The World’s Financier

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Our 1996 book, “The Secret World of Money”, pointed out that the Federal Reserve Banks are a privately owned cartel. These banks are solely responsible for the issuance of dollars worldwide. The lead bank in this system is the Federal Reserve Bank of New York. Goldman Sachs is named as one of the primary owners of this bank ,along with JPMorgan, Citibank and others. The Chief Executive Officer of Goldman Sachs was until recently one Henry Paulson. You may recognize him as our newest Treasury secretary. This is not unusual. It seems as though this private banking institution has provided an inordinate amount of talent to the world’s public financial institutions.

Back in March, President Bush selected Josh Bolton, a former Goldman Sachs managing director, as his chief of staff. Another former director, Reuben Jeffery, was named as chairman of the Commodity Futures Trading Commission, and Stephen Friedman, who led Bush's National Economic Council was moved over to the Foreign Intelligence Advisory Board. Former Goldman chief Robert Rubin was Treasury secretary to Bill Clinton and his Goldman ancestor, Henry Fowler, provided the same fiscal service under Lyndon Baines Johnson. Another Goldman Sachs staffer, John Rogers, served as deputy Treasury secretary and his colleague, John Whitehead, was deputy secretary of State under Ronald Reagan. Goldman Sachs employees have played a major role in every administration in the 20th century. During this period the dollar’s preeminence has grown around the world. This has made Goldman Sachs staffers a hot commodity world wide. In Canada, Mark Carney, former managing director in Goldman's Toronto office, became a senior official in the Canadian Finance Ministry. Goldman Sachs Managing Director Mario Draghi became the governor of the Bank of Italy, the equivalent of the Federal Reserve Chairman here at home. In Britain, Gavyn Davies left Goldman Sachs to assume the chairmanship of the British Broadcasting Corp. In case you think it is a one way street you should consider traffic in the other direction. It seems that public officials and politicians in every branch of government can expect a job at Goldman Sachs when their public service is completed. Three former European Union commissioners Peter Sutherland, Mario Monti, and Karel Van Miert, are now employed at Goldman Sachs.

Former Deputy Secretary of State and U.S. Trade Representative Robert Zoellick, the architect of the nations trade policies, is also now a Goldman Sachs employee. And what generous employees they are. As a group, Goldman Sachs employees gave over $6 million to U.S. politicians in both parties during the 2004 election cycle. They were by far the single largest contributor firm, nearly doubling the closest runner up. Which incidentally was its New York Fed Partner and former home of Alan Greenspan, JPMorgan. But I won’t digress into that morass. Let us stick with Goldman Sachs which has become fabulously wealthy from its status as one of the 22 Primary Bond Dealers for “we the people.” Any institution on earth who wants a U.S. Treasury Bond must buy our nation’s debt through one of these players. Each and every one of which is also a partner in the Federal Reserve Bank in its district. This group has one sweet deal but again let’s just focus on Goldman Sachs. Its 2003 net revenues were $16.0 billion. Corporate 2003 net income was $3.0 billion. That’s $3.0 billion after salaries and bonuses. A mind boggling 50% of gross revenue is paid out to the managing directors, and employees. In 2003 investment banking revenues at the firm topped $2.7 billion and debt underwriting revenues were at $831 million. The most troubling part of this equation involves revenue Goldman Sachs earned in it’s role of advising corporations on fiscal matters. For example, in 1993, the firm “invented” a new form of debenture that offered Enron and other client corporations a magical combination. In exchange for cash these shares paid monthly earnings. They were an instrument that could be characterized as equity or debt depending on who was asking. These Monthly Income Preferred Shares, or MIPS, had all the markings of a stock share, but they carried monthly interest. When the accounting department inquired, it wasn’t a share of stock, it was a loan, and interest was paid on this loan. When the tax man asked, these interest payments were deducted from the firm’s taxable income.

For ordinary Shareholders and Bond rating companies, the instruments were characterized as stock and carried on the equity side of the ledger, effectively hiding the debt component. To career officials at the Treasury Department, these questionable instruments looked like a scam, allowing corporations to mask the true levels of their debt. Perhaps they were jealous and merely wanted to claim a monopoly on this practice. Perhaps they were looking out for America’s shareholders, although I doubt it. Either way, these instruments just did not feel right. When companies claim these as equity, normal shareholders are seriously misled. When the interest is deducted, tax revenues fall. Treasury officials complained. They received a letter from Jon Corzine, CEO of Goldman Sachs (and current Governor of New Jersey). He said the Treasury was being “completely arbitrary” in deciding whether these notes represented debt or equity. Of course, MIPS ultimately made failing companies such as Enron look better on the books, and since Goldman Sachs fees were based on such figures, much more money was made for the firm. Former Goldman Sachs chief and then Treasury Secretary, Robert Rubin, acting for whom I’m not sure, decided the federal government should accept the transactions as represented. The rest is history. Bottom line? The architects of the Enron debacle are also the caretakers of the nation’s treasury. Please, somebody get me a drink…

 

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