Goldman Sachs, Enron and the Rape of Grandma Millie
Historical events, it is said, occur twice, first as tragedy, then as farce. But not in the case of Goldman Sachs and the near-collapse of the American financial system. Six years before Congress released emails showing Goldman executives bragged about making "some serious money" betting against the housing market and "the poor little subprime borrowers", Americans heard tapes of Enron traders joking about all the money they "stole from those poor grandmothers in California." And then as now, Republicans defenders of unregulated markets tried to block the steps needed to prevent the rape of the next Grandma Millie.
Testifying before Congress just one day after Senate Republicans filibuster the Wall Street reform bill, Goldman Sachs CEO Lloyd Blankfein insisted, "I did not mislead" investors. But after last week's release of internal Goldman email exchanges from the height of the subprime market meltdown, convincing lawmakers will be no easy task.
For example, in November 2007, Blankfein wrote:
"Of course we didn't dodge the mortgage mess. We lost money, then made more money than we lost because of shorts."
In another May 2007 exchange, a Goldman employee brushed off a $5 million loss on a bundle of mortgages issued by Long Beach Mortgage Securities because "we own 10 mm in protection." And as the New York Times detailed:
On Oct. 11, 2007, one Goldman manager in the trading unit wrote to another, "Sounds like we will make some serious money," and received the response, "Yes we are well positioned."
But it was Goldman Sachs' derivative wunderkind Fabrice "Fabulous Fab" Tourre who crowed about the windfall his business would reap even as American homeowners saw the rug pulled out from under them:
But some at Goldman were certain the subprime mortgage market was going to crash.
The Wall Street Journal quoted a March 2007 email from Fabrice Tourre, a bond trader and the only individual defendant in the SEC suit, as saying subprime borrowers would not last long.
"According to Sparks, that business is totally dead, and the poor little subprime borrowers will not last so long!!!" Tourre wrote to his girlfriend, the journal said.
If this all sounds sickeningly familiar, it should. In June 2004, the public learned that Enron traders laughed it up as they raked in the cash even as California suffered from energy shortages, skyrocketing prices and rolling blackouts.
In one recorded conversation, an Enron employee ponders an interview with the Wall Street Journal, "I'm just trying to be an honest camper so I only go to jail once." In another, two openly discuss their company's manipulation of the energy market in the Golden State:
EMPLOYEE #1: He just f---s California. He steals money from California to the tune of about a million.
EMPLOYEE #2: Will you rephrase that?
EMPLOYEE #1: OK, he, um, he arbitrages the California market to the tune of a million bucks or two a day.
But it was this exchange which perhaps perfectly encapsulated the Enron scandal:
EMPLOYEE #1: They're f------g taking all the money back from you guys? All the money you guys stole from those poor grandmothers in California?
EMPLOYEE #2: Yeah, grandma Millie, man. Yeah, now she wants her f------g money back for all the power you've charged right up, jammed right up her a------ for f------g $250 a megawatt hour.
And in an eerily prescient discussion, two Enron staffers happily look forward to the victory of George W. Bush in the 2000 presidential election, with its obvious benefits for Dubya's BFF and Enron CEO Ken Lay. "It'd be great," the first said, "I'd love to see Ken Lay Secretary of Energy." His colleague concurred:
"When this election comes Bush will f------g whack this s--t, man. He won't play this price-cap b------t."
Which is exactly what transpired. As the late 1990's deregulation of the California energy market manufactured by Golden State Republicans led to exponential increases in rates for business and residential consumers alike, President George W. Bush announced on May 29. 2001, "We will not take any action that makes California's problems worse and that's why I oppose price caps."
The White House predictably and stridently refused any federal intervention by the Federal Energy Regulatory Commission. Bush stated flatly:
"For those struggling to pay high energy bills, price caps may sound appealing. But their result will ultimately be more serious shortages and, therefore, even higher prices."
FERC belatedly ignored the President, voting 2-1 to impose limited price caps. These were ended in October 2002. But by then, the damage was done.
Enron's rape of California was sadly rich in irony. It was, after all, Republican Governor Pete Wilson who signed the GOP's deregulation regime into law. The subsequent manipulation of the market by the likes of Enron and Duke Energy devastated the state treasury under Wilson's Democratic successor, Gray Davis. It was those multi-billion dollar deficits which enabled Republican Arnold Schwarzenegger to swamp Davis in the 2002 recall election. And until the public pressure finally became overwhelming, the Bush administration and its free market ideologues stood by the predatory energy firms and their mythical subsidiaries even as Californians suffered crushing economic hardship.
As for Grandma Millie, she eventually paid off her electricity bills. But now, thanks to the likes of Goldman Sachs, she probably lost her house.
UPDATE: During today's hearings, Democratic Senator Carl Levin grilled Goldman's Dan Sparks over the Timberwolf CDO offered to customers in what Sparks had called a "sh**ty deal." Meanwhile, the same law firm that won investors a $7.2 billion settlement against Enron is now bringing a class action suit against Goldman Sachs.