[ed. See also: Why the Goldman Sachs Settlement Is a $5 Billion Sham]
The Clintons’ connections to Goldman Sachs can be traced back to their beginnings in national politics, in December 1991, when Robert Rubin, then co-chair co-senior partner of the bank, met Bill Clinton at a Manhattan dinner party and was so impressed by him that he signed on as an economic adviser to Clinton’s campaign for the 1992 Democratic nomination. According to a November 2015 survey of Clinton donors by The Washington Post, Rubin and other Goldman partners “mobilized their networks to raise money for the upstart candidate.”
As Bill Clinton’s secretary of the treasury from January 1995 until July 1999, Rubin was an architect of the financial deregulation that left financial derivatives such as Collateralized Debt Obligations (CDOs) largely free of controls. This paved the way for the large-scale, unregulated speculation in financial derivatives by Wall Street banks beginning in the early 2000s. (Goldman itself continued to enjoy special access to Washington during the George W. Bush administration, with former Goldman chief executive Hank Paulson serving as Treasury Secretary from 2006 to 2009.)
These long-running ties with Goldman have paid off for the Clintons. According to a July 2014 analysis in the Wall Street Journal, from 1992 to the present Goldman has been the Clintons’ number one Wall Street contributor, based on speaking fees, charitable donations, and campaign contributions, the three pillars of what I’ve called the Clinton System. As early as 2000, Goldman was the second most generous funder—after Citigroup—of Hillary Clinton’s 2000 Senate campaign, with a contribution of $711,000. In the early 2000s, Bill Clinton was also a Goldman beneficiary, receiving $650,000 from Goldman for four speeches delivered between December 2004 and June 2005. (The transcripts of these speeches do not appear to be currently available.)
By the winter of 2006–2007, however, Goldman and its CEO Lloyd Blankfein were becoming deeply involved in the collapsing housing bubble—and engaging in the practices that have since resulted in years of investigations and lawsuits. Data gathered mostly from the Corporate Research Project, a public interest website, show that on thirteen occasions between 2009 and 2016, Goldman was penalized by US courts or government agencies for fraudulent or deceptive practices that were committed mostly between 2006 and 2009. Four of these penalties amounted to $300 million or more.
In July 2010 the Securities and Exchange Commission fined Goldman $550 million for the fraudulent marketing of its Abacus CDO; the bank had allowed its client John Paulson to stuff the CDO with toxic ingredients, mostly in the form of mortgage-backed securities (MBSs), and then to bet against the CDO when it was marketed by taking a short position. Paulson earned around $1 billion when the CDO lost value as it was designed to do. In August 2011 the Federal Housing Finance Agency sued Goldman for “negligent misrepresentation, securities laws violations and common fraud” in its dealings with the semi-public mortgage banks Fannie Mae and Freddie Mac. In August 2014 Goldman agreed as restitution to buy back $3.15 billion worth of securities it had sold to the two banks for $1.2 billion more than they were currently worth.
In July 2012 Goldman agreed to pay $25.6 million to settle a suit brought by the Public Employees Retirement System of Mississippi accusing the bank of defrauding investors in a 2006 offering of MBSs. In January 2013, the Federal Reserve announced that Goldman would pay $330 million to settle allegations of foreclosure abuse by its mortgage loan servicing operations. Finally, in January of this year, Goldman announced that it would pay $5 billion to settle multiple lawsuits brought by official agencies against the bank, mainly for fraudulent marketing of CDOs; the final terms of the settlement were released on April 11. (Through the availability of tax credits and allowances, Goldman may end up paying less.) Among the plaintiffs were the Department of Justice, the New York and Illinois Attorneys General, the National Credit Union Administration, and the Federal Home Loan Banks of Chicago and Seattle.
These are summary descriptions of Goldman transgressions, which do no more than point to a pattern of deceptive and often fraudulent trading in derivatives. To get a more detailed sense of what exactly the bank was doing with these trades, we have to look at Goldman’s own record of its behavior during the crash. This record, which is now in the public domain, provides a stark backdrop to Clinton’s recent dealings with Goldman. The story begins on December 14, 2006 when David Viniar, Chief Financial Officer at Goldman and thus number four in the Goldman hierarchy, convened a meeting on the thirtieth floor of Goldman’s Manhattan headquarters. This was the seat of power where, along with Viniar, the bank’s Big Three had their offices: CEO Lloyd Blankfein, and co-vice presidents Gary Cohn and Jon Winkelried.
At the meeting Viniar called for an in-depth review of Goldman’s holdings of mortgage backed securities because its “position in subprime mortgage related assets was too long, and its risk exposure was too great.” The next day Viniar emailed a subordinate about the deteriorating housing markets, its effect on mortgage-backed securities, and not only the risks but also the opportunities this opened up. In his email Viniar alerted his subordinates to the possibility that the bank could profit from the deterioration of its own assets: “My basic message was let’s be aggressive distributing things because there will be very good opportunities as the markets [go] into what is likely to be even greater distress and we want to be in a position to take advantage of them.”
By February 11, 2007, Goldman CEO Lloyd Blankfein himself was urging Goldman’s mortgage department to get rid of deteriorating assets: “Could/should we have cleaned up these books before and are we doing enough right now to sell off cats and dogs in other books throughout the division”? But this was no easy task. In 2006 and 2007 Goldman created 120 complex financial derivatives, relying heavily on subprime mortgages grouped together in MBSs and CDOs with a total value of around $100 billion.
The problem was that the derivatives Goldman was busy creating were clogged with assets that were rapidly losing value. Faced with what it saw as a collapsing market, especially in MBSs, Goldman abandoned some derivatives that were still “under construction” while liquidating others that were fully formed, selling off their components in the markets. If this is all Goldman had done—anticipating where the market was going and unloading its bad assets—it would not have been the target of multiple lawsuits, and Blankfein might rightly be esteemed on Wall Street as the great survivor of the crash.
But Goldman also persisted with the creation of new CDOs and MBSs and continued marketing its existing ones so that they too could become part of new CDOs. Although the trading strategies involved in these maneuvers were sometimes highly complex, the motive underlying them was not. The bank’s executives believed that they could make more money by repackaging their collapsing assets into new CDOs and MBSs, which they could still market to clients as investment opportunities. Crucially, in doing this, Goldman was not simply acting as a “market maker,” an institutional trader that simply buys and sells securities at publicly posted prices. By marketing these new financial products, Goldman was also acting as underwriter and placement agent for them, and as such was subject to additional rules on fair disclosure.
On multiple occasions, as the Federal Housing Finance Agency’s 2011 lawsuit alleged, Goldman failed to disclose to its own clients how risky many of its derivatives were and that the bank itself was betting against them by taking the short position.
The Clintons’ connections to Goldman Sachs can be traced back to their beginnings in national politics, in December 1991, when Robert Rubin, then co-chair co-senior partner of the bank, met Bill Clinton at a Manhattan dinner party and was so impressed by him that he signed on as an economic adviser to Clinton’s campaign for the 1992 Democratic nomination. According to a November 2015 survey of Clinton donors by The Washington Post, Rubin and other Goldman partners “mobilized their networks to raise money for the upstart candidate.”
As Bill Clinton’s secretary of the treasury from January 1995 until July 1999, Rubin was an architect of the financial deregulation that left financial derivatives such as Collateralized Debt Obligations (CDOs) largely free of controls. This paved the way for the large-scale, unregulated speculation in financial derivatives by Wall Street banks beginning in the early 2000s. (Goldman itself continued to enjoy special access to Washington during the George W. Bush administration, with former Goldman chief executive Hank Paulson serving as Treasury Secretary from 2006 to 2009.)These long-running ties with Goldman have paid off for the Clintons. According to a July 2014 analysis in the Wall Street Journal, from 1992 to the present Goldman has been the Clintons’ number one Wall Street contributor, based on speaking fees, charitable donations, and campaign contributions, the three pillars of what I’ve called the Clinton System. As early as 2000, Goldman was the second most generous funder—after Citigroup—of Hillary Clinton’s 2000 Senate campaign, with a contribution of $711,000. In the early 2000s, Bill Clinton was also a Goldman beneficiary, receiving $650,000 from Goldman for four speeches delivered between December 2004 and June 2005. (The transcripts of these speeches do not appear to be currently available.)
By the winter of 2006–2007, however, Goldman and its CEO Lloyd Blankfein were becoming deeply involved in the collapsing housing bubble—and engaging in the practices that have since resulted in years of investigations and lawsuits. Data gathered mostly from the Corporate Research Project, a public interest website, show that on thirteen occasions between 2009 and 2016, Goldman was penalized by US courts or government agencies for fraudulent or deceptive practices that were committed mostly between 2006 and 2009. Four of these penalties amounted to $300 million or more.
In July 2010 the Securities and Exchange Commission fined Goldman $550 million for the fraudulent marketing of its Abacus CDO; the bank had allowed its client John Paulson to stuff the CDO with toxic ingredients, mostly in the form of mortgage-backed securities (MBSs), and then to bet against the CDO when it was marketed by taking a short position. Paulson earned around $1 billion when the CDO lost value as it was designed to do. In August 2011 the Federal Housing Finance Agency sued Goldman for “negligent misrepresentation, securities laws violations and common fraud” in its dealings with the semi-public mortgage banks Fannie Mae and Freddie Mac. In August 2014 Goldman agreed as restitution to buy back $3.15 billion worth of securities it had sold to the two banks for $1.2 billion more than they were currently worth.
In July 2012 Goldman agreed to pay $25.6 million to settle a suit brought by the Public Employees Retirement System of Mississippi accusing the bank of defrauding investors in a 2006 offering of MBSs. In January 2013, the Federal Reserve announced that Goldman would pay $330 million to settle allegations of foreclosure abuse by its mortgage loan servicing operations. Finally, in January of this year, Goldman announced that it would pay $5 billion to settle multiple lawsuits brought by official agencies against the bank, mainly for fraudulent marketing of CDOs; the final terms of the settlement were released on April 11. (Through the availability of tax credits and allowances, Goldman may end up paying less.) Among the plaintiffs were the Department of Justice, the New York and Illinois Attorneys General, the National Credit Union Administration, and the Federal Home Loan Banks of Chicago and Seattle.
These are summary descriptions of Goldman transgressions, which do no more than point to a pattern of deceptive and often fraudulent trading in derivatives. To get a more detailed sense of what exactly the bank was doing with these trades, we have to look at Goldman’s own record of its behavior during the crash. This record, which is now in the public domain, provides a stark backdrop to Clinton’s recent dealings with Goldman. The story begins on December 14, 2006 when David Viniar, Chief Financial Officer at Goldman and thus number four in the Goldman hierarchy, convened a meeting on the thirtieth floor of Goldman’s Manhattan headquarters. This was the seat of power where, along with Viniar, the bank’s Big Three had their offices: CEO Lloyd Blankfein, and co-vice presidents Gary Cohn and Jon Winkelried.
At the meeting Viniar called for an in-depth review of Goldman’s holdings of mortgage backed securities because its “position in subprime mortgage related assets was too long, and its risk exposure was too great.” The next day Viniar emailed a subordinate about the deteriorating housing markets, its effect on mortgage-backed securities, and not only the risks but also the opportunities this opened up. In his email Viniar alerted his subordinates to the possibility that the bank could profit from the deterioration of its own assets: “My basic message was let’s be aggressive distributing things because there will be very good opportunities as the markets [go] into what is likely to be even greater distress and we want to be in a position to take advantage of them.”
By February 11, 2007, Goldman CEO Lloyd Blankfein himself was urging Goldman’s mortgage department to get rid of deteriorating assets: “Could/should we have cleaned up these books before and are we doing enough right now to sell off cats and dogs in other books throughout the division”? But this was no easy task. In 2006 and 2007 Goldman created 120 complex financial derivatives, relying heavily on subprime mortgages grouped together in MBSs and CDOs with a total value of around $100 billion.
The problem was that the derivatives Goldman was busy creating were clogged with assets that were rapidly losing value. Faced with what it saw as a collapsing market, especially in MBSs, Goldman abandoned some derivatives that were still “under construction” while liquidating others that were fully formed, selling off their components in the markets. If this is all Goldman had done—anticipating where the market was going and unloading its bad assets—it would not have been the target of multiple lawsuits, and Blankfein might rightly be esteemed on Wall Street as the great survivor of the crash.
But Goldman also persisted with the creation of new CDOs and MBSs and continued marketing its existing ones so that they too could become part of new CDOs. Although the trading strategies involved in these maneuvers were sometimes highly complex, the motive underlying them was not. The bank’s executives believed that they could make more money by repackaging their collapsing assets into new CDOs and MBSs, which they could still market to clients as investment opportunities. Crucially, in doing this, Goldman was not simply acting as a “market maker,” an institutional trader that simply buys and sells securities at publicly posted prices. By marketing these new financial products, Goldman was also acting as underwriter and placement agent for them, and as such was subject to additional rules on fair disclosure.
On multiple occasions, as the Federal Housing Finance Agency’s 2011 lawsuit alleged, Goldman failed to disclose to its own clients how risky many of its derivatives were and that the bank itself was betting against them by taking the short position.
