Number 18 October 20, 2009

“I’d prefer not to think so.” Richard S. Fuld, Former CEO of bankrupt Lehman Brothers, in congressional testimony, when asked if he thought Secretary of the Treasury Paulson, a former CEO of Goldman Sachs, had intentionally allowed Lehman to fail because of the rivalry between the two firms.

OK, Cookie, this blog is for you. I should mention that for some years Goldman was my investment banker. I’ve mentioned the Shock Doctrine earlier as a must read. The reason that booms, and busts, and bubbles and scams and cowardice and bravery are enacted cyclically in markets lies in the fact that human nature hasn’t changed. The two great motivators in markets are fear and greed, with fear being an even stronger force. Which is why markets crash faster than they go up. The Crash of ’29, by John Kenneth Galbraith is also indispensible reading. (Goldman played a major role in the crash). The head of the NYSE displayed great bravery the week of the crash, openly buying for his own account on the floor, only to be convicted of embezzlement some years later to support his lavish lifestyle.

Fast forward 75 years, and Stan O’Neil walks from Merrill with a $160 million severance after having ruined the entire company with the aid of little more than a dozen derivative traders. (I can’t remember what Thain walked with, probably only $50 million). Ken Lewis will forfeit this year’s pay, and leave B of A with $60 million (and I imagine he feels victimized). And yes, a year after being saved by TARP dollars, Goldman is in the black and the bonus pool is looking good. It wasn’t until this year that I fully understood why the Federal Reserve was created in 1913. To protect the banks, not the depositors. History will record this as one of the largest wealth transfers of all time. And it’s from the tax payer, and little guy, to people who were already fabulously wealthy. (Andrew Carnegie actually thought the wealthy should have all the money, as they spent it more wisely). Joseph Cassano, head of financial products for AIG in London, was formerly with Drexel Lambert, and walked with millions just before Drexel was shut down. 20 years later, after having made hundreds of millions at AIG selling what would become worthless CDO and CDS’s to greedy regional European bankers, he’s actually paid a few million dollars a month in his final days at AIG to try to help unravel the mess he made. If you’d like one villain for the world-wide credit crisis, he’ll do nicely. He should have gone to jail for the Drexel crimes. (More on those, perhaps later). On a brighter note, The Ascent of Money by Niall Ferguson, is brilliant, entertaining, and somehow even uplifting, in its portrayal of the rise of civilization.

I’m going to re-read Das Kapital this year; the preamble on the value of commodities is almost mystic, and a favorite of hedge fund managers (those presumably still out of jail).

Gregory James