It’s 2 o’clock in the afternoon in Piazza Duomo where I sit listlessly procrastinating at an outdoor café, consuming large quantities of coffee and toying around with my first 21st century phone (yes, I finally caved). Time stands in the corner glaring at me while I play spider solitaire, on the difficult level, and watch tourists and locals interfacing like two galaxies colliding in a far part of some star-trek worthy universe. I figure people-watching whilst sipping a caffe should somehow conform to my current studies of the modern history of the world and perhaps somehow metaphorically illustrate the random walk theory of the securities market.
For the record, trying to win at difficult level spider solitaire is like trying to catch a cab on Saturday night anywhere below 42nd street! Either that or Apple’s rigged the game for failure as part of its plan for world domination.
I’m pushing the limit of dilatory procedural tactics now but the obesity-sized portion of homework that looms over my head isn’t helping.
I shouldn’t complain, I’ve just read a delightful exposé from Rolling Stone magazine for my corporate finance class entitled “The Great Big American Bubble Machine”, written by Matt Taibbi. The article fashionably annihilates corporate finance succubus Goldman Sachs for its vast portfolio of sleazy underwriting, sneaky short sales and graceful spinning shenanigans.
While any piece of writing can be exaggerated, I tend to have very few doubts as to the legitimacy of this article in particular, although I’m sure Goldman Sachs, whose company motto is “long-term greedy”, was not the only factor contributing to the tech, oil and housing bubbles. That aside, there has been a wealth of articles lately chastising Goldman Sachs for its naughty behavior.
In Taibbi’s synopsis, Goldman stands accused of not only contributing to various financial bubbles, but of having a direct hand in their intentional creation. Goldman’s out of control, leverage-based investment techniques back in the 20s (Goldman backing Goldman backing Goldman) helped contribute to the crash of the Great Depression. During the tech bubble, Goldman engaged in serious “spinning”, or corporate bribery, for underwriting deals. They further engaged in “laddering”, or tampering with IPO share prices. Robert Rubin, former Goldman CEO was acting as Treasury Secretary in the nineties when all of this was taking place; in fact, he is responsible for much of the dis-regulation that allowed the housing bubble to inflate to the size it did. In the mid-nineties, the Commodity Futures Trading Commission suggested tight regulation of CDOs and Credit Swaps, a move drastically opposed by Rubin, who eventually persuaded Congress to listen to his side; the Commodity Futures Modernization Act was passed shortly thereafter, leaving firms free to trade default swaps.
The best part of all of this however, is all-American corporate luminary Henry Paulson, notoriously well-known for his controversial government bailouts in 2008. Paulson had been in charge when Rubin was Treasury Secretary; he was the one who took Goldman Sacks public in 1999. During the housing bubble, Paulson had taken Rubin’s place in the White House and Lloyd Blankfein was Goldman’s acting CEO. When Goldman blatantly engaged in short-selling its own securities, or betting against its own mortgage bundles, no one cried security fraud. Instead, our favorite financial behemoth made sure (allegedly, though not that much) that AIG got the bailout, from which they received 13 billion, while their biggest competitor, Lehman Brothers filed for bankruptcy.
Another article from the New York Times cited phone and schedule records affirming that Paulson spoke with Goldman CEO Lloyd Blankfein 26 times between 2007 and 2008 prior to receiving the ethics waiver from the government allowing him to be involved in “conflict of interest” affairs, or contact with his former firm. Furthermore, between 16-21 Sept 2008, there were 24 phone conversations between Paulson and Blankfein, more than there were between Paulson and AIG; hey, they were probably discussing the weather.
In my opinion, and based on principles learned in economics and investment classes taken this and last semester, financial firms seem to have become the biggest authorities on the allocation of assets in any given free-market country. This is not a bad thing if only the market could actually follow freshwater theories like the Efficient Market Hypothesis allowing stock prices to reflect all available, not to mention real, information regarding a company and its prospects. Unfortunately for calculus buffs, in the real world there exist companies like Goldman Sachs, who are also calculus buffs but armed with a “long-term greed” (i.e. short-term greed) motto; not to mention rash investors who never learned what logic meant, thus making a rational and efficient marketplace unlikely.
If you have any doubt about the irrationality of mankind, spend an hour people watching at the Duomo of Florence or at the leaning tower of Pisa.
I think I’ve got to side with Krugman on this one; saltwater pragmatists may just have it right!
Nina Michael is in her junior year in the BS in Business program at CUNY School of Professional Studies. Nina has been all over the world and loves traveling; she currently lives between Italy and New York where she works as a professional English teacher and translator. She loves languages, food, coffee, wine and a good book; she is also a first-rate bartender.