	Generational Dynamics
	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 3-Dec-2009
Goldman Sachs employees, doing "God's work," are acquiring handguns

Web Log - December, 2009

Goldman Sachs employees, doing "God's work," are acquiring handguns

Worries about a "populist uprising against the bank."

I've been writing this web site for over seven years now, and I've been called many names in that time. A posting that appeared in 2006 drew criticisms of being "crazy" and "alarmist." It appeared at the height of the credit bubble, and I said the following:

"But what's happened in the last five years is so overwhelming that it can barely be grasped by the human mind. An ordinary 1990s stock market bubble, as bad as it was, has been turned, with the connivance of economic experts, journalists, professors, investors, central bankers, pundits and politicians, into a worldwide bubble of incredibly fastastic proportions that's so huge and so obvious that every expert should see it. Or maybe it's like the whole planet earth has turned from being an ordinary planet into a huge bubble planet, so that it's impossible to see what's going on any more.

Do you remember what happened in 2001 after the Nasdaq crash and the Enron scandal? People wanted to put CEOs in jail -- ALL CEOs, even perfectly honest ones. People were going crazy. Well, it's going to happen again.

The Enron scandal is one historical example, but a better example might be the bankruptcy of the French Monarchy in 1789 that led to the French Revolution. In the Reign of Terror that followed, any person who was an aristocrat, a relative of an aristocrat, a friend of an aristocrat, a servant of an aristocrat, or even had a resemblance to an aristocrat, would be tried and quickly convicted and sentenced to the guillotine.

So as we enter 2007, I have some advice for the economics experts, journalists, professors, investors, central bankers, pundits and politicians that have been telling us that everything is OK and getting better: You'd better have your underground bunker picked out, because people are going to be coming after you, and the guillotine is going to seem mild compared to the punishment that they're going to want to inflict on you."

Now we're beginning to see the first signs of those warnings coming to fruition. Bloomberg reporter Alice Schroeder has found that Goldman Sachs employees are purchasing handguns for self-defense against a possible "populist uprising":

"Arming Goldman With Pistols Against Public

“I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.

I called Goldman Sachs spokesman Lucas van Praag to ask whether it’s true that Goldman partners feel they need handguns to protect themselves from the angry proletariat. He didn’t call me back. The New York Police Department has told me that “as a preliminary matter” it believes some of the bankers I inquired about do have pistol permits. The NYPD also said it will be a while before it can name names."

This story has not been confirmed by Goldman Sachs, but it's been quoted in many places, and so far it hasn't been denied either. Goldman's employees must be very frightened.

And well they should be. These people were at the heart of the fraud that resulted in the real estate and credit bubble crashes. They defrauded investors out of hundreds of billions of dollars by creating and selling mortgage-backed securities and derivatives that have now turned out to be almost worthless.

As I've pointed out many times, the circumstantial evidence is overwhelming that they did this on purpose. Their excuse is that they didn't know that the structured securities they were creating would become worthless. That excuse might have worked in 2002, 2003, 2004, and 2005, but by 2006 it was becoming clear that the computerized models they were using to create these securities were failing. And by 2007, the failures were glaringly obvious to anyone who (like myself) bothered to figure out what was going on. If the bankers at Goldman, Citibank, Bank of America, Bear Stearns and Lehman Brothers had been honest, then they would have warned their investors that the models were becoming questionable. Instead, they redoubled their sales efforts, to sell as many of these securities as they could before the roof caved in. And they made billions of dollars in commissions for themselves by perpetrating this fraud.

This behavior has not changed, but has only taken a different form. These bankers, the exact same people who perpetrated the previous frauds, are now paying themselves million dollar bonuses, to reward themselves for having been clever enough to accept government bailouts.

And Citibank and Bank of America are taking it a step further. They're arbitrarily raising interest rates to 30%, doubling or tripling minimum payments, and engineering phony fees of hundreds or thousands of dollars per customer, and then using the money to pay themselves the million dollar bonuses. These bankers are committing criminal extortion.

And yet they're totally oblivious to the amount of hatred that they're generating against themselves. In a story last month in the London Sunday Times, based on an interview with Lloyd Blankfein, chairman and CEO of Goldman Sachs, author John Arlidge reports, "Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker 'doing God’s work.'"

In a story to appear in next month's Vanity Fair, Bethany McLean reports, "All in all, Goldman executives seem to be gambling that the current mood, in which the rest of us are rethinking the system that brought us to the very edge, and maybe into the depths, of a vast black pit, will blow over. And they may be right."

No, they are not right.

From the point of view of Generational Dynamics, we're seeing a repeat of what happened in the 1930s Great Depression. At that time, bankers were doing exactly the same kinds of things they've been doing today -- defrauding investors and paying themselves enormous salaries, fees and commissions. In the investigations that followed until the end of the decade, many bankers went to jail. We're seeing only the bare beginning of the prosecution of these individuals.

And as I've said several times on this web site, my parents and teachers hated bankers when I was growing up in the 1950s. I didn't understand why then, though I do now. The current mood will NOT blow over for decades to come.

And all this is going on in the context of a Senate Commerce committee investigation that dozens of supposedly honest companies have tricked millions of online customers into paying billions of dollars in mysterious credit card charges. (See "How Priceline, Orbitz, FTD, 1-800-Flowers, Pizza Hut, and Continental Airlines are scamming you online.")

In 2005, I posted an article describing what happened in 1929. What happens is that during a bubble, there's a lot of financial crime going on -- embezzlement and fraud -- but no one cares, because everyone is making money.

After the bubble bursts, people and prosecutors look back to see what happened, and every act is examined. The result is that crimes are discovered and prosecuted years later.

Here's how John Kenneth Galbraith described this phenomenon in his 1954 book, The Great Crash - 1929, as follows:

"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in -- or more precisely not in -- the country's businesses and banks. This inventory -- it should perhaps be called the bezzle -- amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.

The stock market boom and the ensuing crash caused a traumatic exaggeration of these normal relationships. To the normal needs for money, for home, family and dissipation, was added, during the boom, the new and overwhelming requirement for funds to play the market or to meet margin calls. Money was exceptionally plentiful. People were also exceptionally trusting. A bank president who was himself trusting Kreuger, Hopson, and Insull was obviously unlikely to suspect his lifelong friend the cashier. In the late twenties the bezzle grew apace.

Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed. Most important, the collapse in stock values made irredeemable the position of the employee who had embezzled to play the market. He now confessed. ...

Each week during the autumn more such unfortunates were reveled in their misery. Most of them were small men who had taken a flier in the market and then become more deeply involved. Later they had more impressive companions. It was the crash, and the subsequent ruthless contraction of values which, in the end, exposed the speculation by Kreuger, Hopson, and Insull with the money of other people. Should the American economy ever achieve permanent full employment and prosperity, firms should look well to their auditors. One of the uses of depression is the exposure of what auditors fail to find. Bagehot once observed: "Every great crisis reveals the excessive speculations of many houses which no one before suspected."" [pp. 132-35]

In 1929, these crimes were rampant before the crash, but were not discovered until after the crash, as Galbraith describes. These crimes have been just as rampant in the last few years, and are continuing to this very day. History tells us that the consequences for everyone will be harsh, and are only just beginning to be felt. If Goldman Sachs employees are really acquiring handguns to protect themselves against a "populist uprising" for doing "God's work," then things may get worse than even gloomy people like me expect.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (3-Dec-2009) Permanent Link
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Generational Dynamics Web Log for 3-Dec-2009 Goldman Sachs employees, doing "God's work," are acquiring handguns

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Generational Dynamics Web Log for 3-Dec-2009
Goldman Sachs employees, doing "God's work," are acquiring handguns