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Friday, July 16, 2010 FULL SHOW | HEADLINES | NEXT: The Food Bubble: How Wall Street Starved Millions and Got...
2010-07-16

Goldman Sachs Settles Civil Fraud Case for $550M — Less Than It Reportedly Expected, and With No Admission of Criminal Wrongdoing

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Matt Taibbi, political reporter for Rolling Stone magazine. Last year he wrote about Goldman Sachs in an article titled "The Great American Bubble Machine."

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Goldman Sachs has agreed to pay $550 million to resolve a civil fraud lawsuit over selling a mortgage investment that was established to fail. While the SEC hailed the $550 million settlement as the largest in Wall Street history, many outside analysts questioned why the government didn’t demand more. Investors responded favorably as Goldman Sachs shares jumped by five percent in late trading, adding far more to the firm’s market value than the amount it will have to pay in the settlement. We speak to Matt Taibbi of Rolling Stone. [includes rush transcript]

Transcript

This is a rush transcript. Copy may not be in its final form.

JUAN GONZALEZ: We begin today’s show on the landmark settlement between Wall Street giant Goldman Sachs and the Securities and Exchange Commission. On Thursday Goldman Sachs agreed to pay $550 million to resolve a civil fraud lawsuit over selling a mortgage investment that was established to fail. The investment consisted of pools of risky mortgages that had been packaged together. According to the SEC, the pools were picked by another Goldman client, John Paulson, who was betting against their success.

Robert Khuzami, the director of the Division of Enforcement at the SEC, announced the settlement.

    ROBERT KHUZAMI: Today’s settlement is a stark reminder, a very stark reminder, that there will be a heavy price to be paid if firms violate the principles fundamental to the securities laws: full disclosure, honest treatment and fair dealing. And those principles do not change, regardless of how complex the product or how sophisticated the investor.

AMY GOODMAN: While the SEC hailed the $550 million settlement as the largest in Wall Street history, many outside analysts question why the government didn’t demand more. Press reports indicate Goldman Sachs expected to pay at least a billion dollars to settle the case. For Goldman Sachs, $550 million is equivalent to how much Goldman made every two weeks in the first quarter. The penalty is only one-twentieth of the $10 billion in bonuses the firm handed out last year. Investors responded favorably to the settlement, as Goldman Sachs shares jumped by five percent in late trading, adding far more to the firm’s market value than the amount it will have to pay in the settlement.

To talk more about Goldman Sachs, we’re joined by Matt Taibbi, a reporter at Rolling Stone. Last year he published a widely read article about Goldman called "The Great American Bubble Machine."

Welcome to Democracy Now!, Matt.

MATT TAIBBI: Good morning, Amy.

AMY GOODMAN: First, your response to this settlement?

MATT TAIBBI: Well, obviously, it’s the biggest settlement in SEC history, and people shouldn’t overlook the fact that since the suit was announced, Goldman has lost about $25 billion in share value. However, it’s smaller than everybody expected — I mean, the people that I’ve been talking to in the last few weeks. The number everybody thought was the baseline was a billion. And, you know, the fact that it’s only $550 million, I think, was seen on Wall Street as being a light penalty.

JUAN GONZALEZ: Now, the firm obviously admits no wrongdoing in this case, and obviously now its share price is beginning to rebound immediately after the settlement. Your sense of how the administration decided to settle this?

MATT TAIBBI: Well, you know, originally, Goldman didn’t want to settle. So the fact that it was settled at all is interesting. But, you know, this is sort of part of a larger pattern of how, you know, offenses are dealt with by our regulatory enforcement mechanisms. You know, going back twenty years, almost every time we have an instance where a very powerful bank is caught doing something, you know, unethical or immoral, the procedure tends to be a fine which is much less than the profits they generated using that activity, followed by no admission of criminal wrongdoing. And, of course, nobody ever goes to jail. And the most famous example of that was the so-called global settlement, after the internet stock bubble, in which, you know, a variety of offenses involved with the tech bubble were sort of lumped together by then-Attorney General Spitzer, and although some companies took a big hit — Citigroup had to pay $400 million — it was much less than all these guys made during the stock bubble. And so, the important fact here is that these companies know that even if they get caught, the worst-case scenario, they’re going to pay a fraction of the money they make doing this stuff, and that’s why they’re continually emboldened to do it.

AMY GOODMAN: I mean, it is stunning. As the Times put it, "News of the settlement sent Goldman’s shares 5 percent higher in after-hours trading, adding far more to the firm’s market value than the amount it will have to pay in the settlement."

MATT TAIBBI: Right.

AMY GOODMAN: So it profited from the settlement.

MATT TAIBBI: Yeah, absolutely. And, you know, overall, the stock market itself was up, I think, four-and-a-half percent yesterday. So there was a general sense on Wall Street. There was apprehension about what the settlement might be. If it turned out to be much bigger than expected, I think there was going to be fear that, you know, there might be more prosecutions. But I think this was a message that there was an attempt by the government to really put this all behind us, that this is going to be sort of the exclamation point in the financial crisis era. And there’s a belief on Wall Street that this is it, that we can — they’re going to move forward now, and there’s no more worrying about the government looking over their shoulder.

JUAN GONZALEZ: Well, I was struck in the article that you had last year in Rolling Stone in terms of the history of Goldman Sachs, which most Americans don’t know anything about.

MATT TAIBBI: Right.

JUAN GONZALEZ: And you clearly document how Goldman has repeatedly been involved in creations of speculative bubbles on Wall Street and always seems to walk away and then just make more money in the next bubble. Could you talk about some of that history and the actual — how this firm got to be where it is now?

MATT TAIBBI: Well, I mean, Goldman has an extraordinary history. You know, we chose Goldman Sachs because it was representative of everything that investment banks, in general, were into for the last twenty years, but also because it was a special case, because Goldman is politically connected in a way that no other company in America really is. And they’ve had a hand, really, in a variety of financial disasters over the last two decades. During the internet stock bubble, they were the number one bank in terms of initial public offerings of internet companies. Remember that whole period where, you know, teenagers were putting ideas on the back of napkins, and they were being taken public, you know, within five minutes after that. All of that fraudulent and crazy Ponzi scheme of the internet stock bubble, Goldman was right at the forefront of that. They were a major player in the mortgage housing bubble in the middle part of the last decade and, of course, the commodities bubble, which your next guest is going to be talking about. Goldman was a major player in commodities speculation. So they’re right there in the middle of all these speculative bubbles. And again, an important thing to remember is they continually walk away with fines and no admission of criminal wrongdoing, which emboldens the company to continually get into these schemes.

AMY GOODMAN: Matt Taibbi, just to be clear, the firm did not have to admit any wrongdoing.

MATT TAIBBI: Right.

AMY GOODMAN: They just said that it was a mistake, that the marketing materials on a subprime mortgage product that a Goldman client helped craft had not been clearer.

MATT TAIBBI: Yeah, they were incomplete, I think.

AMY GOODMAN: They’re talking about John A. Paulson.

MATT TAIBBI: Right.

AMY GOODMAN: Explain how the whole deal worked and who this hedge fund manager was.

MATT TAIBBI: OK, here’s the deal. You have a hedge fund manager, this guy John Paulson. He looks at the entire subrime market, and he sees that the whole thing is going to collapse, because people who should not be getting big houses are getting houses, you know, the rating system is completely off, instruments that should have been subprime are rated Triple-A. He goes to Goldman Sachs, and he says, "I want to bet against this stuff. Can you make a deal full of, you know, credit default swaps, or a synthetic credit default swap, full of subprime-referenced entities that I can bet against?"

So, Goldman then hires a company called ACA, which is like a middle man, and their job is to basically pick the mortgages in the deal. But Goldman says to ACA, "We’d like you to have this guy, John Paulson, pick the stuff that’s in the deal." Now, ACA thought that Paulson was betting on this stuff and not against it. And the people they ended up selling this material to were not aware that a person who was betting against this material had chosen the material in the deal. And so, you know, when you’re selling somebody this stuff, and they think that the people who chose it are long, when they’re actually short, well, that’s — you know, to say that they just overlooked it and they forgot to include that fact is — you know, it’s a major, major omission.

JUAN GONZALEZ: And you said before that Goldman Sachs originally wanted to go to trial, but wasn’t there the potential that a trial would bring out much more information, under — especially under oath —-

MATT TAIBBI: Sure.

AMY GOODMAN: —- than so far has come out in public and that, therefore, they avoided the exposing the inner workings of the company as a result of the settlement?

MATT TAIBBI: Absolutely. You know, had this gone forward, had there been discovery, had there been public testimony, we would have — you know, among many things, the public would have learned an awful lot about what — you know, how these deals work. But we never, ever find out about this stuff. I mean, that’s — again, that’s a long-running theme of this. You know, if you defraud somebody, just somebody off the street, if you’re a con man and you defraud somebody out of a thousand dollars, $50,000, you’re going to jail. I mean, it’s not like, you know, you’re going to have to pay the money back and you can walk on your merry way. That’s not the way it works. But on Wall Street, if you commit a massive crime, if you steal not a thousand dollars, but a billion dollars, you get to walk away from it. You get to give a little bit of the money back, and then you get to walk away, and nobody goes to jail, and nobody ever hears about it.

AMY GOODMAN: So, let’s talk about who’s in Washington, who’s in the Obama administration, from Goldman Sachs?

MATT TAIBBI: Well, the number two guy at the Treasury, Mark Patterson, is a former Goldman Sachs employee. You know, there are people in the Obama administration who are very close to Robert Rubin, who used to be a head of Goldman Sachs. Timothy Geithner is a former Rubin aide, and he’s the head of the Treasury. The head of the Commodity Futures Trading Commission, Gary Gensler — they’re the people who regulate commodities — he’s a former Goldman Sachs banker, although it must be said, he’s turned out to be sort of one of the good guys in commodities reform over the last year. He’s had sort of a come-to-Jesus moment. But there are a lot of Goldman people in the government. There always have been.

AMY GOODMAN: And what is the role of Larry Summers in this?

MATT TAIBBI: Well, Larry Summers is the principal economic adviser to Barack Obama, so he has a, you know, important role in all of this. He has — I’m not exactly sure what his relationship to Goldman Sachs is, but, you know, he and Rubin — he was an aide to Rubin back in — you know, before he was the Treasury secretary under Clinton. So, you know, it’s all the same camp of Rubinites who are really the —-

JUAN GONZALEZ: And your story last year talked not only about the past bubbles that -— speculative bubbles that Goldman’s been involved in, but the future ones, too. You talk about carbon trading and Goldman’s role in what has become a major pillar of the Obama administration’s efforts to deal with climate change.

MATT TAIBBI: Right. Yeah, I mean, Goldman Sachs is heavily invested in, you know, businesses involving carbon credits. And if the — you know, the carbon credit thing is basically just a tax on pollution. But instead of doing it as a straight tax, they create — they’re going to create this new commodities market, and they’re just going to basically outsource this tax collection to, you know, a brand-new commodities market. And Goldman is probably going to be at the forefront of the companies that are going to be trading in these credits, so they’re going to stand to make an enormous amount of money off the creation of this new market.

AMY GOODMAN: Finally, Matt Taibbi, before you go, Congress passing a major overhaul of finance rules, Senator Feingold standing alone among the Democrats in voting against this. The significance of this?

MATT TAIBBI: Well, it’s a sweeping bill, but the major parts of it have been severely watered down. You know, the two major pillars of this bill were something called the Volcker rule, and then there was another part in there by — that was forwarded by Blanche Lincoln of Arkansas that would have forced companies like Goldman to spin off their derivatives desks, which is directly relevant to the story we’re talking about today. But that Lincoln rule has been severely watered down, and there’s really only about five percent of the derivatives desks are — they’re going to be forced to spin off only a small portion of those derivatives desks now. So it’s — that was also seen as a triumph by Wall Street yesterday, and that’s another reason why the market lurched a little bit higher.

AMY GOODMAN: Feingold saying, "Washington once again caved to Wall Street on key issues and produced a bill that fails to protect the American people from the pain of another economic disaster." Earlier, he had said he doesn’t need to be lectured to, clearly referring to the Obama administration, by the people who got rid of Glass-Steagall.

MATT TAIBBI: Right, yeah. No, I mean, the bill, again, it doesn’t address the major problems that caused the financial crisis. You know, there was an effort in there to curb proprietary trading, but that measure has been severely weakened. There was an effort to curb the specualtion in the derivatives markets and some of the abuses we’ve seen there, which include this thing with the Paulson business; that was severely weakened. Too big to fail, that whole question really fell by the wayside; although there is a measure in there to address that problem, it’s not nearly as strong as the one that was proposed by, you know, Sherrod Brown and Carl Levin, which would have mandated the breakup of companies that got too big. That measure was severely weakened. So, I think Wall Street thinks they’ve really dodged a bullet with the passage of this bill yesterday.

AMY GOODMAN: Well, Matt Taibbi, I want to thank you very much for being with us, political reporter for Rolling Stone, wrote the piece on Goldman Sachs called "The Great American Bubble Machine,” and we’ll link to it at democracynow.org.

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