You then promise your best clients the right to buy big chunks of the ipo at the low offering price — lets say ms starting share price is 15 — in exchange for a promise that they will buy more shares later on the open. That seemingly simple demand gives you inside knowledge of the ipos future, knowledge that wasnt disclosed to the day trader schmucks who only had the prospectus to go by: you know that certain of your clients who bought x amount of shares at 15 are. In this way, goldman could artificially jack up the new companys price, which of course was to the banks benefit — a six percent fee of a 500 million ipo is serious money. Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet ipos, including Webvan and NetZero. The deceptive practices also caught the attention of Nicholas maier, the syndicate manager of Cramer., the hedge fund run at the time by the now-famous chattering television asshole jim Cramer, himself a goldman alum. Maier told the sec that while working for Cramer between 19, he was repeatedly forced to engage in laddering practices during ipo deals with Goldman. Goldman, from what I witnessed, they were the worst perpetrator, maier said.
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After it took a little-known company with weak financials called Yahoo! Public in 1996, once the tech boom had already begun, goldman quickly became the ipo king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the ipo. In 1999, write at the height of the boom, it took 47 companies public, including stillborns like webvan and etoys, investment offerings that were in many ways the modern equivalents of Blue ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, goldman provided profits far more volatile than those of its competitors: In 1999, the average goldman ipo leapt 281 percent above its offering price, compared to the wall Street average of 181 percent. How did Goldman achieve such extraordinary results? One answer is that they used a practice called laddering, which is just a fancy way of saying they manipulated the share price of new offerings. Heres how it works: say youre goldman Sachs, and m comes to you and asks you to take their company public. You agree on the usual terms: youll price the stock, determine how many shares should be released and take the m ceo on a road show to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised).
Bob Rubin sure as hell knew what the underwriting standards were. Theyd been intact since the 1930s. Jay ritter, a professor of finance at the University of Florida who specializes in ipos, says banks like with goldman knew full well that many of the public offerings they were touting would never make a dime. In the early eighties, the major underwriters insisted on three years of profitability. Then it was one year, then it was a quarter. By the time of the Internet bubble, they were not even requiring profitability in the foreseeable future. Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, goldman started slow and finished crazy in the Internet years.
They did this by setting up what was, in reality, a two-tiered investment system — one for resumes the presentation insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While goldmans later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industrys standards of quality control. Since the depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public, says one prominent hedge-fund manager. The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash. Goldman completed the snow job by pumping up the sham stocks: Their analysts were out there saying m is worth 100 a share. The problem was, nobody told investors that the rules had changed. Everyone on the inside knew, the manager says.
And what Rubin thought, mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White house made a series of moves that would have drastic consequences for the global economy — beginning with Rubins complete and total failure to regulate his old firm during its first mad dash for obscene short-term profits. The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that werent much more than potfueled ideas scrawled on napkins by uptoolate bongsmokers were taken public via ipos, hyped in the media and sold to the public for mega-millions. It was as if banks like goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement. It sounds obvious now, but what the average investor didnt know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were.
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It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firms mantra, long-term greedy. One former Goldman banker who left the firm in the early nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. We gave back money to grownup corporate clients who had made bad deals with us, he says. Everything we did was legal and fair — but long-term greedy said we didnt want to make such a profit at the clients collective expense that we spoiled the marketplace. But then, something happened. Its hard to say what it was exactly; it might have been the fact that Goldmans cochairman in the early nineties, robert Rubin, followed Bill Clinton to the White house, where he directed the national Economic council and eventually became Treasury secretary. While the American media fell in love work with the story line of a pair of baby-boomer, sixties-child, Fleetwood Mac yuppies nesting in the White house, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever.
Rubin was the prototypical essay Goldman banker. He was probably born in a 4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was. It became almost a national clichè that whatever Rubin thought was best for the economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the cover. Time with his Treasury deputy, larry summers, and Fed chief Alan Greenspan under the headline. The committee to save the world.
The basic idea isnt hard to follow. You take a dollar and borrow nine against it; then you take that 10 fund and borrow 90; then you take your 100 fund and, so long as the public is still lending, borrow and invest 900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred. In a chapter from, the Great Crash, 1929 titled In Goldman Sachs we trust, the famed economist John Kenneth Galbraith held up the Blue ridge and Shenandoah trusts as classic examples of the insanity of leveragebased investment. The trusts, he wrote, were a major cause of the markets historic crash; in todays dollars, the losses the bank suffered totaled 475 billion. It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity, galbraith observed, sounding like keith Olbermann in an ascot.
If there must be madness, something may be said for having it on a heroic scale. Bubble 2, tech Stocks. Fast-forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the countrys wealthiest and most powerful corporations. Thanks to sidney weinberg, who rose from the rank of janitors assistant to head the firm, goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, goldman may not have been the planet-eating death Star of political influence it is today, but it was a top-drawer firm that had a reputation for attracting the very smartest talent on the Street.
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Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game. Beginning a pattern that would repeat itself over and over again, goldman word got into the investmenttrust game late, then jumped in with both feet and went hogwild. The first effort was the goldman Sachs Trading Corporation; the bank issued a million shares at 100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at 104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund — which in turn sponsored yet another trust called the Blue ridge corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue ridge, 6,250,000 were actually owned by Shenandoah — which, of course, was in large part owned by goldman Trading. Taibblog: Commentary on Politics and the Economy by matt taibbi. The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line.
They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term ious to smalltime vendors in downtown Manhattan. You can probably guess the basic plotline of Goldmans first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history theres really only one episode that bears scrutiny travelling now, in light of more recent events: Goldmans disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s. Wall Streets Big Win, this great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an investment trust. Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest 10 or 100 in a trust and feel like he was a big player.
above greed, just a bunch. Theyve been pulling this same stunt over and over since the 1920s — and now theyre preparing to do it again, creating what may be the biggest and most audacious bubble yet. If you want to understand how we got into this financial crisis, you have to first understand where all the money went — and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long — including last years strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasnt one of them. Bubble 1, the Great Depression. Goldman wasnt always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids —just almost always. The bank was actually founded in 1869 by a german immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs.
The heads of the canadian and Italian national banks are goldman alums, as is the head of the world Bank, the head of the new York Stock Exchange, the last two heads of the federal Reserve bank of New York — which, incidentally, is now. But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed. The banks unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself. All that money that youre losing, its going somewhere, and in both a literal and a figurative sense, goldman Sachs is where its going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most. Goldman, they pdf achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage.
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The first thing you need to know about Goldman Sachs is that its everywhere. The worlds most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a whos Who of Goldman Sachs graduates. By now, most of us know the major players. As george bushs literature last Treasury secretary, former Goldman ceo henry paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of your Dollars to a handful of his old friends on Wall Street. Robert Rubin, bill Clintons former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup — which in turn got a 300 billion taxpayer bailout from paulson. Theres John Thain, the asshole chief of Merrill Lynch who bought an 87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multi-billion-dollar handout from paulson, who used billions in taxpayer funds to help Bank of America. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives 225 million in golden-parachute payments as his bank was self-destructing. Theres Joshua bolten, bushs chief of staff during the bailout, and Mark patterson, the current Treasury chief of staff, who was a goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom paulson put in charge of bailed-out insurance giant aig.