What’s the deal with Bush’s new honcho at the Treasury? Replacing John Snow as Secretary (effective Tuesday, May 30) is Henry (Hank) Paulson, who is CEO of Goldman Sachs. Among Wall Street’s capos, that makes Paulson capo di tutti capital markets and the speculator-in-chief of our speculation driven economy, the main manipulator in a manipulated market.
It means that the chicken coop is directly in the paws not just of any egg-sucking fox but a Bengal tiger in its prime. Really, why not invite the Cali drug cartel to run the DEA while we’re at it?
Servicing the Public
The story goes that Paulson was reluctant to leave his lucrative post for government service. After all, at Goldman he makes about $38.8 million a year (with $154,000 tossed in for a car and driver, just in case he can’t afford them on his own). And he has a 4.58 million-share stake in the company worth nearly $700 million. Why would he want the piddling 171,900 bucks that the Treas. Sec. makes except for the satisfaction of public service? Why indeed. (1)
We could point out uncharitably that the quantity of filthy lucre a person brings to the table is no guarantee that he won’t be wanting more. And we don’t mean the chump change that the Secretary takes home. We’re talking about the untold influence that comes from being at the helm of the global capital markets. And we hear that that was the cruncher in the deal. President Bush assured the Sachs man that unlike others before him he would get to play more than second fiddle.
This is not the first time the firm has supplied high priced bodies for high office -- Robert Rubin, a former trader, Clinton’s man at Treasury, being the most notable till now. Public service might better be called public servicing.
Of course, Goldman, whose shares fell 1 percent on the news, got as much from Paulson as it gave. The 137-year-old private partnership went public in 1999, but under Paulson still managed to turn in first quarter earnings of $10.34 billion in total revenues. As much as half -- yes, half -- of the net from that was then steered to compensation. Last year, that came to about $11 billion or half a million per employee. Of course, the actual split is not nearly so egalitarian with about 15% or $1.5 billion going to the 250 partners at the top while the bottom rung of the talent, junior analysts out of college, get $70,000 apiece in base salary. (2) That’s aside from the bonuses and stock options with which management rewards its lucky self. A worthy compensation for providing liquidity to the markets, right?
Actually, it’s a nice demonstration of the anomalies of modern capitalism, where the capitalists -- the shareholding public -- get shafted by their overpriced workers -- the technocrat managers. While Paulson and the partners have raked it in, Goldman stock has just outpaced the S&P and Dow since the firm went public.
The public gets shafted another way too.
The usual business of investment banks is buying shares in block from companies -- at a discount -- and then selling at a slight mark-up, pocketing the difference. Block trading is the bank’s return for bringing liquidity to the market, since on its own a new company would not easily find buyers for its shares. The markup is most profitable in things like bond trading and commodity trading -- the trading of agricultural products like oil, sugar, and coffee, and metals like silver, platinum, and gold -- where the traders at the desks rake in big money for their firms. Naturally, they develop complex strategies to maximize their profits; naturally, this proprietary trading -- as it’s called -- contributes the lion’s share of revenues to the firm; and naturally, it also creates incentives to exploit investors for it can -- and does -- influence the firm’s buy/sell recommendations on stocks.
These recommendations, made by the firm’s analysts, are supposed to be a professional service that allows the public to invest wisely, but in practice, they tend to get the public to play into whatever strategy the bank’s traders are pursuing at any point. If the traders want to pick up a stock cheap, the analysts can downgrade it and cause panic selling. If the traders want to sell high, the analysts can pump it up and create a frenzy of buying. In short, the analysts are shills for the casino; the traders are the professionals with the house edge on their side; and the mom and pop investors are naïve marks whose losses can be counted on to keep finance professionals in their high-rolling lifestyles.
That’s the gambling den whose boss now also has his hands on the money pump at the Fed. What gives?
Hank’s Pranks -- Number One
According to the official spin, Paulson has been brought in -- as a Wall Street heavy -- to loan some gravitas to the uphill task of chatting up the dollar. Years of massive trade deficits, mushrooming debt, irresponsible monetary policy at the Fed, and insanely wasteful expenditures on defense and space boondoggles have finally made the almighty buck as credible to the globe as a televangelist in a brothel. For a few years now it’s been in a swoon, investment legends like Warren Buffet and Jim Rogers swearing they no longer feel a pulse.
But with creditors -- especially central banks -- all around the world holding dollars, any sudden loss of faith in the currency could well trigger a financial panic that would cause chaos. A strong dollar keeps the global paper game going. On the other hand, a weak dollar helps US trade deficits. Caught between debt and devaluation the Feds have plumped for a game of deceit, chatting up the economy and the currency in public while privately preparing insiders for the decline. Last year, surprise, the dollar strengthened if it did not actually flex its pecs, erasing half its losses against the backdrop of continuing tight money policy and higher interest rates in the US (versus the euro area and Japan). The dumping of the EU's Constitutional Treaty in France and the Netherlands also stiffened a few rickety vertebrae in the greenback’s spine. It must have been just a touching coincidence that this also gave corporations a convenient window -- courtesy of Congress -- to repatriate earnings in stronger dollars.
Then just as soon as the stronger dollar got every one to let down their guard and go lock up some good CD rates, the powers that be suddenly let fly that they had no objection whatsoever to a weak buck. And the greenback proved the point with a nasty six week slalom downhill this spring, weakening against possibly everything but the Zimbabwe dollar and sending the traditional financial safe-haven -- gold -- to heights last seen in the ‘70s.
Now, however, it’s summer -- the traditional time for a slump in the markets. Gold, like the rest, has fallen sharply. And its fall wasn’t helped any by the bloodthirsty buzzards at sundry counting houses around the globe rushing out to deliver the coup-de-grace. Dollar oversold, they tsked. We want a strong dollar, added former Treasury Secretary Mister Snow-Job. Euro too strong, scolded the commissars in the Eurozone. Commodity bubble, clucked the Wall Street-Walkers -- probably as definite proof as you will ever get that commodities will be in the mother of all bull runs for the next ten years.
That leaves buck-holders in a quandary -- how do you move out of USD when everything else looks stretched to the point of no return? Stocks, real estate, commodities, metals -- right now they all look like the fat lady . . . about to sing.
And that’s the point. You don’t. You keep clutching paper while the Fed makes soothing noises for as along as it takes for the shift to happen. Then when the insiders are ready, the dollar flutters down -- or sinks like a rock. It scarcely matters which. The point is the government will at that point devalue its debts, stiff its creditors, and transfer the pain of its own financial misdeeds to savers unwise enough to have hung on to their dollars instead of trading them in for hard assets. And who better to pull off this massive act of chicanery except a Goldman CEO with a proven track record of financial sleight of hand?
Hank’s Pranks -- Number Two
The unofficial theory is naturally a lot juicier, although described by even sworn enemies of paper currency as conspiratorial. Still, it’s managed to rear its head in the Wall Street Journal, so it can’t be all wet. Here is what widely respected libertarian Congressman Ron Paul had to say on Feb 14, 2002:
While the Treasury denies it is dealing in gold, the Gold Anti-Trust Action Committee (GATA) has uncovered evidence suggesting that the Federal Reserve and the Treasury, operating through the Exchange-Stabilization Fund and in cooperation with major banks and the International Monetary Fund, have been interfering in the gold market with the goal of lowering the price of gold. The purpose of this policy has been to disguise the true effects of the monetary bubble responsible for the artificial prosperity of the 1990s, and to protect the politically-powerful banks that are heavy invested in gold derivatives. GATA believes federal actions to drive down the price of gold help protect the profits of these banks at the expense of investors, consumers, and taxpayers around the world.
GATA has also produced evidence that American officials are involved in gold transactions. Alan Greenspan himself referred to the federal government's power to manipulate the price of gold at hearings before the House Banking Committee and the Senate Agricultural Committee in July, 1998: “Nor can private counterparts restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise. [Emphasis added] (3)
Gold is borrowed by Morgan Chase from the Bank of England at 1 percent interest and then Morgan Chase sells the gold on the open market, then reinvests the proceeds into interest-bearing vehicles at maybe 6 percent.
At some point, though, Morgan Chase must return the borrowed gold to the Bank of England, and if the price of gold were significantly to increase during any point in this process, it would make it prohibitive and potentially ruinous to repay the gold. (4)
In plain English, the strong dollar policy that put the sizzle in the stock market under Clinton was made possible only by manipulating the gold market to keep prices low. The low interest rates which kept the economy on the boil went hand in hand with low gold prices. Investment banks used the low rates to borrow gold from the central banks and sold them short (short selling being the technique of selling assets you don’t actually own in the hope of buying back at a cheaper price because you anticipate a fall in the price). This allowed the banks to make billions from a market rigged to take the risk out of their shorting. And it kept the dollar pumped up. And who was the architect of this strong dollar policy? Why, none other than Robert Rubin of Goldman Sachs -- one of the bullion banks most implicated in the gold fixing scenarios.
So, the appearance of another Gold-man at this critical moment is all the proof the gold cartel theorists need that more manipulation is in store to keep the dollar up, gold down, and the bullion banks from losing their . . . er . . . shorts. (5)
And if this seems conspiratorial, consider what Paul Mylchreest, investment analyst at Cheuvreux, top ranked for its research in Western Europe and part of Credit Agricole, the largest bank in France says today, “Central banks have 10–15,000 tonnes of gold less than their officially reported reserves of 31,000. This gold has been lent to bullion banks and their counterparties and has already been sold for jewellery, etc. Non-gold producers account for most and may be unable to cover shorts without causing a spike in the gold price...” (6)
Or what the Wall Street Journal itself wrote about what took place in the seventies:
Worried the falling dollar was undermining its anti-inflation efforts, the Carter administration announced a multi-part support package on Nov. 1, 1978: The Treasury would use gold sales and foreign borrowing and draw on its reserves with the International Monetary Fund to defend the dollar. At the same time the Federal Reserve raised its discount rate a full point. (7)
And that was in the ‘70s, when there was no credible alternative to the dollar, India and China were sleeping giants, Russia was still the Soviet Union, and the United States was not threatening to nuke the Middle East.
How bad is the situation?
[A]s of June 2000, J.P. Morgan reported nearly $30 billion of gold derivatives and Chase Manhattan Corp., although merged with J.P. Morgan, still reported separately in 2000 that it had $35 billion in gold derivatives. Analysts agree that the derivatives have exploded at this bank and that both positions are enormous relative to the capital of the bank and the size of the gold market.
It gets worse. J.P. Morgan's total derivatives position reportedly now stands at nearly $29 trillion, or three times the U.S. annual gross domestic product. Wall Street insiders speculate that if the gold market were to rise, Morgan Chase could be in serious financial difficulty because of its "short positions" in gold. In other words, if the price of gold were to increase substantially, Morgan Chase and other bullion banks that are highly leveraged in gold would have trouble covering their liabilities. (8)
That was 2000. This is 2006.
So long as gold remains a mere relic . . . a yellow reminder of what used to be money . . . no harm done. Unless something absurd happens, that is. Something absurd like, say, gold doubling to $573 an ounce inside 5 years. If that happened, then the ‘carry trade’ of borrowing gold to invest in paper could become a very expensive way to bankrupt the entire global financial system. (9)
This spring gold hit over $700. And that’s why the hanky-panky is likely to begin in earnest now.
Lila Rajiva is a freelance writer in Baltimore, and the author of the must-read book The Language of Empire: Abu Ghraib and the US Media (Monthly Review Press, 2005) She can be reached at: firstname.lastname@example.org. Copyright (c) 2006 by Lila Rajiva
(1) “Good as Goldman: Bush drafts Hank to bat third,” Daniel Gross, Slate, Tuesday, May 30, 2006.
(2) “Please, Sir, I Want Some More. How Goldman Sachs is carving up its $11 billion money pie,” Duff Mcdonald, New York Metro, Dec 21, 2005.
(3) Speech of Congressman Ron Paul, U.S. House of Representatives, February 14, 2002, www.house.gov/paul
(4) “All That Glitters Is Not Gold,” Kelly Patricia O'Meara, Insight Magazine, March 4, 2000.
(5) According to GATA, the cartel includes J.P. Morgan Chase, Deutsche Bank, Citigroup, Goldman Sachs, Bank for International Settlements (BIS), the U.S. Treasury, and the Federal Reserve
(6) “How Central Banks Have Kept Gold Down,” Adrian Ash, Money Week, February 9, 2006.
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