The Audacity of Greed

Originally posted October 14, 2008: As Henry Paulson's and his "Mini Me," Neel Kashkari, took the stage as Lehman Brothers fell, I was struck by the audacity of greed.

As our country confronts its greatest economic crisis, Paulson -- after accumulating a $700 million equity stake in Goldman Sachs (source: New York Times) and then requesting almost one trillion dollars from American taxpayers in true Dr. Evil style -- introduced hisGoldman Sachs' "Mini Me" .

Kashkari, appropriately pronounced "CASH-carry," joined Goldman Sachs six years ago just out of school as Henry Paulson's protégé, training at his feet when Paulson was CEO of Goldman Sachs in 2006.

The story started almost ten years ago, when Goldman Sachs, led by Jon Corzine and Henry Paulson, decided to take itself public on May 3rd, 1999. With the fanfare and glory befitting a king of Wall Street, Henry Paulson rang the opening bell on the New York Stock Exchange that day, as Goldman shares were introduced at $53B. According to Business Week, on the first trade, Goldman's freshly minted 69 million shares zoomed from $53 to $76B per share, before closing the day at 70 3/8 valuing the Wall Street firm at a healthy $33 billion. ''Without any doubt, it was absolutely a stellar success. To have priced this much paper -- and as a nontechnology IPO -- is incredible.''

Goldman Sachs employees and board members made money that day, including Robert Rubin, Henry Paulson, and John Thain, who went on to become the CEO of Merrill Lynch after handing his job as the head of the New York Stock Exchange over to another Goldman alum, Duncan L. Niederauer (source: New York Times).

According to Business Week, "the largest single owners (were) former CEO Jon S. Corzine, who owned 0.9%, worth $305 million, and Paulson (who) owned a 0.8% interest" (valued at approximately $300 million in May 1999).

And the audacity of greed was born.

When Corzine, "whose $400 million Goldman Sachs fortune helped bankroll his 2000 Senate campaign", (source; the New York Times) decided to run for Senate in New Jersey,
Paulson took the helm as Goldman's CEO, assuming a new responsibility: managing Goldman's share price (NYSE: GS). According to the Washington Post, in order to drive profitability and shareholder value for his firm, Paulson promoted a new line of derivative products for Goldman Sachs: mortgage backed securities.

But according to the International Herald Tribune, investors like Warren Buffet and George Soros perceptively expressed their concern:

"George Soros, the prominent financier, avoids using the financial contracts known as derivatives 'because we don't really understand how they work.'"

Felix Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential "hydrogen bombs."

And Warren Buffett presciently observed five years ago that derivatives were "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

But according to the International Herald Tribune, Paulson had a key supporter in Goldman's new derivatives and product line, Alan Greenspan who "fiercely objected whenever derivatives - like Paulson's mortgage backed securities -- (came) under scrutiny in Congress or on Wall Street"

"What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so," Greenspan told the Senate Banking Committee in 2003. "We think it would be a mistake" to more deeply regulate the contracts, he added.

As a result, Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Greenspan appeared there in February 1999, declared of Alan Greensapan, "You will go down as the greatest chairman in the history of the Federal Reserve Bank."

And the greed continued. According to Bloomberg, "Goldman, the most profitable investment bank, was one of 14 primary dealers of U.S. Treasuries who contributed to a three year binge as $1 trillion of subprime mortgages were packaged and sold to investors."

But as the last year has shown, Paulson's product was a pig, resulting in losses for Goldman Sachs (not to mention our economy and its shareholders, the US taxpayers).

But Paulson, having earned the nickname "Hurricane Hank" because he was always so quick to act, once again moved with speed, "and even though many of Goldman's mortgage-backed customers were getting stomped," Goldman still made money on mortgages that year, shorting an index of mortgage-backed securities. "Although we recognized significant losses on our non-prime mortgage loans and securities, those losses were more than offset by gains on short mortgage positions," Goldman said in a recent SEC filing" according to the Washington Post.

Then in 2006, having accumulated $700 million equity stake in Goldman Sachs (source; New York Times), Paulson was hesitant to relinquish his position as Goldman's CEO when President Bush asked him to join the Treasury Department. According to the Economist, Paulson agreed to accept Bush's offer after being assured that he would receive a $200 million tax benefit on the sale of $500 million in Goldman shares while allowing the remainder of his shares to be placed in a "ring fence so that he will have no influence on how they are managed" (source: New York Times).

Today, as we stand by watching Henry Paulson use our taxpayer dollars for the government's leveraged buyout of Goldman Sachs, I am struck by the audacity of greed: Paulson's greed in securing a $200 million tax benefit for himself, his audacity at shorting the very product line that he had created as the CEO of Goldman and his impudence at placing a 35 year old "Mini Me" at the helm of our nation's economic crisis.

I am struck by the impertinence of Paulson's former employer, Goldman Sachs, who not only continues to pay dividends to its shareholders while accepting billions of dollars in taxpayer money, but who also, according to the Wall Street Journal, refuses to be overseen by a federal agency (as Morgan Stanley and the other surviving, taxpayer subsidized banks will be) instead leveraging Goldman's "long association with New York State... pleased that relationship will be reinforced."

I am struck by the fact that, according to the Wall Street Journal, "Wall Street is so caught up in the game of competitive advantage" that when the CEO of Goldman Sachs met with the CEOs of Wall Street's hedge funds last week, the chieftains nodded in agreement when one of their own stated "with a wounded look:"

"I don't see corruption in this room..."

Perhaps not. But what I do see is the audacity of greed.