Why Goldman Sachs May Have Trouble Maintaining its Business Model

“There’s nothing to see here, folks… Move along… Move along… Nuthin’ to see here… Just another little pile-up of victimless financial crimes.” That’s what the beat cops on Wall Street barked repeatedly last week just after the Justice Department and the SEC dropped their separate criminal investigations of Goldman Sachs.

Last Thursday, the Justice Department announced that it would not pursue criminal charges against Goldman Sachs or its employees over its “big short” on the housing market several years ago. Nevertheless, as Bloomberg’s Jonathan Weil observes, “the details of Goldman’s appalling behavior and role in the financial crisis will live on forever in the public record.

The department’s investigation began last year after Senators Carl Levin of Michigan and Tom Coburn of Oklahoma, a Democrat and a Republican, released the findings of a two-year inquiry by the Senate Permanent Subcommittee on Investigations into Goldman Sachs’ sales and trading practices.

“At a press conference last year,” Weil continues, “Levin said he wanted prosecutors to examine whether Goldman violated the law by putting customers into disastrous mortgage bonds that it was shorting – without telling the customers about its short positions. Levin also said prosecutors should review whether Goldman officials who testified before the panel committed perjury, including Goldman’s chief executive, Lloyd Blankfein.”

The Justice Department took the bit in its mouth for a while, but spit it out last week, having “determined that, based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report.”

Gosh that’s lucky! But here’s double-lucky: On the very same day that Justice dropped its case, Goldman Sachs announced that the SEC had decided to drop its case also.

“The SEC extracted a $550 million settlement from Goldman in 2010 over a deal called Abacus,” Weil explains “which had a prominent role in the Levin-Coburn report. It may have been perfectly legal for Goldman to sell doomed investment schemes of the bank’s own invention to Goldman customers, while its employees denigrated the same deals in e-mails to colleagues as ‘crap’ and other bad words we can’t use on a family website. The conduct was exposed, and Goldman’s slogan of putting customers first was debunked.”

Interestingly, Levin was not content to quietly accept the non-actions of the Justice Department and SEC. He responded in a statement:

Our investigation of the origins of the financial crisis revealed wrongdoing and failures among mortgage lenders, banking regulators, credit rating agencies and investment banks. One of those investment banks, Goldman Sachs, created complex securities that included ‘junk’ from its own inventory that it wanted to get rid of. It misled investors by claiming its interests in those securities were ‘aligned’ with theirs while at the same time it was betting heavily against those same securities, and therefore against its own clients, to its own substantial profit. Its actions did immense harm to its clients, and helped create the financial crisis that nearly plunged us into a second Great Depression.

Wow!…It’s getting harder to hang a felony charge on a past or present Goldman exec than it is to hang panties on a porn star. The darn things just keep sliding off.

“Whether the decision by the Department of Justice is the product of weak laws or weak enforcement,” Weil concludes, “Goldman Sachs’ actions were deceptive and immoral.”

Remember, the Justice Department is one of the same government agencies that can’t bring itself to pose a single embarrassing question to John Corzine, former CEO of Goldman Sachs, former New Jersey Senator, former CEO of the fraudulently destroyed M.F. Global and perennial scumbag.

In particular, the Justice Department can’t bring itself to ask Corzine what happened to the $1.6 billion of customer funds that he (allegedly) “disappeared” while overseeing M.F. Global.

How embarrassing these charades of justice must be for President Obama! Here you’ve got Goldman Sachs, the largest contributor to President Obama’s 2008 election campaign – as well as the largest contributor the Democratic Party itself in 2008 – slipping charge after charge from federal agencies.

Coincidences like that might give folks the wrong idea…like the idea that American Justice sometimes peeks through her blindfold.

Better for outward appearances if the Justice Department had impounded Goldman CEO, Lloyd Blankfein’s car for parking at an expired meter and then dropped its investigation…and better for appearances if the SEC had fined Goldman Sachs $100,000 for omitting a comma in a regulatory filing and then dropped its case. But that’s not what happened.

Such a shame. Folks can be so judgmental. [For the record, Goldman Sachs has become a major supporter of the Republican Party. Based on campaign contributions-to-date, Goldman employees have tossed nearly $5 million to Republican campaign efforts – that’s tops among contributors from private companies. Perhaps Goldman senses a change in the wind and wishes to sail with it, rather than into it].

Poetically, even though the Justice Department and the SEC can’t find any wrists to slap at Goldman Sachs, the financial markets are finding plenty. Goldman Sachs’ trading revenues are falling even faster than its reputation, especially proprietary trading revenues – the high-octane fuel that has long-powered Goldman’s profitability.

Goldman’s prop trading profit plummeted 80% in the second quarter of 2012, continuing a multi-quarter trend of mostly dismal trading results. Since trading profits often account for one- to two-thirds of Goldman’s overall profit, the company would miss them if they took a sabbatical.

What’s that saying? You can fool some of the people some of the time [and you might even be able to fool some of the people all of the time], but you certainly can’t fool all of the people all the time.

Just maybe, Team Goldman is struggling to find enough folks to fool – “Muppets,” I believe, is Goldman’s technical term for these individuals – to keep their “business model” thriving.

The same could be said of the Federal Reserve’s monetary policy, relying as it does on the gullibility of the Muppetinvestoriat. The Fed’s policies succeed only to the extent that the masses trust them. But if the Fed loses the faith of the masses, it loses everything…including its power over the currency it purports to “control.”

Faith in the Fed – and in central banking generally – may not yet have slipped into a genuine bear market, but as Jim Grant often asserts, the bull market has ended.

If Grant is correct, therefore, we Muppets may want to begin pledging our allegiances to assets that Goldman Sachs cannot manipulate and that the Federal Reserve does not “control.”

The list of such assets is very short…and most of them glisten in direct sunlight.


Eric Fry
for Markets and Money

From the Archives…

When the Trickle Becomes a Flood
10-08-2012 – Greg Canavan

What Central Planners Can Never Know
09-08-2012 – Bill Bonner

The Central Bank Big Bazooka in Theory and Practice
08-08-2012 – Bill Bonner

In Thrall to the Iron Fist
07-08-2012 – Dan Denning

Cracks in the Foundation
06-08-2012 – Dan Denning

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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3 Comments on "Why Goldman Sachs May Have Trouble Maintaining its Business Model"

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truth and integrity

This is why the US has not the slightest chance of fixing their problems, they are inbred and they have no hope except words that mean nothing but lies; and it starts at the top!!! Their dollar will be worth 10 cents in a short time now.


Sorry to contradict you ‘truth and integrity’ but the us dollar is now worth 4 cents, quite mind blowing isn’t it. But more to point, what is the A$ worth.


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