There's a massive disconnection (as noted by Yves Smith, over at Naked Capitalism, and as I'm reporting it towards the end of this diary) with reality occurring within the Democratic Party between what's just happened on Wall Street and what's occurring everywhere else in our society now, right on up to--and including--the current dialogue about funding national healthcare and providing for the rapidly increasing millions of souls that are falling through the holes in our nation's social safety net, even as I write this.
IMHO, funding national healthcare--and Main Street, in general--is quite simple: if we're given the opportunity, let's get the damn money back from Wall Street. Every last cent of it! There are lots of ways we could do this; but I'm going to focus on the newest one that's now staring us in the face as of the past 24 hours...at least if you've been paying attention.
Nowhere has this disconnection between events become more self-evident to this diarist than in the dialogue emerging--or more accurately
not emerging in the blogosphere
apart from the financial community--from the publishing of a milestone of an article in Sunday's New York Times, by Gretchen Morgenson and Don Van Natta, Jr., entitled: "
Paulson's Calls to Goldman Tested Ethics During Crisis."
I posted a diary about this, a little over 24 hours ago, entitled: "Breaking: Paulson's Ethical Missteps Detailed. Is It Perjury?"
While the reaction to Morgenson and Van Natta's piece has gone (somewhat) unnoticed on this blog, pundits throughout the Internet have been commenting on this Times' piece for the past day. And, IMHO, it wouldn't surprise me if Morgenson wins another Pulitzer for it (she won for, quoting the Pulitzer committee, "trenchant and incisive beat reporting," in 2002). She and Van Natta precisely document--rather clearly IMHO due to the Treasury Department's recent response to a New York Times' Freedom Of Information Act request--how former Treasury Secretary Henry Paulson, who was also the former CEO of Goldman Sachs, continually communicated with his successor there, Lloyd Blankfein, extensively, prior to receiving a waiver to do so from the Treasury Department and the Bush White House.
To say the very least, Paulson's ongoing communications with his former employer, who benefitted to the tune of many tens of billions of dollars in revenues, federal backstops and related loan guarantees as a direct result of Paulson's actions in response to the mortgage meltdown in the late summer and early fall of last year, raise massive ethical concerns regarding the former Treasury Secretary's actions; but, perhaps more importantly, as the Treasury Department's recent response to the NY Times'-filed FOIA request details it for us now, it all but tells us that Paulson's responses to Congress, in front of whom he testified just last month, were potentially fraught with half-truths and possible deceptions.
Matt Taibbi, Barry Ritholtz, Yves Smith, and the folks over at Zero Hedge all had quite a bit to say about the Times' piece, later on Sunday, too. But, first a little more context on the original story. Morgenson and Van Natta tell us that Paulson, prior to becoming Treasury Secretary in 2006...
...agreed to hold himself to a higher ethical standard than his predecessors. He not only sold all his holdings in Goldman Sachs, the investment bank he had run, but also specifically said that he would avoid any substantive interaction with Goldman executives for his entire term unless he first obtained an ethics waiver from the government.
Paulson's calendars, obtained via the NY Times FOIA request, document that he spoke with his successor at Goldman, CEO Lloyd Blankfein, "24 times during the week of the AIG bailout," alone, including multiple times prior to receiving waivers permitting him to do so. According to their story, Paulson did receive waivers from the White House and the Treasury Department on the afternoon of September, 17th, 2008.
...government ethics specialists say that the timing of Mr. Paulson's waivers, and the circumstances surrounding it, are troubling.
"I think that when you have a person in a high government position who has been with one of the major financial institutions, things like this have to happen more publicly and they have to happen more in the normal course of business rather than privately, quietly and on the fly," said Peter Bienstock, the former executive director of the New York State Commission on Government Integrity and a partner at the law firm of Cohen Hennessey Bienstock & Rabin.
He went on: "If it can happen on a phone call and can happen without public scrutiny, it destroys the standard because then anything can happen in that fashion and any waiver can happen."
--SNIP--
Concerns about potential conflicts of interest were perhaps inevitable during this financial crisis, the worst since the Great Depression. In the weeks before Mr. Paulson obtained the waivers, Treasury lawyers raised questions about whether he had conflicts of interest, a senior government official said.
Indeed, Mr. Paulson helped decide the fates of a variety of financial companies, including two longtime Goldman rivals, Bear Stearns and Lehman Brothers, before his ethics waivers were granted. Ad hoc actions taken by Mr. Paulson and officials at the Federal Reserve, like letting Lehman fail and compensating A.I.G.'s trading partners, continue to confound some market participants and members of Congress.
Matt Taibbi's reaction focused upon the "AIG week," and Goldman CEO Blankfein's inappropriate presence in meetings where, obviously, Goldman Sachs simply had no business being present. From Taibbi, "Why was Goldman invited to the AIG bailout party?"
I spoke with someone who was in the Fed offices the whole weekend prior to the AIG bailout, a government official, and he poses an interesting question. Aside from the Fed, the Treasury, and the New York State Department of Insurance, the main players involved in the AIG bailout that weekend were AIG (obviously), JP Morgan, Morgan Stanley, and Goldman Sachs. There were swarms of bankers from the latter three banks there that weekend, poring over AIG's books, trying to figure out if AIG could be rescued without government help.
Now, we know why AIG was there, obviously. Morgan Stanley was there representing the Treasury (it had been hired to advise the Treasury on the bailouts by Paulson during the Fannie/Freddie mess, with the rumor being that it was the only bank willing to give up market positions that would have left it too conflicted to do the work). JP Morgan we know was there because AIG had hired them weeks before to come in and try to clean up its messes. Only Goldman Sachs did not have an official role at these proceedings.
So why was Goldman there? And why was Paulson calling Goldman two dozen times that week? This is one of the other problems with Gasparino's account ("of course" Blankfein was there that weekend, he says, not telling us why this is so obvious). I'm not sure I've ever seen an official explanation for why Goldman was there that weekend; the ostensible explanation that most people seem to accept is that Goldman naturally was there because it was such a large counterparty to AIG.
But I suspect we're going to find that Paulson was not on the phone two dozen times with executives from Deutsche Bank or Societe Generale or Barclays or Calyon, all of whom were significant counterparties to AIG as well. Goldman was not even AIG's largest counterparty in the sec-lending wing of its business (Deutsche Bank was, and would eventually receive $7 billion via the bailout as a result), and yet as far as I know there were no Deutsche reps there that weekend at all. So what made Goldman special?
And, then there was this snark-laden banner story from "Benjamin N. Dover III," (See: "The Misunderstood Treasury-Goldman Connection") at Zero Hedge:
A senior government official claims Paulson said that he had been warned by Treasury lawyers not to contact Goldman executives directly, but that Paulson told him he had disregarded the advice because the "crisis" required action. (Judging by Paulson's 13 calls with Blankfein -- more than all the contacts he had with the CEOs of Lehman, JP Morgan and Merrill Lynch combined -- way back in August 2007, the "crisis" obviously started more than a full year before Paulson ever publicly ackowledged it. One of a Treasury Secretary's jobs is to keep things like this on the down low.) Paulson kind of, sort of denies the remark, saying through his spokeswoman that he doesn't "recall" saying it. Case closed.
Paulson's decision to let Goldman competitors Bear Stearns and Lehman fail while propping up Goldman trading partner AIG at all costs had nothing to do with protecting Goldman. AIG's demise posed a "systemic risk" -- Bear's and Lehman's did not. Period. And besides, Goldman has insisted over and over again (when will you people get it through your thick skulls?): it was fully insulated from any collapse of AIG and thus was never in any danger. So it makes perfect sense that Goldman couldn't have cared less whether AIG survived and paid off billions in committments or went belly up. Unless, that is, you believe Paulson's spokeswoman, Michele Davis, who says that Paulson requested the ethics waiver because federal officials were worried that Goldman was at risk of failing later the same week that Lehman imploded. "The waiver was in anticipation of a need to rescue Goldman Sachs," Ms. Davis said, "not to bail out A.I.G." But what would Paulson or federal officials know about Goldman's business?
Besides, Paulson last month swore to Congress that he had "no role whatsoever in any of the Fed's decision [sic] regarding payments to any of A.I.G.'s creditors or counterparties." Sure, Paulson personally sacked AIG's CEO on September 16, apparently drafted a letter to AIG the same day, and had calls with Blankfein the morning the AIG rescue was announced (before he got the ethics waiver). And, sure, two senior government officials claim that Paulson "played a major role in the A.I.G. rescue discussions over that weekend and that it was well known among the participants that a loan to A.I.G. would be used to pay Goldman and the insurer's other trading partners." But who are you going to believe: anonymous government officials or the former head of a respected bank like Goldman?
Here's Barry Ritholtz's take on the situation, as he tells us this story trumps Matt Taibbi's late-June, Rolling Stone takedown of Goldman Sachs, too:
Forget Rolling Stone's broadside: Today's must read column is Gretchen Morgenson's New York Times piece on Paulson:
"Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential."
And government ethics specialists say that the timing of Mr. Paulson's waivers, and the circumstances surrounding it, are troubling.
"I think that when you have a person in a high government position who has been with one of the major financial institutions, things like this have to happen more publicly and they have to happen more in the normal course of business rather than privately, quietly and on the fly," said Peter Bienstock, the former executive director of the New York State Commission on Government Integrity and a partner at the law firm of Cohen Hennessey Bienstock & Rabin."
Last of all, I'm going to close this out tonight with Yves Smith's commentary over at Naked Capitalism, because she ties everything together with regard to my comments at the top of this diary. And, to summarize her sentiments, what's most amazing about all of this is how few eyebrows this story is raising. As she notes, it's almost as if we've become numb to all of it. (And, that may be the saddest thing of all.) I totally agree. Here's the link: "Quelle Surprise! Hank Paulson and Goldman CEO Talked to Each Other a Lot!"
At this point, the New York Times story reporting that Treasury Secretary Hank Paulson and Goldman chief Lloyd Blankfein spoke frequently during the crisis is close to a "dog bites man" news item. After Goldman was the only Wall Street player involved in the discussions of what to do about the rapidly unravelling AIG, and Goldman then turned out to be the biggest beneficiary of the dubious credit default swaps unwinding, any other cases of undue attentiveness to the needs of Paulson's former firm are likely to pale. The amusing bit is that the public is looking for more signs of behind the scenes winks and nods, when what is in the open is so blatant that there really wasn't much need to do things in a covert fashion. You already have a very steep yield curve, FDIC guaranteed debt, the Fed engineering massive liquidity facilities, which reduces the risks of holding the types of paper the Fed is targeting (the Fed is working mightily to keep interest rates in a certain range, which reduces the risk of loss), all hugely props to the industry that no one seems to think about too much.
The real issue here is that this is yet another sign of how much standards have shifted. One of the curbs on behavior, believe it or not, was having a sense of propriety...
--SNIP--
...today, seven months after Mr. Paulson left office, questions are still being asked about his part in decisions last fall to prop up the teetering financial system with tens of billions of taxpayer dollars, including aid that directly benefited his former firm. Testifying on Capitol Hill last month, he was grilled about his relationship with Goldman.
"Is it possible that there's so much conflict of interest here that all you folks don't even realize that you're helping people that you're associated with?" Representative Cliff Stearns, Republican of Florida, asked Mr. Paulson at the July 16 hearing.
--SNIP--
Rep. Stearns' comment is key. The standards have fallen so low that people can fool themselves about what is acceptable. And that is pronounced among Goldman employees, since the firm is a cult. Even though the industry is known for violating personal boundaries (a big cult habit) and keeping people in a closed community of the likeminded, Goldman does that one better, making a point of hiring people when they are young and malleable, having a strong sense of elitism and resultant belief that leaving the firm to work anywhere else would be an admission of personal failure, and making even more extreme demands than the norm. For instance, it is not uncommon for Goldman to ask staff members to reschedule weddings if they will conflict with a deal.
As a result, Goldmanite are particularly prone to "all animals are equal, but some are more equal than others" thinking, and of course, the "more equal" ones hail from Goldman. Recall the bizarre incident revealed in May, in which Steve Friedman, former co-chairman of Goldman and then chairman of the New York Fed, not only failed to recuse himself on Goldman's application to become a bank holding company, but while waiting for a waiver of his newly-conflicted status, he then also bought Goldman shares! Friedman resigned over the scandal, and sent a peturbed-sounding letter, clearly indicating he did not get it. A conflict of interest is not a conflict of interest if Goldman is involved. But the NY Fed's general counsel didn't back down on the Friedman waiver, so in his little ethics bubble, he got reinforcement of his dubious position...
We haven't heard the last of this...even if you've phased yourself out from "the first of it."
Money for national healthcare, extended unemployment benefits (until who knows when), patching other aspects of our shredded social safety net, transformation of the workforce, and repairing our country's dilapidated infrastructure is all going to have to come from somewhere, right?
Let's beat the right at their own game. Let's hold Wall Street accountable. We've been scammed, dammit! It's becoming more apparent with every passing day...at least if you're not numb to it all by now and you can still afford to pay attention.