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Allan Powell: History only repeats itself with human assistance

July 12, 2012|By ALLAN POWELL

It took more than 600 pages for author William D. Cohan to disclose the origin and development of what became Goldman Sachs, a financial giant which once had an office on Wall Street. There is much to be learned about investment and banking from Cohan’s fine research, but even more can be learned about human nature.

Both families — Goldman and Sachs — were Jewish immigrants from Germany, who combined their talents for business in 1882. While inspiring, because the story is one of genius, tenacity, dedication, discipline and innovation, there is also a parallel record of risk, greed, shady manipulation, dishonesty and questionable legality.

The emphasis of this account will be the similarity of the conduct of Goldman Sachs in the crash of 1929, which ushered in the Great Depression, and the second major crash precipitating the Great Recession of 2008. It was when these bubbles burst that we discovered the questionable financial practices of our large investment firms. As Warren Buffett put it, “Only when the tide goes out, do you find out who is not wearing a bathing suit.”

A major source of trouble behind the eventual crisis for Goldman Sachs began when they hired a personable genius, Wadill Catchings, to be a senior officer in 1918. Catchings was a dominating personality and, as we say, “a man in a hurry.” He convinced Goldman Sachs to introduce a new business structure called an investment trust in 1928 that was said by others to be “a clever Wall Street innovation designed to separate investors from their money.” By 1929 there were 265 trusts in operation. In fact an investigating committee for the New York Stock Exchange concluded in 1929 that this fad was “marked for dishonesty, inattention, inability and greed.” In addition they were charged with insider trading.

With loses approaching $50 million and stocks falling from $326 a share to a low of $1.75 a share, Goldman Sachs fired Catchings and began the slow, painful struggle toward recovery.

We learn about the moral and legal transgressions of Goldman Sachs which contributed to the crisis of 2008 (dubbed the “Great Recession”) from the testimony recorded during the Senate Investigation Committee hearing in 2010. Also, the report of the charges filed against them by the Security and Exchange Commission are revealing. The money lost in investments was massive compared to those of 1929, making the new financial crisis a sad repetition of bad habits.

The senior officer behind the new, innovative financial products was Lloyd Blankfein, who was regarded as an aggressive and feisty leader, unwilling to admit any breach of integrity or law. This reluctance remained in spite of the fact that these new investment tactics were labeled, very risky, poisonous, esoteric, toxic, and by some, fraudulent.

While other financial firms were losing millions of dollars in mortgage-related securities, Goldman Sachs offset its own mortgage-related losses by a gain of $4 billion from a bet (the big short) that the housing market would fail. Goldman Sachs denied it ever made such a bet, which is said to have helped “push other firms over the cliff.” In 2007, they made at least $500 million from mortgage trading activity.

Sen. Carl Levin asked senior officer, Lloyd Blankfein, “Did you bet big time in 2007 against the housing mortgage business…?” He replied, “No we did not.” This was found to be an outright lie, and that their efforts to take advantage of the oncoming crisis began in December of 2006. Sen. Levin then added: “They made a huge amount of money betting against housing and they lied about it and their greed was in credibly intense.”

The conclusions drawn by the SEC report charged Goldman Sachs with conduct like that of an attendant in a casino who tampered with a roulette wheel to induce the bouncing ball to favor a certain color. For this they should “disgorge all such fraudulently earned profits and accept any penalties imposed.” Goldman Sachs did pay two fines to the SEC of $550 million and $535 million without admitting any guilt for their conduct. This did not deter CEO Blankfein from asserting (perhaps joking) that he was just a banker “doing God’s work.”

The oft repeated phrase, “History repeats itself,” should be amended to read, “People repeat events.” There will always be buyers and sellers who meet in commerce. Some are honest and some are not. Those who are driven by greed will forever be active in discovering new ways to circumvent the rules governing exchanges. It is human nature which determines this endless repetition.


Allan Powell is professor emeritus of philosophy at Hagerstown Community College.

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