quite clear that any ideas that came from the floor that ran counter to their ‘programme’ would not be entertained. The reason being, we were told, was that ‘contentious’ issues, for example, a principled position on immigration and abortion would lose them votes in an election! Pure opportunism in action and worse, the notion of democratic and open debate also vanished in the process. I might add that this is nothing new on the ‘left’, it has been part of our ‘tradition’ for decades hidden under the guise of ‘democratic centralism’, but in actuality it’s just centralism, the democratic bit having been jettisoned in the name of ‘discipline, comrades’.

How therefore can we be advocating a democratic socialism if we can’t tolerate open debate and democratic decision-making within our own structures? Is it any wonder therefore why we can’t gain any traction over events or why we are simply not trusted?

No democratic process is perfect, for example in a time of crisis when decisions have to made literally on the spot, it is unrealistic to engage in a general debate with the members about what to do, but this constitutes an exceptional circumstance and in any case, if meaningful democratic debate and discussion has taken place prior to the ‘emergency’ and members are confident that the ‘leadership’ can make the right decisions even if it turns out to be the wrong decision, trust is maintained, lessons are learned and we move on.

It is clear, at least to me, that if we want to complete the revolution initiated by our 19th century brethren, we need to completely restructure the left and the way it operates starting with the way our political structures are organized. No more leadership from on high with dictates being issued to the ‘rank and file’, or else.

It means a political party composed of two essential elements the first being an elected administrative body tasked with making sure that it operates democratically and that the party functions effectively on a day-to-day basis. This body would have absolutely nothing to do with programmes and policies, these would handled by a different body, if you like an ideas committee, which unlike today’s hierarchy would be tasked by the membership to produce a programme that reflected the objectives of the party that in turn originate with the membership.

This is a far cry from today’s left organizations where decision-making is made by the very same people who formulate programmes and policies and thus they have a vested interest in making sure that their view dominates, if for no other reason than ego.

Yes, I know it’s all very small potatoes, a veritable storm in a teacup but this top-down approach has dominated the left for decades. It stifles debate, it leads to never-ending splits as the ‘real’ revolutionaries depart for their chosen barricade. All in all, it’s a very depressing situation that if we are to stand a chance of saving what’s left of the planet, we surely have to change.

Where Did The Left Go Wrong?

The Article: Has the left blown its big chance of success? by Andy Beckett in the Guardian.

The Text: Surprisingly, perhaps, the mood at Marxism 2009 was animated rather than feverish. Photograph: Frank Baron

It is a rare sunny summer morning and I am on the bus from Stoke Newington to Bloomsbury in central London. In these old, slightly earnest parts of the capital, leftwing politics runs deep: from Karl Marx writing in the British Library to communes in the 70s to today’s dogged socialist flyposters. This morning’s bus ride does not disappoint. Seated in front of me, en route to Marxism 2009, the pre-eminent British gathering of the international radical left, are a clean-cut man and woman in their early 20s. He is wearing a crisp new T-shirt that reads “Revolución Bolivarana”. She has a large rucksack. They are speaking German, but the word “socialism” recurs.

The papers today are full of the recession as usual. On the Today programme, David Cameron has been talking about emergency cuts in government spending, and a union leader has been fiercely defending the wages of public sector workers. It could almost be the heady days of the mid-70s, when capitalism seemed to struggle for breath and all political bets appeared to be off.

At Euston station, the couple get off the bus. I follow them, past the looming tower of Network Rail headquarters – once the chaotic private-sector Railtrack, until it was nationalised – and into the complex of meeting rooms hosting Marxism 2009. But the atmosphere inside comes as something of a shock. It is the final, supposedly climactic day of the conference. The speakers are reasonably intriguing and diverse – the radical playwright David Edgar, the dissident Labour MP Jeremy Corbyn, the rising young union boss Mark Serwotka. And yet, Marxism 2009 feels little different from most such leftwing summits in Britain over the last quarter century. The corridors are animated rather than feverish. Attendees greet each other as old friends and comrades rather than eager new converts. The pavement outside has moderately busy stalls for the usual causes: opposition to Israeli land occupations, opposition to the British National Party.

At one table, a weatherbeaten man sits alone selling DVDs of “activist news” and collecting names and addresses. The sky above turns overcast, then steadily darkens. It starts to pour, but he does not move. As the rain soaks his hair and jacket, he sits still and erect, impressively defiant but a bit absurd. The ink on his list of names starts to run.

The last year should have been a happy one for the left. The great global lab experiment in unfettered finance capitalism has blown up. Bankers have become pariahs. Taxes on the rich have gone up. The pages of the financial press have had a frequent air of panic. New Labour has fallen out of love with the free market. Above all, the rightwing economic and political ideas first popularised by Margaret Thatcher in the 70s have, finally, lost their air of impregnability.

“These are the best circumstances to make the left case we’ve known for an awful long time,” says Neal Lawson, head of the leftwing pressure group Compass, “since way back before 1979, since back to the 30s.” Geoff Mulgan, the former Labour strategist and a longtime observer of the left, agrees: “This is a moment that should be incredibly propitious for the left. Capitalism is collapsing. You don’t get more propitious than that.”

There is also the widening recognition that free-market countries have deep social as well as economic problems. Earlier this year Richard Wilkinson and Kate Pickett, at the time almost unknown outside academia, published The Spirit Level: Why More Equal Societies Almost Always Do Better. Its findings about the failings of the most fiercely capitalist countries, such as Britain and the US, in everything from obesity to violent crime to mental health, received overwhelming acclaim in both the rightwing and liberal press. Wilkinson says he is now “absolutely deluged with invitations to speak: to religious groups, to civil servants, to government”. In academia he senses an intellectual tide running leftwards: “In a lot of different subjects there’s a move towards a fundamental recognition of how social people are. In neurology, epidemiology, social psychology, child development, there’s lots of evidence that humans do better if they’re collaborative.”

And yet, in Britain and most comparable countries the left is not thriving. Quite the opposite. The Brown government’s mild tilt to the left has made it no more popular. At the European elections in June, left-leaning parties, whether in office or opposition, cautious or militant, were trounced across the continent. Votes went instead to mainstream conservative parties or far right and anti- immigration groups. Over the summer the broader political debate, particularly in Britain, has shifted in the same direction: “The crisis of the financial markets has become a crisis of public spending – it’s incredible!” says Hilary Wainwright, editor of leftwing magazine Red Pepper. “Public servants are going to be scrutinised down to the last paperclip, while bankers are not going to be scrutinised down to the last million they have received from the government.”

Has the left missed its moment? The radical American writer Rebecca Solnit fears so. “It felt like last October [the peak of the banking panic] was the golden moment to put forward an alternative vision,” she says. “What’s been dismaying is that there has been so little coherent response from the left since.” Lawson wonders whether the sheer size of the political opportunity presented by the financial crisis has induced paralysis: “All our Christmases have come at once, but we don’t know what to do about it.”

At Marxism 2009, the best-attended session of the morning is “Where is the radical left going?”. The main speaker is Alex Callinicos, for decades now one of the key theorists in the Socialist Workers Party (SWP), the tirelessly agitating British fringe party that has organised the conference. In the airless main hall, in front of a stage backdrop reading “Capitalism Isn’t Working!”, Callinicos, concise and dapper in a black shirt, delivers a strikingly downbeat speech. “The forward march of the radical left in Europe has been halted,” he says. “We’re in a situation that is in a sense quite problematic . . . It’s not a uniform picture of stagnation or retreat. The left bloc in Portugal got 10% of the vote in the European elections . . . But the ruling classes are desperately grabbing bits of Keynesianism. So a left economic policy based on Keynesianism, when Keynesianism has entered the mainstream, isn’t very powerful.”

This theme – that governments everywhere have borrowed the left’s traditional tools for taming capitalism to deal with the financial crisis, thus stealing the left’s clothes – is repeated often at the conference. It is met with looks of resignation but also grim satisfaction from the audience. The infinite deviousness of “the ruling classes” and the immense difficulty of the left’s task are a given in these halls. In 2004, Solnit published a much-praised book, Hope in the Dark: the Untold History of People Power, challenging the instinctive pessimism of many leftists. “A lot of activists,” she wrote, “specialise in disappointment.” She adds now: “Despair is a black leather jacket that everyone looks good in. Hope is a frilly pink dress that exposes your knees.”

It is quite hard to imagine Jon Cruddas in a frilly pink dress. The prominent leftwing Labour MP for the raw suburb of Dagenham in east London is all shirtsleeves and strong handshakes when we meet in Westminster. But he is one British socialist who still sees the recession as an ongoing political opportunity. Crisis on the left or not, his own trajectory seems upward: elected as an MP in 2001, he won the most first-preference votes in the Labour deputy leadership contest only six years later (Harriet Harman won via second preferences), and is spoken of by some as a potential party leader if Labour, as is quite possible, moves truly leftward after a general election defeat.

“The 15th of September 2008, the day Lehman Brothers went bust, could be the day the world turned,” he begins with characteristic confidence. “The whole politics of Blair and Cameron looks like the product of more benign times.” Cruddas, unlike some on the left, supported the subsequent bank bail-outs – “you couldn’t let the whole system collapse” – and does not think the apparent amelioration of the financial crisis that has followed means a return to economic and political business as usual. “This is the early knockings of this crisis. You’ve still got trillions of pounds of debt around. The assumption in here” – he nods impatiently towards the House of Commons – “is that we tinker with this economic system, and then go back to 60 consecutive quarters of growth. But out in the country people know different. There is no economic status quo any more. There is a hunger for political ideas. I helped do an e-book on the crisis. Cost £250 to produce, put it on the web, 50,000 copies gone – bang. There is a space for a populist left politics – around [opposition to] ID cards and Trident, around taxes, tax justice – that wasn’t there a year ago.”

But Cruddas says people wanting this politics to crystallise will have to be patient. Rightwing ideas have been so dominant for so long in western politics and economics that they may only slowly loosen their grip. “This is going to take years. There was a long lag between the Wall Street Crash in ’29 and the New Deal [the first effective left-of-centre response to it].” In the meantime, he warns, “There could be a different new form of politics, much more populist, dangerous, fascistic, like the BNP.” With only the faintest hint of ostentation, Cruddas, who has a philosophy PhD, quotes part of a famous passage by the Italian Marxist thinker of the 20s and 30s Antonio Gramsci: “The old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.”

To less upbeat observers than Cruddas it is the left that displays “morbid symptoms”. Mulgan says: “A lot of the left literature feels like it’s just words, just rhetorical. [Groups such as] Compass don’t feel like they’re part of a real social movement. It’s very different from a generation ago.”

Until well into the Thatcher era, the left in Britain was a complete and vigorous political world. It had a mass membership through the unions and the Labour party. It had credibility and charismatic figures: even establishment papers such as the Times feared and sometimes respected Tony Benn or the National Union of Mineworkers. And it had potent ideas from the likes of Gramsci and Marx and Keynes. All of these elements have decayed since the 80s; but none so damagingly, especially in the light of the financial crisis, as the left’s thinking about the economy.

“The left just gave up on economics,” says the economist Paul Ormerod, who retains sympathy for the cause. “Marx and Keynes cast such long shadows. There was too much of the left saying, ‘It’s all there in the old masters.'” Marx died in 1883 and Keynes in 1946; by the 80s – some would say much earlier – the world economy had changed sufficiently to invalidate some of their ideas. Yet the left was more interested by then, Ormerod argues, in other issues such as race and gender and sexuality. Lawson agrees: “We’ve had a hollowed-out generation of economic thinkers.”

Since the 80s, Ormerod says, rightwing economists “have taken over in treasuries and central banks all over the world”. Western universities, too, have become production lines for rightwing economics graduates – and for graduates who do not even consider a complete faith in the free market to be a political position at all. Meanwhile, the left has suffered a broader crisis of confidence: as Lawson puts it, “We’ve had the intellectual stuffing knocked out of us – the fall of communism, the fall of postwar social democracy.”

By the early 21st century, even fresh and successful leftwing books such as Naomi Klein’s The Shock Doctrine or Empire by Michael Hardt and Antonio Negri assumed that global capitalism was immensely strong, “in the midst of conquering its final frontiers” in Klein’s words. Most of the left, just like most other political schools of thought, did not see the great financial collapse of 2008 coming. Since the recession set in, the left has not been able to play what should have been its electoral trump card: “We told you so.”

Solnit considers this picture of universal leftwing retreat too bleak. She sees signs of radicalism in Barack Obama’s administration, for example on green issues. She points out that anti-globalisation and left-leaning environmental groups across the west remain energetic and creative, and that some have paid attention to economics. “I do feel like there are a lot of small alternatives out there: community agriculture, people living by barter, people living off the grid. That revolution is slow and incremental. It’s been going on since the 60s. That continues.” In Hope in the Dark, she criticises those who “expect . . . a punctual reaction” from the left to big political or economic events “and regard the lack of one as a failure”. The way politics works, she writes, “is more complicated than cause and effect”.

At Marxism 2009 there is the occasional reminder that leftwing politics still has potential. In the conference bookshop, for the most part a well-visited mausoleum of nostalgic volumes – Glorious Summer: Class Struggle in Britain 1972 – there is a brief, more forward-looking pamphlet on sale for £1. Visteon: How Workers Occupied and Won is an SWP account of the factory occupations in Northern Ireland and England this spring at the car component manufacturer Visteon. It is written in the usual overdone party style – “Now we have the template for resistance” – but suggests that the left’s response to the global slump may not be completely toothless.

In March, with the motor industry in free-fall, Visteon, a spin-off of Ford, abruptly closed its UK plants and sacked all its workers. Staff reportedly received “six minutes” to clear their lockers, and redundancy terms far inferior to those they had been promised when Ford created the company nine years earlier. Kevin Nolan, a Unite union official at the Visteon factory in Enfield in north London, was one of those fired.

“I’ve always been a middle-of-the-road working man,” he says. “I always voted Labour but I wouldn’t say I was too leftwing.” Yet the mass sackings radicalised him almost instantly. “I started thinking, we’ve got to come up with something. This was a corporation which had decided to use the recession to walk away. The initial plan was to ram a car through the main gates. Then we found a gate round the back of the factory open – no one knows the plant better than the worker – and we could just walk in.” Once inside, Nolan and between a third and two-thirds of the Enfield workforce (accounts vary) blocked up the entrances to the plant with plastic crates, climbed on to the roof and fire escape, and announced that they would occupy the premises until they were offered satisfactory redundancy terms.

Nolan and many of his colleagues had never been on strike, but they made beds out of cardboard on the chilly shopfloor and dug in. Local people, some with no connection to the plant, brought them food and blankets. Members of the SWP arrived. “I said to them, ‘I used to think you were a bunch of nutcases,'” says Nolan. “But they were very, very helpful.” The Enfield occupation acquired a revolutionary tinge: “Don’t Need Politicians, Don’t Need Bosses, Workers Take Control,” read one placard prominent in the TV and web coverage.

The Visteon sit-ins led to pickets of Ford dealerships and the threat of walkouts at Ford factories. In May, after less than five weeks’ campaigning, the Visteon workers were granted redundancy payments close to what they had originally demanded.

Other British factory occupations have followed, most recently at the Vestas wind turbine plant on the Isle of Wight. But the ability of such well-publicised local episodes to restore a lasting momentum to the left is far from obvious. Over the last 20 years, there have been intermittent waves of leftwing militancy – the huge and vivid anti-globalisation protests of the 90s, for example – while the underlying political assumptions of Britain and similar western countries have continued to move rightwards. The modern left, its internal critics say, has become too fragmented, too utopian and divorced from how most people live. Wainwright asks: “What is the underlying social force that’s going to be the basis of the left? In the mid-20th century it was the factory worker and the union member. There are far fewer of them now.” Solnit says: “I don’t see the networks in which great ideas circulate.”

Other people think the left has just run out of ideas. “The feeling is still around that the left doesn’t have any solutions,” says Wilkinson. “Actually, our society is full of alternative ways of organising things” – he cites the success of the Co-operative Bank, built on ethical investments – “but the left desperately needs a developed ideology . . . an analysis of society.” When capitalism had its last great crisis of confidence in the 70s, the British right had a set of remedies and a whole alternative worldview – later called Thatcherism – ready and waiting, decades in the making. Neal Lawson refers provocatively but also enviously to the early Thatcherites’ political and intellectual “brilliance”.

This time, perhaps the real challenge to the tottering status quo is not from the left at all. “The greens share a lot of the ideas of the left,” says Mulgan, “but they are not in coalition with it, they are suspicious of it.” Climate change is almost certain to make environmentalism more powerful. “The dominant sectors of the economy in 10 or 20 years’ time,” Mulgan predicts, will not be banking and property but “environmental services, health, education. This will be good for the left.”

Maybe. Yet the left used to aim to change society rather than wait for society to change in its favour. For the bankers, who seemed to be facing near-extinction less than a year ago, the prospect of much more slowly losing their dominance over western economies to Mulgan’s caring capitalists may not seem such a bad deal.

At the closing rally of Marxism 2009, with all the seats eagerly taken but the air stale as ever in the main hall, the SWP’s national organiser Martin Smith interrupts his speech to read a short poem by the radical American writer Langston Hughes called Dream Deferred. It is an odd but stirring interlude, at least at first. The hall goes completely quiet; the heavyset, middle-aged Smith switches from bare-fisted rhetoric to the ambiguity – half defeatism, half defiance – of Hughes’ verse: “What happens to a dream deferred?/. . . Maybe it just sags/Like a heavy load/Or does it explode?” But Smith rushes too quickly through the words and the moment is gone.

Obama And The Cult Of Neoliberalism

The Article: Can Obama be deprogrammed? The president is a prisoner of the cult of neoliberalism by Michael Lind at Salon.

The Text: In my first foray into political life in the 1970s, I worked during college on the staff of a liberal Democrat in the Texas state Senate. Only a few years earlier, Patty Hearst had been kidnapped and brainwashed by the Symbionese Liberation Army, and a moral panic about cults seducing college kids was sweeping the nation. One result was the rise of a new, thankfully ephemeral profession: “deprogrammers” who for pay would kidnap a young person from a cult and break the spell, by means of isolation, interrogation and maybe reruns of “The Waltons.”

A reactionary Republican state senator from the Houston area, who was heartily despised by my senator, introduced a bill granting parents the right to hire deprogrammers to kidnap adult children who belonged to what the parents regarded as cults and then confine them in motels for several weeks, subject to psychological coercion, without notifying the authorities. Needless to say, this deprogramming law was the greatest threat to the tradition of habeas corpus until another reactionary Texan was installed in the White House in 2001. The bill was laughed to death, when, during a hearing, the sponsor was asked if it could be used to deprogram young people who had joined a certain well-known cult. “Why, yes, Senator,” the Republican replied, “it would apply to cults like the Unitarians.”

Boy, do we need deprogrammers now, to liberate Barack Obama from the cult of neoliberalism.

By neoliberalism I mean the ideology that replaced New Deal liberalism as the dominant force in the Democratic Party between the Carter and Clinton presidencies. In the Clinton years, this was called the “Third Way.” The term was misleading, because New Deal liberalism between 1932 and 1968 and its equivalents in social democratic Europe were considered the original “third way” between democratic socialism and libertarian capitalism, whose failure had caused the Depression. According to New Deal liberals, the United States was not a “capitalist society” or a “market democracy” but rather a democratic republic with a “mixed economy,” in which the state provided both social insurance and infrastructure like electric grids, hydropower and highways, while the private sector engaged in mass production.

When it came to the private sector, the New Dealers, with some exceptions, approved of Big Business, Big Unions and Big Government, which formed the system of checks and balances that John Kenneth Galbraith called “countervailing power.” But most New Dealers dreaded and distrusted bankers. They thought that finance should be strictly regulated and subordinated to the real economy of factories and home ownership. They were economic internationalists because they wanted to open foreign markets to U.S. factory products, not because they hoped that the Asian masses some day would pay high overdraft fees to U.S. multinational banks.

New Dealers approved of social insurance systems like Social Security and Medicare, which were rights (entitlements) not charity and which mostly redistributed income within the middle class, from workers to nonworkers (the retired and the temporarily unemployed). But contrary to conservative propaganda, New Deal liberals disliked means-tested antipoverty programs and despised what Franklin Roosevelt called “the dole.” Roosevelt and his most important protégé, Lyndon Johnson, preferred workfare to welfare. They preferred a high-wage, low-welfare society to a low-wage, high-welfare society. To maintain the high-wage system that would minimize welfare payments to able-bodied adults, New Deal liberals did not hesitate to regulate the labor market, by means of pro-union legislation, a high minimum wage, and low levels of immigration (which were raised only at the end of the New Deal period, beginning in 1965). It was only in the 1960s that Democrats became identified with redistributionist welfarism — and then only because of the influence of the New Left, which denounced the New Deal as “corporate liberalism.”

Between the 1940s and the 1970s, the New Deal system — large-scale public investment and R&D, regulated monopolies and oligopolies, the subordination of banking to productive industry, high wages and universal social insurance — created the world’s first mass middle class. The system was far from perfect. Southern segregationist Democrats crippled many of its progressive features and the industrial unions were afflicted by complacency and corruption. But for all its flaws, the New Deal era is still remembered as the Golden Age of the American economy.

And then America went downhill.

The “stagflation” of the 1970s had multiple sources, including the oil price shock following the Arab oil embargo in 1973 and the revival of German and Japanese industrial competition (China was still recovering from the damage done by Mao). During the previous generation, libertarian conservatives like Milton Friedman had been marginalized. But in the 1970s they gained a wider audience, blaming the New Deal model and claiming that the answer to every question (before the question was even asked) was “the market.”

The free-market fundamentalists found an audience among Democrats as well as Republicans. A growing number of Democratic economists and economic policymakers were attracted to the revival of free-market economics, among them Obama’s chief economic advisor Larry Summers, a professed admirer of Milton Friedman. These center-right Democrats agreed with the libertarians that the New Deal approach to the economy had been too interventionist. At the same time, they thought that government had a role in providing a safety net. The result was what came to be called “neoliberalism” in the 1980s and 1990s — a synthesis of conservative free-market economics with “progressive” welfare-state redistribution for the losers. Its institutional base was the Democratic Leadership Council, headed by Bill Clinton and Al Gore, and the affiliated Progressive Policy Institute.

Beginning in the Carter years, the Democrats later called neoliberals supported the deregulation of infrastructure industries that the New Deal had regulated, like airlines, trucking and electricity, a sector in which deregulation resulted in California blackouts and the Enron scandal. Neoliberals teamed up with conservatives to persuade Bill Clinton to go along with the Republican Congress’s dismantling of New Deal-era financial regulations, a move that contributed to the cancerous growth of Wall Street and the resulting global economic collapse. As Asian mercantilist nations like Japan and then China rigged their domestic markets while enjoying free access to the U.S. market, neoliberal Democrats either turned a blind eye to the foreign mercantilist assault on American manufacturing or claimed that it marked the beneficial transition from an industrial economy to a “knowledge economy.” While Congress allowed inflation to slash the minimum wage and while corporations smashed unions, neoliberals chattered about sending everybody to college so they could work in the high-wage “knowledge jobs” of the future. Finally, many (not all) neoliberals agreed with conservatives that entitlements like Social Security were too expensive, and that it was more efficient to cut benefits for the middle class in order to expand benefits for the very poor.

The transition from New Deal liberalism to neoliberalism began with Carter, but it was not complete until the Clinton years. Clinton, like Carter, ran as a populist and was elected on the basis of his New Deal-ish “Putting People First” program, which emphasized public investment and a tough policy toward Japanese industrial mercantilism. But early in the first term, the Clinton administration was captured by neoliberals, of whom the most important was Treasury Secretary Robert Rubin. Under Rubin’s influence, Clinton sacrificed public investment to the misguided goal of balancing the budget, a dubious accomplishment made possible only by the short-lived tech bubble. And Rubin helped to wreck American manufacturing, by pursuing a strong dollar policy that helped Wall Street but hurt American exporters and encouraged American companies to transfer production for the U.S. domestic market to China and other Asian countries that deliberately undervalued their currencies to help their exports.

By the time Barack Obama was inaugurated, the neoliberal capture of the presidential branch of the Democratic Party was complete. Instead of presiding over an administration with diverse economic views, Obama froze out progressives, except for Jared Bernstein in the vice-president’s office, and surrounded himself with neoliberal protégés of Robert Rubin like Larry Summers and Tim Geithner. The fact that Robert Rubin’s son James helped select Obama’s economic team may not be irrelevant.

Instead of the updated Rooseveltonomics that America needs, Obama’s team offers warmed-over Rubinomics from the 1990s. Consider the priorities of the Obama administration: the environment, healthcare and education. Why these priorities, as opposed to others, like employment, high wages and manufacturing? The answer is that these three goals co-opt the activist left while fitting neatly into a neoliberal narrative that could as easily have been told in 1999 as in 2009. The story is this: New Dealers and Keynesians are wrong to think that industrial capitalism is permanently and inherently prone to self-destruction, if left to itself. Except in hundred-year disasters, the market economy is basically sound and self-correcting. Government can, however, help the market indirectly, by providing these three public goods, which, thanks to “market failures,” the private sector will not provide.

Healthcare? New Deal liberals favored a single-payer system like Social Security and Medicare. Obama, however, says that single payer is out of the question because the U.S. is not Canada. (Evidently the New Deal America of FDR and LBJ was too “Canadian.”) The goal is not to provide universal healthcare, rather it is to provide universal health insurance, by means that, even if they include a shriveled “public option,” don’t upset the bloated American private health insurance industry.

Education? In the 1990s, the conventional wisdom of the neoliberal Democrats held that the “jobs of the future” were “knowledge jobs.” America’s workers would sit in offices with diplomas on the wall and design new products that would be made in third-world sweatshops. We could cede the brawn work and keep the brain work. Since then, we’ve learned that brain work follows brawn work overseas. R&D, finance and insurance jobs tend to follow the factories to Asia.

Education is also used by neoliberals to explain stagnant wages in the U.S. By claiming that American workers are insufficiently educated for the “knowledge economy,” neoliberal Democrats divert attention from the real reasons for stagnant and declining wages — the offshoring of manufacturing, the decline of labor unions, and, at the bottom of the labor market, a declining minimum wage and mass unskilled immigration. One study after another since the 1990s has refuted the theory that wage inequality results from skill-biased technical change. But the neoliberal cultists around Obama who write his economic speeches either don’t know or don’t care. Like Bill Clinton before him, Barack Obama continues to tell Americans that to get higher wages they need to go to college and improve their skills, as though there weren’t a surplus of underemployed college grads already.

Environment? Here the differences between the New Deal Democrats and the Obama Democrats could not be wider. Their pro-industrial program did not prevent New Deal Democrats from being passionate about resource conservation and wilderness preservation. They did not hesitate to use regulations to shut down pollution. And their approach to energy was based on direct government R&D (the Manhattan Project) and direct public deployment (the TVA).

Contrast the straightforward New Deal approaches with the energy and environment policies of Obama and the Democratic leadership, which are at once too conservative and too radical. They are too conservative, because cap and trade relies on a system of market incentives that are not only indirect and feeble but likely to create a subprime market in carbon, enriching a few green profiteers. At the same time, they are too radical, because any serious attempt to shift the U.S. economy in a green direction by hiking the costs of non-renewable energy would accelerate the transfer of U.S. industry to Asia — and with it not only industry-related “knowledge jobs” but also the manufacture of those overhyped icons of the “green economy,” solar panels and windmills.

While we can’t go back to the New Deal of the mid-20th century in its details, we need to re-create its spirit. But short of confining them in motel rooms and making them watch newsreels about the Hoover Dam, Glass-Steagall, the TVA and the Manhattan Project, is it possible to liberate President Obama and the Democratic leadership from the cult of neoliberalism?

Running The Worlds Largest Scam Right In The Open

The Article: The Man Who Crashed the World by Michael Lewis in Vanity Fair, a profile on Joseph Cassano’s role in bringing down AIG. Almost a year after A.I.G.’s collapse, despite a tidal wave of outrage, there still has been no clear explanation of what toppled the insurance giant. The author decides to ask the people involved—the silent, shell-shocked traders of the A.I.G. Financial Products unit—and finds that the story may have a villain, whose reign of terror over 400 employees brought the company, the U.S. economy, and the global financial system to their knees.

The Text: Six months ago, I received an odd phone call from a man named Jake DeSantis at A.I.G. Financial Products—the infamous unit of the doomed insurance company, staffed by expensively educated, highly paid traders, whose financial ineptitude is widely suspected of costing the U.S. taxpayer $182.5 billion and counting. At the time A.I.G. F.P.’s losses were reported, it became known that a handful of traders in this curious unit had sold trillions of dollars of credit-default swaps (essentially unregulated insurance policies) on piles of U.S. subprime mortgages, but its employees hadn’t yet become the leading examples of Wall Street greed. And so this was before Jake DeSantis and his colleagues found themselves suburban-Connecticut outcasts, before their first death threats, before the House of Representatives passed a bill because of them (taxing 90 percent of their large bonuses), before New York attorney general Andrew Cuomo announced he was going after their paychecks, and before Iowa senator Charles Grassley said that A.I.G.’s leaders should follow the Japanese example and “either do one of two things, resign or go commit suicide.”

DeSantis turned out to be a friend of a friend. He’d called because he didn’t know anyone else “in the media.” As a type he was instantly recognizable: a “quant,” a numbers guy who was allowed to take financial risks because of his superior math skills, but who had no taste for company politics or public exposure. He’d grown up in the Midwest, the son of schoolteachers, and discovered Wall Street as a scholarship student at M.I.T. The previous seven years he’d spent running A.I.G. F.P.’s profitable stock-market-related trades. He wasn’t looking for me to write about him or about A.I.G. F.P. He just wanted to know why the public perception of what had happened inside his unit, and the larger company, was so different from the private perception of the people inside it, who actually knew what had happened. The idea that the employees of A.I.G. F.P. had conspired to maximize their short-term gains at the company’s longer-term expense, for instance. He and the other traders had been required to defer about half of their pay for years, and intertwine their long-term interests with their firm’s. The people who lost the most when A.I.G. F.P. went down were the employees of A.I.G. F.P.: DeSantis himself had just watched more than half of what he’d made over the previous nine years vanish. The incentive system at A.I.G. F.P., created in the mid-1990s, wasn’t the short-term-oriented racket that helped doom the Wall Street investment bank as we knew it. It was the very system that U.S. Treasury secretary Timothy Geithner, among others, had proposed as a solution to the problem of Wall Street pay.

Even more oddly, the public explanation of A.I.G.’s failure focused on the credit-default swaps sold by traders at A.I.G. F.P., when A.I.G.’s problems were clearly broader. There was the mortgage-insurance unit in North Carolina, United Guaranty, that had taken on all sorts of silly risks in the past two years, lost several billion dollars, and replaced their C.E.O. There were the fund managers at A.I.G., the parent company, who had blown nearly $50 billion on trades in subprime mortgages—that is, they had lost more than A.I.G. F.P., whose losses stood around $45 billion. And there was a pattern: all of this stuff had happened since 2005, after an accounting scandal forced C.E.O. Maurice “Hank” Greenberg to resign. Greenberg, who had headed A.I.G. since 1968, was a bullying, omnipotent ruler—one of those bosses who did not so much build a company as tailor it to his character and render it incapable of being run by anyone else. After he was forced out, Greenberg said, “The new management wanted to prove that they could continue to grow without former management” and so turned a blind eye to all sorts of risks. So how come most of the senior management at A.I.G. was left in place by the U.S. Treasury after the bailout? Why were officials, both public and private, so intent on leading others to believe all the losses at A.I.G. had been caused by a few dozen traders in this fringe unit in London and Connecticut?

I had no idea, was busy doing other things, and had no special interest in Jake DeSantis’s predicament. I listened politely, made my excuses—and went back to whatever it was I’d been doing. But then, on March 19, the new C.E.O. of A.I.G., Edward Liddy, went to Washington to testify. The story broke—or, rather, rebroke, as it had been reported two weeks earlier, without stirring much notice—that A.I.G. F.P. had just shelled out $450 million in bonuses to the 400 employees of A.I.G. F.P., including to Jake DeSantis. It must have been an otherwise slow news day because all hell broke loose, in a way it hadn’t before and hasn’t since in this financial crisis. The perception was that the very same people who had made these insane, greed-driven decisions that might cost the U.S. taxpayer $182.5 billion were still paying themselves big bucks! An exchange between C.E.O. Liddy and Florida congressman Alan Grayson captured the spirit of that moment:

grayson: Mr. Liddy, you said before that there’s 20 or 25 people who were involved in the credit default business. What are their names, please?

liddy: I don’t have their names at my disposal, sir. grayson: Well, I’m sure you remember a few of the names. I mean, they did cause your company to crash.

liddy: You know, I’ve been at the company, as you know, for six months. I don’t know all the people that were in AIG F.P., and many of them are gone.

grayson: Well, there or gone, it doesn’t really matter. I want to know who they are. Names, please.…

liddy: If it’s possible to provide you the names, we will. We will cooperate with you.

grayson: That’s good, but I want to know the names that you know right now.

liddy: I don’t know them, sir.

grayson: Not a single one. You’re talking about a group, a small group of people who caused your company to lose $100 billion, as you sit here today, you can’t give me one single name.

liddy: The single name I would give you is Joseph Cassano, who ran …

grayson: That’s a good start. You already gave that name. Give me another name.

liddy: I just don’t know them. I do not know those names. I don’t have them all at my command.

grayson: Well, how can you propose to solve the problems of the company that you’re now running if you don’t know the names of the people who caused that problem? … I would expect you’d at least know more than one name. How about two names? Give us one more name.

liddy: I’m just not going to do that, sir, because that will provide—that’ll be the—that could be a list of people that we could do—individuals who want to do damage to them could do that. It’s just not …

grayson: Well, listen, these same people could now be working right now today at Citibank. Is it more important to protect them, the ones who caused the $100 billion loss, or protect us? Which is more important to you right now?

For a brief moment you had a glimpse of how harshly financial people might be treated if Wall Street ever lost its political influence. Just days before, Larry Summers had gone on the morning talk shows to explain that a contract is a contract and the government couldn’t just go in and void it and take back A.I.G.’s paychecks, but that “every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve System.” Then Obama himself went out of his way to denounce the greed at A.I.G. F.P. and say he was looking for a way to get the bonus money back—and even that failed to slake the public anger. “On A.I.G.,” a journalist asked Obama at a press conference, “why did you wait—why did you wait days to come out and express that outrage? It seems like the action is coming out of New York and the attorney general’s office. It took you days to come public with Secretary Geithner and say, Look, we’re outraged. Why did it take so long?”

“It took us a couple of days because I like to know what I’m talking about before I speak,” Obama said testily. “All right?”

It’s unlikely that he actually did know what he was talking about, except in the broadest outlines. Nor, for that matter, did the people who had engineered the bailout. How could they? At no point did anyone from the U.S. Treasury or the U.S. Congress, or any of the various New York State authorities that had gotten involved, call them up, much less visit A.I.G. F.P.—as, say, someone might who was genuinely curious to know what, exactly, had happened there. Not even A.I.G. C.E.O. Ed Liddy had bothered to make the drive from Manhattan to Wilton, Connecticut, where many of the offending trades had been done, and most of the offending bonuses were being paid, to ask questions of the people still on the scene—people who could have told him a great deal about what had happened and why. Everyone seemed to be operating on whatever they read in the newspapers—and the people inside A.I.G. F.P., who had the best view of the action, did not appear to be talking to reporters. Depending on which account you read, you thought they had lost $40 billion, or $100 billion, or $152 billion. They had done this by selling credit-default swaps on subprime-mortgage bonds—which is to say they had insured Goldman Sachs, Deutsche Bank, Merrill Lynch, and the rest against Americans with weak credit histories defaulting on their mortgages. But why? Apparently, because they were greedy: the premiums they took in from the insurance allowed them to pay themselves big bonuses, which they’d grown so accustomed to that they now were reduced to stealing from the U.S. taxpayer. And that, it seemed, was that.

The day after Liddy’s testimony, I got another call from Jake DeSantis. (I was still the only person “in the media” with whom he felt any connection.) He was upset. He’d turned down offers of more money from other people. He’d stayed only because the company had begged him to help clean up the mess: the bonus he was paid was the result of profits he had generated by selling off his trades in global equities—profits which almost surely would have been losses had he not hung around. He’d had nothing to do with the trades that lost money; the handful of people who’d known about them, when they happened, were long gone, and even they had been guided by a certain understandable logic. Now A.I.G.’s new leader, who had accepted these bonuses and run them by both the Treasury and the Federal Reserve, flies down to Washington and tells the world that he found the bonuses “distasteful.”

“You go to church and you go to soccer practice and people look at you funny,” said DeSantis. “This is changing people’s views on who I am as a person.” He’d decided to resign, write a letter to Liddy, and, as he put it, “release it to the media.”

It sounded like the sort of thing that might work on a TV show. “What does that mean: ‘Release it to the media’?” I asked. That, he said, was why he’d called me: he thought I knew how. Having no clue, I put him in touch with the editor of the New York Times op-ed page, who published Jake DeSantis’s letter of resignation on March 25 at the top of his page under the headline: dear a.i.g., i quit! In it Jake repeated what he’d told me, offered a bit of his life story, and confessed the size of his after-tax bonus ($742,006.40). He also explained that he had for a year spent up to 14 hours a day helping to dismantle the company and that he and the others who had nothing to do with the losses had agreed to do so based on the promise their contracts would be honored.

It’s never easy to prove that a piece of writing causes anything, but Jake’s letter was an instant sensation. Bits of it were reprinted in major publications around the world. Within a few days it was the most sent, most blogged, and most read item on the Times’s Web site, and remained so for the entire month. Three point nine million browsers clicked on it and read it, and the tone of the public discussion changed. New York attorney general Andrew Cuomo stopped saying he intended to hound the millions paid to the people who worked at A.I.G. F.P., and started saying he was more interested in the $12.9 billion A.I.G. had paid out to Goldman Sachs, and others, to cover the massive bets against U.S. subprime mortgages that they had made with A.I.G. The House tax bill stalled in the Senate. I didn’t really know Jake DeSantis, but I thought, That was just incredibly brave. He stepped out alone in front of the mob and compelled it to disband, at least for the moment. But I never heard back from him. After a few days of not being able to open a newspaper or go to a Web site without seeing some reference to Jake DeSantis and his letter, I phoned him. “Oh hey,” he said cheerily. “They published my letter.”

No shit, Jake.

“Has it worked out O.K.?” I asked.

“Oh yeah,” he said, “but I had to move my family out of our house.”

He had woken up the morning his piece ran to find media trucks jamming the end of his driveway. He took his family out back through the woods—“We live in the middle of nowhere”—and secreted them at a friend’s house. “I’ve been going back and standing on the porch down the road and pretending to be a gawking neighbor,” he said, “but they’re all still there blocking the end of the driveway. They’re waiting for me to come back, I guess.” His voice mail, he said, was also jammed. “All these media people keep calling,” he said. “Like who?” I asked. “We don’t watch TV, so I don’t know who they are,” he said. I pressed him. “Well, there’s one guy who has been calling a bunch. Matt Lauer. I don’t know who he’s with.” The only caller he could completely identify was Katie Couric: “She called our mayor personally and tried to butter her up to get her to tell her where I am,” he said. (A Couric producer says, “Katie placed a brief call to the mayor, expressed interest in the interview, and nothing further happened.”) He suspected, probably rightly, that the media wanted him to play the role of the greedy Wall Street trader who had stolen millions and now claimed to feel misunderstood. “O.K.,” he said. “I can do this and probably not make an ass of myself. But I can do nothing and not make an ass of myself. I’ll stick with that.”

With that, A.I.G. F.P. went dark again, which, I now realized, was a shame. DeSantis had established, sort of, what the people in his unit didn’t do. He’d left unexplained what exactly they did do.

Here is an amazing fact: nearly a year after perhaps the most sensational corporate collapse in the history of finance, a collapse that, without the intervention of the government, would have led to the bankruptcy of every major American financial institution, plus a lot of foreign ones, too, A.I.G.’s losses and the trades that led to them still haven’t been properly explained. How did they happen? Unlike, say, Bernie Madoff’s pyramid scheme, they don’t seem to have been raw theft. They may have been an outrageous departure from financial norms, but, if so, why hasn’t anyone in the place been charged with a crime? How did an insurance company become so entangled in the sophisticated end of Wall Street and wind up the fool at the poker table? How could the U.S. government simply hand over $54 billion in taxpayer dollars to Goldman Sachs and Merrill Lynch and all the rest to make good on the subprime insurance A.I.G. F.P. had sold to them—especially after Goldman Sachs was coming out and saying that it had hedged itself by betting against A.I.G.? Since I had him on the phone I asked Jake DeSantis for what Congressman Grayson had asked Edward Liddy: names. He obligingly introduced me to his colleagues in London and Connecticut, and they walked me through what had happened—all of them speaking to someone from the outside for the first time. All, for obvious reasons, were terrified of seeing their names in print, and asked not to be mentioned by name. That was fine by me, as their names are not what’s interesting. What’s interesting is their point of view on the event closest to the center of the financial crisis. For while they disagreed on this and that, they all were fairly certain that if it hadn’t been for A.I.G. F.P. the subprime-mortgage machine might never have been built, and the financial crisis might never have happened.
The Soul of a New Machine

A.I.G. F.P. was created back in 1987 by refugees from Drexel Burnham, led by a trader named Howard Sosin, who claimed to have a better model to trade and value interest-rate swaps. Nineteen-eighties financial innovation had all sorts of consequences, but one of them was a boom in the number of deals between big financial firms that required them to take each other’s credit risks. Interest-rate swaps—in which a party swaps a stream of income from a floating rate of interest for one from a fixed rate of interest—was one such innovation.

Once upon a time Chrysler issued a bond through Morgan Stanley, and the only people who wound up with credit risk were the investors who had bought the Chrysler bond. Now Chrysler might sell its bonds and simultaneously enter into a 10-year interest-rate-swap transaction with Morgan Stanley—and just like that Chrysler and Morgan Stanley were exposed to each other. If Chrysler went bankrupt, its bondholders obviously lost; depending on the nature of the swap and the movement of interest rates, Morgan Stanley might lose, too. If Morgan Stanley went bust, Chrysler along with anyone else who had done interest-rate swaps with Morgan Stanley stood to suffer. Financial risk had been created, out of thin air, and it begged to be either honestly accounted for or disguised.

Enter Sosin, with his supposedly new and improved interest-rate-swap model (even though Drexel Burnham was not at the time a market leader in interest-rate swaps).

There was a natural role for a blue-chip corporation with the highest credit rating to stand in the middle of swaps and long-term options and the other risk-spawning innovations. The traits required of this corporation were that it not be a bank—and thus subject to bank regulation and the need to reserve capital against the risky assets—and that it be willing and able to bury exotic risks on its balance sheet. There was no real reason that company had to be A.I.G.; it could have been any AAA-rated entity with a huge balance sheet. Berkshire Hathaway, for instance, or General Electric. A.I.G. just got there first.

In a financial system that was rapidly generating complicated risks, A.I.G. F.P. became a huge swallower of those risks. In the early days it must have seemed as if it was being paid to insure against events extremely unlikely to occur—how likely was it that all sorts of companies and banks all over the globe would go bust at the same time? Its success bred imitators: Zurich Re F.P., Swiss Re F.P., Credit Suisse F.P., Gen Re F.P. All of these places were central to what happened in the last two decades; without them the new risks being created would have had no place to hide, but would have remained in full view of bank regulators. All of these places have been washed away by the general nausea now felt in the presence of complicated financial risks, but there was a moment when their existence seemed cartographically necessary to the financial world. And A.I.G. F.P. was the model for them all.

The division’s first 15 years were consistently, amazingly profitable—there wasn’t the first hint that it might be running risks that would cause it to lose money, much less cripple its giant parent. Its traders were able to claim that they were “hedged,” and even if the term was misleading, they never sold exactly the same thing as the thing they had bought—there was always some slight difference. The risks it ran were probably trivial in relation to its capital, because the risks that the financial system wanted to lay off on it were, in fact, not terribly risky. One indication of this is that, even in the middle of the calamity, the 95 percent of A.I.G. F.P. that had nothing to do with subprime-mortgage bonds continued to generate profits. By 2001, A.I.G. F.P. could be counted on to generate $300 million a year, or 15 percent of A.I.G.’s profits.

Meanwhile, the people who worked at A.I.G. F.P. got rich. Exactly how rich is hard to say, but there are plenty of hints. One is that a company lawyer—a mere lawyer!—took home a $25 million bonus at the end of one year. Another is that in 2005, when Howard Sosin and his wife divorced, she received more than $40 million of an estate valued at $168 million—and Sosin had left A.I.G. in 1993, receiving $182 million from the company! He had been replaced that year as C.E.O. by a gentler soul named Tom Savage, who had allowed Hank Greenberg to take some of the sugar out of F.P., but even then the small band of traders had, arguably, a sweeter deal than any money managers in the world. The typical hedge fund kept 20 percent of profits; the traders at A.I.G. F.P. kept 30 to 35 percent. The typical hedge fund or private-equity fund has to schlep around and raise money all the time, and post collateral with big Wall Street firms for all the trades they do. The traders at A.I.G. F.P. had essentially unlimited capital on tap from the parent company, along with the AAA rating, rent-free. For the people who worked there, A.I.G. F.P. was a financial miracle. They were required to leave 50 percent of their bonuses in the company, but they were happy to do so; many of them, viewing it as the best way to grow their own savings, invested far more than the minimum back in the company. When it collapsed, the employees lost more than $500 million of their own money.

How and why their miracle became a catastrophe, A.I.G. F.P.’s traders say, is a complicated story, but it begins simply: with a change in the way decisions were made, brought about by a change in its leadership. At the end of 2001 its second C.E.O., Tom Savage, retired, and his former deputy, Joe Cassano, was elevated. Savage is a trained mathematician who understood the models used by A.I.G. traders to price the risk they were running—and thus ensure that they were fairly paid for it. He enjoyed debates about both the models and the merits of A.I.G. F.P.’s various trades. Cassano knew a lot less math and had much less interest in debate.

It’s impossible to deliver the full flavor of a man’s character without talking to him, and relying instead upon a bunch of people who remain afraid of seeing their names in print. That Joe Cassano is the son of a police officer and was a political-science major at Brooklyn College seems, in retrospect, far less relevant than that he’d spent most of his career, both at Drexel and A.I.G. F.P., in the back office, doing operations. Across A.I.G. F.P. the view of the boss was remarkably consistent: a guy with a crude feel for financial risk but a real talent for bullying people who doubted him. “A.I.G. F.P. became a dictatorship,” says one London trader. “Joe would bully people around. He’d humiliate them and then try to make it up to them by giving them huge amounts of money.”

“One day he got me on the phone and was pissed off about a trade that had lost money,” says a Connecticut trader. “He said, ‘When you lose money it’s my fucking money. Say it.’ I said, ‘What?’ ‘Say “Joe, it’s your fucking money!”’ So I said, ‘It’s your fucking money, Joe.’”

“The culture changed,” says a third. “The fear level was so high that when we had these morning meetings you presented what you did not to upset him. And if you were critical of the organization, all hell would break loose.” Says a fourth, “Joe always said, ‘This is my company. You work for my company.’ He’d see you with a bottle of water. He’d come over and say, ‘That’s my water.’ Lunch was free, but Joe always made you feel he had bought it.” And a fifth: “Under Joe the debate and discussion that was common under Tom [Savage] ceased. I would say what I’m saying to you. But with Joe over my shoulder as the audience.” A sixth: “The way you dealt with Joe was to start everything by saying, ‘You’re right, Joe.’”

According to traders, Cassano was one of those people whose insecurities manifested themselves in a need for obedience and total control. “One day he came in and saw that someone had left the weights on the Smith machine, in the gym,” says a source in Connecticut. “He was literally walking around looking for people who looked buff, trying to find the guy who did it. He was screaming, ‘Who left the fucking weight on the fucking Smith machine? Who left the fucking weight on the fucking Smith machine?’” If that rings a bell it may be because you read The Caine Mutiny and recall Captain Queeg scouring the ship to find out who had stolen the strawberries. Even by the standards of Wall Street villains, whose character flaws wind up being exaggerated to fit the crime, Cassano was a cartoon despot.

Oddly, he was as likely to direct his anger at profitable traders as at unprofitable ones—and what caused him to become angry was the faintest whiff of insurrection.

Even more oddly, his anger had no obvious effect on the recipient’s paycheck; a trader might find himself routinely abused by his boss and yet delighted by his year-end bonus, determined by that same boss. Every one of the people I spoke with admitted that the reason they hadn’t taken a swing at Joe Cassano, before walking out the door, was that the money was simply too good. A man who valued loyalty and obedience above all other traits had not any tools to command them except money. Money worked, but only up to a point. If you were going to be on the other side of a trade from Goldman Sachs, you had better know what, exactly, Goldman Sachs was up to. A.I.G. F.P. could attract extremely bright people, whose success depended on precision of both calculation and judgment. It was now run, roughly, by a man who didn’t fully understand all the calculations and whose judgment was clouded by his insecurity. The few people willing to question that judgment wound up quitting the firm. Left behind were people who more or less accommodated Cassano. “If someone is a complete asshole,” one of them puts it to me, “you seek his approval in a way you don’t if he’s a nice guy.”

All of which raises an obvious question: Who put a man like Joe Cassano in charge of such an enterprise as A.I.G. F.P.? The simple answer is Hank Greenberg, the C.E.O. of A.I.G.; the more complicated one is A.I.G. F.P.’s board, consisting of many smart people, including Harvard economist Martin Feldstein. “Tom Savage proposed Joe to replace him,” says Greenberg, “and we had no reason to think he wasn’t able to do the job.”

A.I.G. F.P.’s employees for their part suspect that the only reason Greenberg promoted Cassano was that he saw in him a pale imitation of his own tyrannical self and felt he could control him. “So long as Greenberg was there, it worked,” says one trader, “because he watched everything Joe did. After the Nikkei collapsed [in the 1990s], a trader in Japan lost 20 million. Greenberg personally flew to Tokyo and took him into a room and grilled him until he was satisfied.” In March 2005, however, Eliot Spitzer forced Greenberg to resign. And, as one trader puts it, “the new guys running A.I.G. had no idea.” They thought the money machine ran on its own, and Cassano did nothing to discourage the view. By 2005, A.I.G. F.P. was indeed, in effect, his company.

But even here the story’s messier than its broad outlines. For a start, the guy who had the most invested in A.I.G. F.P. was Joe Cassano. Cassano had been paid $38 million in 2007, but left $36.75 million of that inside the firm. His financial interest in A.I.G. F.P. struck those who worked for him as secondary to his psychological investment: the firm was, by all accounts, Cassano’s sole source of self-worth, its success his lone status symbol. He wore crappy clothes, drove a crappy car, and spent all of his time at the office. He had made huge piles of money ($280 million!), but so far as anyone could tell he didn’t spend any of it. “Joe wasn’t a trader and now he wasn’t a risktaker, in his personal life,” says one of the traders. “With the money he didn’t have in the company he bought Treasury bonds.” He had no children, no obvious social ambition; his status concerns seemed limited to his place in the global financial order. He entertained a notion of himself as the street-smart guy who had triumphed over his social betters—which of course implied that he wasn’t quite sure that he had. “Joe had Goldman envy,” one trader tells me—which was strange, as Cassano’s brother and sister both worked for Goldman Sachs. “His whole life was F.P.,” another trader says. “Without F.P. he had nothing.” That was another reason, in addition to fear, that the highly educated, highly intelligent people who worked for Joe Cassano were slow to question whatever he was doing: he was the last person, they assumed, who would blow the place up.

The more subtle change inside A.I.G. F.P. occurred not long after Cassano assumed control. In 1998, A.I.G. F.P. had entered the new market for credit-default swaps: it sold insurance to banks against the risk of defaults by huge numbers of investment-grade public corporations. As Gillian Tett tells it in her new book, Fool’s Gold, bankers at J. P. Morgan, having invented credit-default swaps, went looking for an AAA-rated company to assume the bulk of the risk associated with them, and discovered A.I.G. The relationship began innocently enough, by Wall Street standards. The risk in these early deals was indeed small: it was unlikely that large numbers of investment-grade companies in different countries and different industries would default on their debt at the same time. (Even now A.I.G. F.P.’s $450 billion portfolio of corporate credit-default swaps, which dwarfs the $75 billion portfolio of subprime-mortgage credit-default swaps, has avoided losses.) But it made explicit what until then had only been implicit: A.I.G. F.P. was the most receptive dumping ground for new risks created by big Wall Street firms.

And in the early 2000s, the big Wall Street firms performed this fantastic bait and switch in two stages. Stage One was to apply technology that had been dreamed up to re-distribute corporate credit risk to consumer credit risk. The banks that used A.I.G. F.P. to insure piles of loans to IBM and G.E. now came to it to insure much messier piles that included credit-card debt, student loans, auto loans, prime mortgages, and just about anything else that generated a cash flow. “The problem,” as one trader puts it, “is that something else came along that we thought was the same thing as what we’d been doing.” Because there were many different sorts of loans, to different sorts of people, the logic applied to corporate credit seemed to apply to this new pile of debt: it was sufficiently diverse that it was unlikely to all go bad at once. But then, these piles, at least at first, contained almost no subprime-mortgage loans.

Toward the end of 2004, that changed dramatically—but just how dramatically A.I.G. F.P. was extremely slow to realize. In the run-up to the financial crisis there were several moments when an intelligent, disinterested observer might have realized that the system was behaving strangely. Maybe the most obvious of these was the effects of U.S. monetary policy on borrowing and lending. The combination of the dot-com bust and the 9/11 attacks had led Alan Greenspan to pump money into the system, and to lower interest rates. In June 2004 the Fed began to contract the money supply, and interest rates rose. In a normal economy, when interest rates rise, consumer borrowing falls—and in the normal end of the U.S. economy that happened: from June 2004 to June 2005 prime-mortgage lending fell by half. But in that same period subprime lending doubled—and then doubled again. In 2003 there had been a few tens of billions of dollars of subprime-mortgage loans. From June 2004 until June 2007, Wall Street underwrote $1.6 trillion of new subprime-mortgage loans and another $1.2 trillion of so-called Alt-A loans—loans which for some reason or another can be dicey, usually because the lender did not require the borrower to supply him with the information typically required before making a loan. The subprime sector of the financial economy clearly was responding to different signals than the others—and the result was booming demand for housing and a continued rise in house prices. Perhaps the biggest reason for this was that the Wall Street firms packaging the loans into bonds had found someone to insure against what turned out to be the rather high risk that they’d go bad: Joe Cassano.

A.I.G. F.P. was already insuring these big, diversified, AAA-rated piles of consumer loans; to get it to insure subprime mortgages was only a matter of pouring more and more of the things into the amorphous, unexamined piles. They went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. And yet no one at A.I.G. said anything about it—not C.E.O. Martin Sullivan, not Joe Cassano, not Al Frost, the guy in A.I.G. F.P.’s Connecticut office in charge of selling his firm’s credit-default-swap services to the big Wall Street firms. The deals, by all accounts, were simply rubber-stamped by Cassano and then again by A.I.G. brass—and, on the theory that this was just more of the same, no one paid them special attention. It’s hard to know what Joe Cassano thought and when he thought it, but the traders inside A.I.G. F.P. are certain that neither Cassano nor the four or five people overseen directly by him, who worked in the unit that made the trades, realized how completely these piles of consumer loans had become, almost exclusively, composed of subprime mortgages.
The Big Switch

Gene Park worked in the Connecticut office and sat close enough to the credit-default-swap traders to have a general idea of what they were up to. In mid-2005 he’d read a front-page story in The Wall Street Journal about the mortgage lender New Century. He noted how high its dividend was and thought he might like to buy some of its stock for himself. As he dug into New Century, however, Park saw that it owned all these subprime mortgages—and he could see from its own statements that the quality of the loans was frightening. Just after that he got a phone call from a penniless, jobless old college friend who had been offered a package of loans to buy a house he couldn’t afford. At the same time, Park saw Al Frost announcing new credit-default-swap deals at an alarming rate. A year before, Frost might have had one half-billion-dollar deal each month; now he was doing 20, all on piles of consumer loans. “We were doing every single deal with every single Wall Street firm, except Citigroup,” says one trader. “Citigroup decided it liked the risk and kept it on their books. We took all the rest.” When traders asked Frost why Wall Street was suddenly so eager to do business with A.I.G., says a trader, “he would explain that they liked us because we could act quickly.” Park put two and two together and guessed that the nature of these piles of consumer loans insured by A.I.G. F.P. was changing, that they contained a lot more subprime mortgages than anyone knew, and that if U.S. homeowners began to default in sharply greater numbers A.I.G. didn’t have anywhere near the capital required to cover the losses. He told Andy Forster, Cassano’s right-hand man in London, who brought this up at a meeting, but Cassano dismissed the concerns as overblown.

Oddly, this dramatic increase in the amount of risk A.I.G. F.P. was assuming came at exactly the moment when it lost the reason for its existence. The day after Hank Greenberg was forced to resign, in March 2005, the credit-rating agencies downgraded A.I.G. from AAA to AA. The AAA rating was the competitive advantage; without it, the natural course of action would have been to close or dramatically shrink A.I.G. F.P.’s business. Instead, Cassano grew it.

Toward the end of 2005, Cassano promoted Al Frost, then went looking for someone to replace him as the ambassador to Wall Street’s subprime-mortgage-bond desks. As a smart quant who understood abstruse securities, Gene Park was a likely candidate. That’s when Park decided to examine more closely the loans that A.I.G. F.P. had insured. He suspected Joe Cassano didn’t understand what he had done, but even so Park was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost, who had no clue, but then, his job was to sell, not to trade. “None of them knew,” says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing—and paying them for their talent!

By the time Joe Cassano invited Gene Park to London for the meeting in which he would be “promoted” to the job of creating even more of these ticking time bombs, Park knew he wanted no part of it. He announced that, if he was made to take the job, he’d quit. (Had he taken it he would now be a magazine cover.)

This, naturally, infuriated Joe Cassano, who, says one trader, thought Park was being lazy, dreaming up reasons not to do the deals that would require work. Confronted with the new development—his company was insuring not consumer credit generally but subprime mortgages—Cassano didn’t blink. He simply claimed that the fact was irrelevant: for the bonds to default, U.S. house prices had to fall, and Cassano didn’t believe house prices could ever fall everywhere in the country at once. After all, Moody’s and S&P still rated this stuff AAA!

Still, Cassano agreed to meet with all the big Wall Street firms and discuss the logic of their deals—to investigate how a bunch of shaky loans could be transformed into AAA-rated bonds. Together with Park and a few others, Cassano set out on a series of meetings with Morgan Stanley, Goldman Sachs, and the rest—all of whom argued how unlikely it was for housing prices to fall all at once. “They all said the same thing,” says one of the traders present. “They’d go back to historical real-estate prices over 60 years and say they had never fallen all at once.” (The lone exception, he said, was Goldman Sachs. Two months after their meeting with the investment bank, one of the A.I.G. F.P. traders bumped into the Goldman guy who had defended the bonds, who said, Between you and me, you’re right. These things are going to blow up.) The A.I.G. F.P. executives present were shocked by how little actual thought or analysis seemed to underpin the subprime-mortgage machine: it was simply a bet that U.S. home prices would never fall. Once he understood this, Joe Cassano actually changed his mind. He agreed with Gene Park: A.I.G. F.P. shouldn’t insure any more of these deals. And at the time it didn’t really seem like all that big of an issue. A.I.G. F.P. was generating around $2 billion year in profits. At the peak, the entire credit-default-swap business contributed only $180 million of that. He was upset, it seemed, mainly that he had been successfully contradicted.

What no one realized was that it was too late. A.I.G. F.P.’s willingness to assume the vast majority of the risk of all the subprime-mortgage bonds created in 2004 and 2005 had created a machine that depended for its fuel on subprime-mortgage loans. “I’m convinced that our input into the system led to a substantial portion of the increase in housing prices in the U.S. We facilitated a trillion dollars in mortgages,” says one trader. “Just us.” Every firm on Wall Street was making fantastic sums of money from this machine, but for the machine to keep running the Wall Street firms needed someone to take the risk. When Gene Park informed them that A.I.G. F.P. would no longer do so—Hello, my name is Gene Park and I’m closing down your business—he became the most hated man on Wall Street.

The big Wall Street firms solved the problem by taking the risk themselves. The hundreds of billions of dollars in subprime losses suffered by Merrill Lynch, Morgan Stanley, Lehman Brothers, Bear Stearns, and the others were hundreds of billions in losses that might otherwise have been suffered by A.I.G. F.P. Unwilling to take the risk of subprime-mortgage bonds in 2004 and 2005, the Wall Street firms swallowed the risk in 2006 and 2007. Lending standards had fallen, property values had risen, and the more recent loans were thus far riskier than the earlier ones, but still they gobbled them up—for if they didn’t, the machine would have ceased to function. The people inside the big Wall Street firms who ran the machine had made so much money for their firms that they were now, in effect, in charge. And they had no interest in anything but keeping it running. A.I.G. F.P. wasn’t an aberration; what happened at A.I.G. F.P. could have happened anywhere on Wall Street … and did.

As recently as August 2007, A.I.G. F.P. traders were feeling almost smug: all these loans made in 2006 and 2007 were going bad, but the relatively more responsible 2005 vintage that they had insured didn’t look as if it would suffer any credit losses. They were, they thought, the smart guys at the poker table. Joe Cassano even went on an investor conference call and said, famously, “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 on any of those transactions.”
Say It Ain’t So, Joe

What no one realized is that Joe Cassano, in exchange for the privilege of selling credit-default swaps on subprime-mortgage bonds to Goldman Sachs and Merrill Lynch and all the rest, had agreed to change the traditional terms of trade between A.I.G. and Wall Street. In the beginning, A.I.G. F.P. had required its counter-parties simply to accept its AAA credit: it refused to post collateral. But in the case of the subprime-mortgage credit-default swaps, Cassano had agreed to several triggers, including A.I.G.’s losing its AAA credit rating, that would require the firm to post collateral. If the value of the underlying bonds fell, it would fork over cash, so that, for instance, Goldman Sachs would not need to be exposed for more than a day to A.I.G. Worse still, Goldman Sachs assigned the price to the underlying bonds—and thus could effectively demand as much collateral as it wanted. In the summer of 2007, the value of everything fell, but subprime fell fastest of all. The subsequent race by big Wall Street banks to obtain billions in collateral from A.I.G. was an upmarket version of a run on the bank. Goldman Sachs was the first to the door, with shockingly low prices for subprime-mortgage bonds—prices that Cassano wanted to dispute in court, but was prevented by A.I.G. from doing so when he was fired. A.I.G. couldn’t afford to pay Goldman off in March 2008, but that was O.K. The U.S. Treasury, led by the former head of Goldman Sachs, Hank Paulson, agreed to make good on A.I.G.’s gambling debts. One hundred cents on the dollar.

A pair of ancient maples shade Joe Cassano’s London home. It’s a tasteful, almost inconspicuous place on a square, one of the best in London, just around the corner from Harrods. Only the living-room drapes are left open, to let in the spring light. Four black porcelain elephants decorate the windowsill. Behind them a shadow moves through the room.

Cassano resigned from A.I.G. F.P. early last year, but he didn’t simply leave. He continued to turn up at his desk and spend the day staring at his Bloomberg TV. The traders thought it strange; only later did they learn that A.I.G. was still paying him $1 million a month to consult. As far as anyone could tell, he had nothing to do. And then one day he simply stopped showing up. From time to time they spotted him cycling past their Mayfair office. Every now and again some British newspaper snapped a picture of him exiting his house with his racing bike. Apart from that he had as good as vanished. His absence is as frustrating as it is expected—the people best positioned to explain this financial disaster have all similarly vanished from view. It would be nice if Joe Cassano came out of hiding and tried to explain what he did and why, but there is little chance of that.

The people still left inside A.I.G. F.P. like to list just how many things had to go wrong for their business to implode. Any one of a number of things might have sufficed to avert their catastrophe: our political leaders might have decided against the Wall Street argument not to regulate credit-default swaps; the ratings agencies might have resisted the Wall Street argument to rate subprime bonds AAA; Wall Street banks, in 2006 and 2007, might have declined to replace A.I.G. F.P. in the role of subprime risktaker of last resort; and on and on. Their list is mostly a catalogue of large, impersonal forces. But impersonal forces require people to conspire with them. Joe Cassano was the perfect man for these times—as responsible for a series of disastrous trades as a person in a big company can be. He discouraged the dissent of subordinates who understood them better than he did. He acted with the approval of A.I.G., but he also must have known that A.I.G. wasn’t able to evaluate his trades. Once he was persuaded to stop insuring subprime-mortgage bonds, the logical course of action was to reverse the deals he had already done. In 2006 he might have found a way to do this, if he had been willing to accept the costs involved, but he wasn’t. Had he been, the machine he helped to create would have kept running—by then it had a life of its own—and the losses would have simply wound up more concentrated inside the big banks. But he’d have saved his company. No one would be blaming Jake DeSantis for blowing up the world.

And yet the A.I.G. F.P. traders left behind, much as they despise him personally, refuse to believe Cassano was engaged in any kind of fraud. The problem is that they knew him. And they believe that his crime was not mere legal fraudulence but the deeper kind: a need for subservience in others and an unwillingness to acknowledge his own weaknesses. “When he said that he could not envision losses, that we wouldn’t lose a dime, I am positive that he believed that,” says one of the traders. The problem with Joe Cassano wasn’t that he knew he was wrong. It was that it was too important to him that he be right. More than anything, Joe Cassano wanted to be one of Wall Street’s big shots. He wound up being its perfect customer.

How Goldman Sachs Took Over The American Economy

The Article: The Great American Bubble Machine: 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 in Rolling Stone [Note: Currently unavailable on Rolling Stone’s website because they have a terrible web presence].

The Text: 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 Citi-group – which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former GoIdman 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 payoff 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.

BUBBLE #1 – THE GREAT DEPRESSION

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 Jobn 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.”

BUBBLE #2 – TECH STOCKS

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 cliché 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 future.”

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 240 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 percent.

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 Nicholas Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television asshole 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 tum 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.

BUBBLE #3 – THE HOUSING CRAZE

Goldman’s role in the sweeping global 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 shit 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 shitty 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-eon’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 shitty 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 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.

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 same crap it was selling. Even worse, Goldman bragged about it in public. The mortgage sector continues to he 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 fraud.”

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 holding 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 $1.3 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 fucked the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and fucked the taxpayer by making him pay off 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.

BUBBLE #4 – $4 A GALLON

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 rises 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 tor 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 pcrcent. 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 CITC’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.

“I 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 semisecret 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 be 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 alternatives.”

But it wasn’t the consumption of real oil that was driving up prices – it was the trade in paper oil. By the summer of 2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, wich 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.”

BUBBLE #5 – RIGGING THE BAILOUT

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 muscle.

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 AlG 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 halfbaked 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.

Howis 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 fucked 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.”

BUBBLE #6
GLOBAL WARMING

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 HankPaulson 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 billion 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 all’ 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 ofstaff.) 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 Hanis. 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 hedgefund 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.

See Also: Headlines from the 1930s: Sound Familiar?, Goldman Sachs Is The Devil, A Bloodless Coup: The Transition From Democracy To A Bank-run Society, Who is to Blame, The Bubble Blowers: Goldman Sachs and Cap and Trade, Blast from the Past, and Congress Gives Goldman One More Free Pass.

[tags]goldman sachs, goldmen sachs, us economy, united states economy, economics, take over of the us government, treasury department, predatory capitalism, financial banking, big banks, bailout, taxes, rubin, summers, bank bailouts[/tags]