By Pam Martens and Russ Martens: December 14, 2016
Two former Goldman Sachs bankers and the sitting President of the Wall Street firm are taking high positions in Donald Trump’s administration despite the egregious role that Goldman Sachs played in the 2008 financial collapse that cost millions of Americans their homes and their jobs.
Steve Bannon, who at one time worked in Mergers and Acquisitions at Goldman, will be Trump’s Senior Counselor and Chief White House Strategist.
Steve Mnuchin, who joined Goldman in 1985 and worked there for the next 17 years, has been nominated by Trump to serve as U.S. Treasury Secretary. That post also entitles Mnuchin to Chair the Financial Stability Oversight Council, a body that frequently meets in secret to deliberate if the U.S. could be looking at another 2008-style meltdown. Yesterday, an article at Bloomberg News raised questions about Mnuchin’s qualifications to serve in one of the most important cabinet posts in government, writing that shortly after Mnuchin had made a windfall last year from the sale of OneWest Bank, problems emerged: “The U.S. Department of Housing and Urban Development opened an investigation into foreclosure practices in a division that handles loans to senior citizens. Accountants determined the unit’s books were a mess. Eventually, the bank’s new owner, CIT Group Inc., discovered a shortfall of more than $230 million.”
Mnuchin, at least, was not at Goldman Sachs in the leadup to the greatest financial crash since the Great Depression. He left in 2002. The same cannot be said for Gary Cohn, the current President and Chief Operating Officer of Goldman, whom Trump has picked to lead the National Economic Council and be his chief strategist in developing his economic policy. It’s convenient that Cohn’s new position does not require Senate confirmation since exactly what he knew about Goldman selling bogus investments to its clients while the firm made billions of dollars betting the instruments would fail might be raised in Senate questioning of Cohn’s fitness to serve.
In the two years leading up to the epic 2008 financial crash on Wall Street, Cohn was Co-President of Goldman. Cohn became a multi-millionaire from the business done in those years, earning $27.5 million in restricted stock and options just in the year 2006. However, as Greg Gordon of McClatchy Newspapers would report in 2009, a key part of Goldman’s business in the years before the crash operated like this: “In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.”
On April 11 of this year, the U.S. Justice Department and other regulators announced a $5.06 billion settlement with Goldman Sachs related to the fraudulent manner in which it had sold residential mortgage bonds. On the day the settlement was announced, a spokesman for the Justice Department stated: “This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail.”
What the Justice Department settlement didn’t do was put any Goldman Sachs’ executive in jail nor did it provide details about how Goldman Sachs was not only selling investments that it knew were likely to fail but it was also making billions of dollars making wagers (shorting) that the instruments would indeed fail. The profits from those wagers flowed to the top executives – men like Gary Cohn.
One particularly slimy and illegal deal done by Goldman Sachs was the 2007 ABACUS. The Securities and Exchange Commission described the deal as follows when it brought charges on April 16, 2010:
“The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.”
The SEC complaint goes on: “…after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS [Residential Mortgage Backed Securities] portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.’s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.”
According to the SEC’s complaint, Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By October 2007, 83 percent of the bonds in the portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded. The SEC estimated that investors lost more than $1 billion in the deal while Paulson made an equivalent amount.
Earlier this year, the American people got a devastating look at what was really going on inside the SEC that prevented it from bringing fraud charges against higher ups at Goldman Sachs who were involved in the ABACUS deal. Jesse Eisinger, writing for the New Yorker, reported that the SEC attorney, James Kidney, who was in charge of bringing the ABACUS case to trial, wrote in an email to his boss at the SEC that it was an “unbelievable fraud.” According to the emails and documents Kidney turned over to Eisinger after Kidney retired from the SEC, Kidney had wanted to charge higher ups. But his efforts were quashed by his bosses at the SEC.
Less than three months after filing its lawsuit on the ABACUS deal, the SEC settled with Goldman Sachs for $550 million, bringing charges solely against a low level trader, Fabrice Tourre. No charges or settlement was ever leveled against Paulson by the SEC.
Making the appointment of Cohn even more of a travesty and insult to the American people, Cohn is reported to own more than $200 million in Goldman Sachs stock, much of it awarded to him during the company’s years of selling their fraudulent mortgage investments to public pension funds. Cohn will be able to get a monster tax break on that stock by serving in the Trump administration. Under the law, if Cohn sells his Goldman stock to avoid a conflict of interest as a member of the Executive Branch, he will be able to indefinitely defer capital gains taxes on the sale, providing he invests the proceeds from the stock sales in government securities or an approved government securities mutual fund.
Hank Paulson, a Goldman Sachs CEO who served in the George W. Bush administration as Treasury Secretary, immediately filed to sell almost $500 million of his Goldman stock and take advantage of a tax-savings windfall estimated to be $200 million by The Economist. Paulson was also on hand at the Treasury when all of those fraudulently constructed mortgage bonds across Wall Street began to implode, taking down the iconic names on Wall Street and the U.S. economy. Paulson’s government position allowed him to oversee the biggest taxpayer bailout of Wall Street in U.S. history – portions of which remained secret for years, like the Fed’s covert $16 trillion in hidden loans to Wall Street and foreign banks.
Trump is sending a loud and clear message to Americans: crime not only pays on Wall Street but it qualifies you to run the government of the United States. Instead of draining the swamp, Trump is simply restocking it.