Just under a year ago, when we published "The Great American Bubble Machine" [RS 1082/1083], accusing Goldman of betting against its clients at the end of the housing boom, virtually the entire smugtocracy of sneering Wall Street cognoscenti scoffed at the notion that the Street's leading investment bank could be guilty of such a thing. Attracting particular derision were the comments of one of my sources, a prominent hedge-fund chief, who said that when Goldman shorted the subprime-mortgage market at the same time it was selling subprime-backed products to its customers, the bait-and-switch maneuver constituted "the heart of securities fraud."
CNBC's house blowhard, Charlie Gasparino, laughed at the "securities fraud" line, saying, "Try proving that one." The Atlantic's online Randian cyber-shill, Megan McArdle, said Rolling Stone had "absurdly" accused Goldman of committing a crime, arguing that "Goldman's customers for CDOs are not little grannies who think a bond coupon is what you use to buy denture glue." Former Wall Street Journal reporter Heidi Moore hilariously pointed out that Goldman wasn't the only one betting against the housing market, citing the short-selling success of – you guessed it – John Paulson as evidence that Goldman shouldn't be singled out.
The truth is that what Goldman is alleged to have done in this SEC case is even worse than what all these assholes laughed at us for talking about last year.
Prior to the "Bubble Machine" piece, I had heard rumors that Goldman had gone out and intentionally scared up toxic mortgages and swaps in order to get short of them with sucker bookies like AIG. But – and this seems funny in retrospect – I foolishly dismissed those tales as being too conspiratorial. I thought it was bad enough that Goldman was shorting the subprime market even as it was selling toxic subprime-backed securities to chumps on the open market. The notion that the bank would actually go out and create big balls of crap that would be designed to fail seemed too nuts even for my tastes.
In the year since – and this, to me, is the main lesson from the SEC case against Goldman – the public has quickly come to accept that when it comes to the once-great institutions of modern Wall Street, literally no deal that makes money is too low to be contemplated.
The nearly identical case involving a Merrill Lynch mortgage deal called Norma now making its way through the courts is just one example. There is more fraud out there, and everyone knows it: front-running, manipulation of the commodities markets, trading ahead of interest-rate moves, hidden losses, Enron-esque accounting, Ponzi schemes in the precious-metals markets, you name it. We gave these people nearly a trillion bailout dollars, and no one knows what service they actually provide beyond fraud, gross self-indulgence and the occasional transparently insincere public apology.
The Goldman case emerges as a symbol of all this brokenness, of a climate in which all financial actors are now supposed to expect to be burned and cheated, even by their own bankers, as a matter of course. (As part of its defense, Goldman pointed out that IKB is a "sophisticated CDO market participant" – translation: too fucking bad for them if they trusted us.) It would be nice to think that the SEC suit is aimed at this twisted worldview as much as at the actual offense. Some observers believe the case against Goldman was timed to pressure Wall Street into acquiescing to Sen. Chris Dodd's loophole-ridden financial-reform bill, which probably won't do much to prevent cases like the Abacus fiasco. Or maybe it's just pure politics – Democrats dropping the proverbial horse's head in Goldman's bed to get their fig-leaf financial-reform effort passed in time for the midterm elections.
Whatever the long-range motives, the immediate effect of the lawsuit is to put Wall Street's crazy fraud ethos on trial in the court of public opinion. For now, at the end of the first quarter, Goldman and most of the other big banks are still winning that case. But the second quarter might be a different story.
This article originally appeared in RS 1104 from May 13, 2010. This issue and the rest of the Rolling Stone archives are available via Rolling Stone Plus, Rolling Stone's premium subscription plan. If you are already a subscriber, you can click here to see the full story. Not a member? Click here to learn more about Rolling Stone Plus.
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