Perhaps the most glaring example of deliberate financial fraud by an informed elite group can be found in the example of Abacus, created by Goldman Sachs employee Fabrice Tourre and the hedge fund Paulson & Co. in 2007 default.[i] Abacus consisted of synthetic collateralized debt obligations selected and packaged by Tourre and Paulson that Goldman sold to its clients, while assuring them that the underlying mortgages were unlikely to default. Meanwhile, Paulson & Co shorted or bet against Abacus by purchasing credit default swaps from the Royal Bank of Scotland, which incurred a $840 million liability from backstopping the hedge funds deal.[ii] Goldman told clients like did not tell its clients it was betting against the same CDO package it was selling them. ACA Financial Guarantee Corp filed suit against Goldman in 2011 for deliberately misleading the company about the Paulson’s investment in Abacus. Goldman allegedly told ACA that Paulson & Co (one of Goldman's clients) "was betting on a deal, when in fact Paulson was betting against it."[iii] Goldman claims it didn’t mislead ACA and other investors, despite incriminating evidence that surfaced in the form of Fabrice Tourre’s emails to his girlfriend. In these emails, Tourre referred to himself "fabulous Fab" and described creating "Frankenstein" products that were nothing more than "pure intellectual masturbation" sold to naive widows and orphans.[iv]
Despite blatant evidence of intent to deceive, the SEC failed to seek criminal charges against Goldman.[v] Instead, Goldman settled a civil fraud suit by paying $550 million. Journalist gadfly and would-be reformer Matt Taibbi recently penned an indignant letter about government’s failure to right the wrongs of Wall Street’s many transgressions, titled, “The federal rescue of Wall Street didn’t fix the economy – it created a permanent bailout state based on a Ponzi-like confidence scheme. And the worst may be yet to come.”[vi]
Taibbi expresses outrage shared by many Americans over the consolidation of wealth that has resulted from the financial crisis. Emerging in the aftermath of the global financial crisis that began in late 2007 is a world order dominated by a few governments and corporations that have unprecedented control over global resources. Government prioritization of corporate interests over public welfare during the financial crisis was reflected in the lopsided allocation of funds to banks, including the bailout of investment banks that should not have been eligible for relief, and the unlimited backstopping of AIG’s credit default swaps while average Americans, who saw work hours and income collapse, received little-to-no support. During the height of the great financial crisis, secret Federal Reserve loans to the biggest banks totaling $7.7 trillion enabled them to reap $13 billion in profits.[vii] U.S homeowners, who faced around $6.5 million in delinquent and foreclosed mortgages, saw little to no relief.”[viii]
In 2009, Graham Bowley reported in The New York Times that the federal financial “bailout helps fuel a new era of Wall Street wealth” enabling “hefty bonuses” to corporate Wall Street executives.[ix] Goldman Sachs alone received $70 billion in combined funds from TARP, the Federal Reserve, AIG, and the FDIC.[x] As of 2010, six U.S. banks, held assets in excess of 63 percent of the U.S. Gross Domestic.[xi] Perhaps most telling, the US government largely declined to prosecute those financial agents responsible for the crisis within these monopolists, many of which profited from rampant foreclosure fraud in the wake of the crisis. Reflecting on these data, Economist Simon Johnson observed: "The US increasingly displays characteristics that we have seen many times in middle-income “emerging markets” – new dimensions of vast inequality, forms of financial instability that benefit the best connected, and consistently easy credit for the privileged."[xii]
[i] A. Clark, “Lloyd Blankfein Admits Goldman Sachs Failed to Raise the Alarm Bank’s Boss Tells Senate its Derivatives Deals Fuelled Image of Wall Street Out of Control,” The Guardian April 27, 2010, http://www.guardian.co.uk/business/2010/apr/26/goldman-sachs-sec-senate-hearing
[ii] Z. A. Goldfarb and T. M. Tse “SEC Sued Goldman Sachs to Break an Impasse,” The Washington Post, April 20, 2010, A1.
[iii] J. Chung, “Goldman: Insurer Knew Paulson was ‘Shorting,’” The Wall Street Journal, January 14, 2013, C3
[iv] A. Clark, “Goldman Sachs banker Fabrice Tourre Faces the Music London-based banker says he has been the target of unfounded attacks,” The Guardian, April 27, 2010, http://www.guardian.co.uk/business/2010/apr/27/goldman-sachs-fabrice-tourre.
[v] Reed Albergotti and Elizabeth Rappaport “U.S. Not Seeking Goldman Charges,” The Wall Street Journal, August 10, 2012 p. C1
[vi] Matt Taibbi, “Secrets and Lies of the Wall Street Bailout,” The Rolling Stone, January 8, 2013, http://www.rollingstone.com/politics/blogs/taibblog/secrets-and-lies-of-the-bailout-one-brokers-story-20130108.
[vii] Bob Ivry, Bradley Keoun and Phil Kuntz, “Secret Fed Loans Helped Banks Net $13B,” Bloomberg.com 27 November, 2011, http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html.
Bradlye Keoun and Phil Kuntz “Wall Street Aristocracy Got $1.2 Trillion from Fed,” Bloomberg, August 22, 2011, http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html
Graham Bowley “Bailout Helps Fuel a New Era of Wall Street Wealth,” The New York Times 17 October, 2009, http://www.nytimes.com/2009/10/17/business/economy/17wall.html?_r=1&th&emc=th
Dylan Ratigan, “Goldman Sachs” Black Magic, Here’s How They Did It,” The Huffington Post, October 16, 2009, http://www.huffingtonpost.com/dylan-ratigan/goldman-sachs-black-magic_b_324095.html
[xi] Bill Moyers, Simon Johnson and James Kwak, Bill Moyers Journal [on-line] April 16, 2010, http://www.pbs.org/moyers/journal/04162010/profile.html
Simon Johnson “Who is Carlos Slim,” Baseline Scenario, October 17, 2009, http://baselinescenario.com/2009/10/17/who-is-carlos-slim/.