Macro Economics
Rolling Stone, Goldman and Bubbles

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By WatchingTheHerd
June 30, 2009

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

METAR has had threads on the Matt Taibbi story in Rolling Stone about Goldman Sachs and their, shall we say, "unique" position of financial and political influence in the economy and its booms and busts over the past few years. In a decision worthy of its own commentary somewhere else, the Goldman story is currently one of the stories the RS web site has chosen to NOT make available online, though you CAN get "in depth" coverage of the Jonas Brothers and their search for relevancy in a post-tween, pre-twenties twilight zone of "talent."

The Taibbi story itself is really worth going out and buying the magazine or reading on sites that have published copies of it.

Was anyone curious, puzzled, concerned or maybe victimized by pump and dump IPOs during the Internet bubble? The Taibbi article explains techniques of IPO "laddering" which guaranteed rising demand for new IPO stock issues over a guaranteed window of time -- normally at least a month or two -- by lining up sales of future shares IN ADVANCE while discounting the original IPO price which a) produced the famous price pops at IPO which execs used to pocket money that should have gone into the firms, b) created artificial shortages of shares while artificially creating an upward arc in prices which allowed insiders to time their sales, and c) locked in hefty fees for investment banks who often locked in future finance business from the new firm in exchange for running the IPO. Guess who helped pioneer laddering? Goldman Sachs. Some of the names involved? Jim Cramer's "Cramer & Co." which allegedly participated in laddering deals with Goldman between 1996 and 1998. Meg Whitman, who allegedly received a multi-million dollar deal and a seat on Goldman's board in exchange for committing future business to Goldman. Also, Jerry Yang (Yahoo!), Dennis Kozlowsi (Tyco) and (of course) Ken lay (Enron).

As we now know, Goldman had huge positions and took huge risks in mortgage lending. The Taibbi article provides some additional background on how Goldman created numerous CDO issues with AAA ratings while internal paperwork was either non-existent or downright scary. In one $494 million offering, FIFTY EIGHT PERCENT of the mortgages only had ZIP codes -- no names, SSNs, no nothin'. Taibbi cites one public comment from a Goldman VP in 2007 who stated publicly Goldman was taking short positions (via CDSs) on its own CDO "long" positions.

Taibbi also outlines Goldman's role in the 2007-2008 oil bubble and crash. A strange 1991 letter sent by a Goldman subsidiary named J. Aron to the Commodity Futures Trading Commission (CFTC) argued that not only actual producers or consumers of commodities (e.g. farmers / food processors or oil producers / oil refiners) need to be able to use hedge bets on commodities but major financial dealers with large positions in the commodity futures should be able to hedge. Taibbi writes that by the peak in 2008, the amount of oil associated with speculative contracts reached 1.1 billion barrels -- more than we have physically on hand in inventories and the Strategic Petroleum Reserve. Despite the subsequent price crash, apparently no one's learned a thing because in fact SUPPLY of oil is actually up and demand is down and yet prices are again rising.

The story also reiterates the news covered here on METAR regarding Goldman's manipulation of its fiscal reporting calendar to magically exclude $1.3 billion in losses incurred in December of 2008 by simply fast-forwarding its reporting year for 2009 to start in January instead of the historical December. At the same time, Goldman declared a $1.8 billion "profit" for 1Q2009, paid $4.7 billion in bonuses for that "fabulous" first quarter, and got all the dirty work done before the "stress test" results were announced.

The icing on the cake in Taibbi's article is the final section on Goldman's role in future markets for carbon credits. After explaining the mechanics of the prior bubbles, the structure of the market mechanisms for carbon credits and the relationships between the player should give everyone chills -- from both a political and investment perspective:

* Goldman was the single largest private donor to Obama 2008
* Goldman owns 10 percent of the Chicago Climate Exchange that will trade the credits
* gradually reducing CO2 via credits requires rising prices for credits
* Goldman began lobbying for carbon credits in 2008, spending $3.5 million
* Goldman's chief lobbyist in 2008 for carbon credits was Mark Patterson
* Mark Patterson is now chief of staff in the Treasury
* Neel Kashkari, head of TARP management and former Goldman employee, has been replaced by Gary Gensler, also former Goldman alumni
* Gary Gensler was previously head of the CFTC which did nothing to halt the hedging which imploded the mortgage and petroleum markets

If you have even a passing interest in any of the market mechanics discussed on this board or have any thought of investing in energy stocks or remaining invested in financials or commodities, you really need to find a copy of Rolling Stone and read this article.