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Does Goldman Sachs Chief Lloyd Blankfein Enjoy Connections to the Intelligence Community?

Money to Burn

COMMENT: In recent years there has [appropriately] been much discussion of Goldman Sachs. CEO Lloyd Blankfein has an interesting professional background, which might indicate operational connections to the intelligence community.

After a rise that could truly be called a classic American “up-by-the-bootstraps” ascent, Blankfein worked for years as a tax lawyer for Donovan Leisure, the firm started by former OSS chief William Donovan.

He subsequently went to work in the commodities trade, specializing in gold–this at a time when some of the machinations stemming from the Golden Lily program were gaining steam in the early 1980’s.

As discussed in–among other works–Burton Hersh’s The Old Boys: The American Elite and the Origins of the CIA, the U.S. intelligence establishment (CIA and its World War II predecessor the OSS) is inextricably linked with the world of Wall Street. (Note that Blankfein’s predecessor Sidney Weinberg worked for OSS on assignment in the U.S.S.R.)

Another of the firms that came under public scrutiny in the meltdown–AIG–was run for many years by Maurice Greenberg, himself an OSS veteran.

“Where Blankfein Came From” by William D. Cohan; Fortune; 4/21/2011.

EXCERPT: . . . In 1978, Blankfein graduated from Harvard Law School and took a job as an associate at Donovan, Leisure, a small “old- line” law firm founded in 1929, by William J. “Wild Bill” Donovan, who later formed the Office of Strategic Services during World War II and was known as the father of the CIA. (He was the fellow who authorized Sidney Weinberg’s espionage work in the Soviet Union during World War II.) Donovan, Leisure was so traditional that “tea ladies” served tea and cookies every afternoon on pushcarts. During his four- year stint at Donovan, Leisure, he represented the film industry in a tax dispute with the IRS and spent his time shuttling between Los Angeles and New York. But he was not particularly devoted to the law. In 1980, as part of his Harvard reunion, Blankfein wrote that in his “spare time,” he worked “as a tax lawyer, the only career for a real man of action.” In 2000, he described his responsibilities at Donovan, Leisure as being “to keep certain large corporations from paying their fair share of taxes.” . . .

. . . Soon thereafter, a headhunter called and asked him if he would be interested in working at an obscure commodities trading firm, J. Aron & Company, which Goldman had purchased in November 1981. . . .  At the end of 1982, Blankfein went to work on the gold bullion sales desk at J. Aron “to trade commodities,” he once wrote. . . .

Discussion

3 comments for “Does Goldman Sachs Chief Lloyd Blankfein Enjoy Connections to the Intelligence Community?”

  1. Well, here’s one more data point explaining why GoldmanSachs’s “select group of top clients” would be interested in remaining the client of a firm. Bankster cuddle puddles:

    Goldman Sachs Settles SEC ‘Huddle’ Probe For $22M

    By Dunstan Prial

    Published April 12, 2012

    FOXBusiness

    Goldman Sachs has agreed to pay a $22 million fine for failing to make sure that the firm’s analysts didn’t pass along inside information to Goldman traders during weekly “huddles,” the Securities and Exchange Commission said Thursday.

    According to an SEC statement, Goldman Sachs “lacked adequate policies and procedures to address the risk that during weekly ‘huddles,’ the firm’s analysts could share material, nonpublic information about upcoming research changes.”

    In other words, Goldman allegedly either did not enforce or had no policy in place to ensure that analysts who met with the firm’s traders didn’t tell those traders about upcoming ratings changes on stocks covered by the analysts.

    Stocks typically rise or fall when analysts change their ratings on the companies they cover. Having this information beforehand would obviously be helpful.

    “Huddles,” according to the SEC, were a practice at Goldman during which stock research analysts met “to provide their best trading ideas to firm traders and later passed them on to a select group of top clients.”

    But this still doesn’t explain why Goldman’s muppets non-select but still respected customers haven’t abandoned ship yet(and yes, there’s the reality that they’re all monsters, but still…).

    Posted by Pterrafractyl | April 12, 2012, 12:39 pm
  2. Well, here’s one more data point explaining why GoldmanSachs’s “select group of top clients” would be interested in remaining a client of the firm. Bankster cuddle puddles:

    Goldman Sachs Settles SEC ‘Huddle’ Probe For $22M

    By Dunstan Prial

    Published April 12, 2012

    FOXBusiness

    Goldman Sachs has agreed to pay a $22 million fine for failing to make sure that the firm’s analysts didn’t pass along inside information to Goldman traders during weekly “huddles,” the Securities and Exchange Commission said Thursday.

    According to an SEC statement, Goldman Sachs “lacked adequate policies and procedures to address the risk that during weekly ‘huddles,’ the firm’s analysts could share material, nonpublic information about upcoming research changes.”

    In other words, Goldman allegedly either did not enforce or had no policy in place to ensure that analysts who met with the firm’s traders didn’t tell those traders about upcoming ratings changes on stocks covered by the analysts.

    Stocks typically rise or fall when analysts change their ratings on the companies they cover. Having this information beforehand would obviously be helpful.

    “Huddles,” according to the SEC, were a practice at Goldman during which stock research analysts met “to provide their best trading ideas to firm traders and later passed them on to a select group of top clients.”

    But this still doesn’t explain why Goldman’s muppets non-select but still respected customers haven’t abandoned ship yet(and yes, there’s the reality that they’re all monsters, but still….).

    Posted by Pterrafractyl | April 12, 2012, 12:40 pm
  3. When you’re doing “God’s work“, there’s nothing to fear:

    Justice Department will not prosecute Goldman Sachs, employees for Abacus deal

    WASHINGTON | Thu Aug 9, 2012 7:34pm EDT

    (Reuters) – Neither Goldman Sachs Group Inc nor its employees will face U.S. criminal charges related to trades they made during the financial crisis that were highlighted in a 2011 U.S. Senate report, the Justice Department said on Thursday.

    The unusual announcement not to prosecute criminally came in an unsigned statement attributed to the department.

    Goldman itself settled with the SEC for $550 million in July 2010 without admitting wrongdoing.

    The statement from the Justice Department said that officials there “have determined that, based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report” from Levin’s subcommittee.

    They “ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time,” the statement continued.

    “If any additional or new evidence emerges, today’s assessment does not prevent the department from reviewing such evidence and making a different determination, if warranted,” the statement said.

    And yes, this is was all about THAT “Abacus” deal:

    Goldman’s Abacus lies
    By Felix Salmon
    April 16, 2010

    The SEC suit against Goldman Sachs (full complaint here, and well worth reading) is explosive stuff. Essentially the SEC seems to have nailed down the kind of behavior that ProPublica was looking for in its story on the Magnetar Trade — a hedge fund which was short mortgages, in this case Paulson, was carefully picking nuclear waste to put into synthetic CDOs, unbeknownst to the final investors in those deals.

    From the complaint:

    GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third-party with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process.

    It seems here that ACA was somewhere between a useful idiot and an outright victim of Goldman’s Fabrice Tourre:

    Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting.

    Essentially what Goldman was doing here was using the respected ACA brand name (it wouldn’t remain respected for long) in order to attract big investors like Germany’s IKB: they even said in an email that “we expect to leverage ACA’s credibility and franchise to help distribute this Transaction.” But ACA was to a large extent a front for Paulson, as is evidenced in the name of the spreadsheet where it listed the proposed contents of the CDO:

    On January 22, 2007, ACA sent an email to Tourre and others at GS&Co with the subject line, “Paulson Portfolio 1-22-10.xls.” The text of the email began, “Attached please find a worksheet with 86 sub-prime mortgage positions that we would recommend taking exposure to synthetically…

    On February 5, 2007, Paulson sent an email to ACA, with a copy to Tourre, deleting eight RMBS recommended by ACA, leaving the rest, and stating that Tourre agreed that 92 bonds were a sufficient portfolio.

    On February 5, 2007, an internal ACA email asked, “Attached is the revised portfolio that Paulson would like us to commit to – all names are at the Baa2 level. The final portfolio will have between 80 and these 92 names. Are ‘we’ ok to say yes on this portfolio?” The response was, “Looks good to me.”

    I think that the SEC has the right defendant here. Paulson and ACA are both culpable, but it’s Goldman which was clearly central to the plan of deceiving investors into believing that the CDO was being managed by people who wanted it to make money, when in fact it was being structured by the biggest short-seller in the entire subprime market.

    But what happened here was that both IKB and ACA Capital placed their trust in ACA Management. And Goldman, armed with hefty CDO management fees and sleazy lies about Paulson’s role in the transaction, turned ACA Management from a bona fide fund manager into a useful idiot who could be relied upon to buy exactly the subprime securities that Paulson wanted to short.

    With this suit, the SEC has finally uncovered the real scandal behind the Abacus deals. The NYT tried, back in December, but it didn’t quite get to the nub of the story — although Paulson was mentioned in the NYT story as someone who was generally short the subprime market, there was no indication that he played any role in structuring the deals. Neither was there any mention of ACA.

    The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told ACA that Paulson had a long position in the deal when in fact he was entirely short.

    Goldman Sachs has lost more than $10 billion in market capitalization today, in the wake of these revelations. Good. It can go long markets and it can go short markets. But it can’t lie to its clients. That’s well beyond the pale.

    I think this response by Simon Johnson on the DOJ’s decision pretty much captures the essence of it all:“I’m shocked but not surprised.”. Yep.

    Also, note that primary victim in the Abacus deal, Germany’s IKB, wasn’t exactly unfamiliar with the art of shady deals involving subprime mortgage-backed security:

    UPDATE 3-German bank IKB must defend Rhinebridge SIV lawsuit

    Wed May 5, 2010 1:13pm EDT

    * Plaintiffs say SIV created to avert possible bankruptcy

    * Investors lost large portion of $1.1 billion investment

    * Moody’s, S&P also lost bid to dismiss suit

    * IKB also invested in Goldman’s Abacus transaction (Adds IKB declining to comment, paragraph 6)

    By Jonathan Stempel
    p
    NEW YORK, May 5 (Reuters) – A federal judge has rejected a request by German bank IKB Deutsche Industriebank AG IKBG.DE to throw out U.S. lawsuits accusing it of fraudulently creating a risky debt vehicle it knew was likely to default, resulting in several hundred million dollars of investor losses.

    The lawsuits contended that IKB sponsored the creation of a structured investment vehicle, Rhinebridge, in June 2007 to dump investment losses onto unsuspecting investors and save itself from possible bankruptcy.

    U.S. District Judge Shira Scheindlin in Manhattan late Tuesday declined to dismiss the bank and former Chief Executive Stefan Ortseifen as defendants.

    A week earlier, she had rejected requests by rating agencies Moody’s Investors Service and Standard & Poor’s to dismiss them as defendants.

    The lawsuits were filed by Washington state’s King County, which includes Seattle and manages accounts for more than 100 public agencies, and the Iowa Student Loan Liquidity Corp.

    An IKB spokesman declined to comment.

    The German bank is also one of the main investors in ABACUS 2007-AC1, the synthetic collateralized debt obligation that is the subject of a U.S. Securities and Exchange Commission fraud lawsuit against Goldman Sachs Group Inc (GS.N).

    In the Rhinebridge case, the plaintiffs accused the defendants of misrepresenting the risks of Rhinebridge, which won “triple-A” credit ratings despite holding risky, subprime mortgage-backed assets.

    They called Rhinebridge “the shortest-lived ‘triple-A’ investment fund in the history of corporate finance.”

    Rhinebridge was wound down in August 2008, costing investors 45 percent of their $1.1 billion investment.

    And yes, it was the toxic contents of the ABACUS deal that was then repackaged into the investments offered by IKB’s Rhinebridge funding and sold to US municipalitities:

    Time
    How Goldman Trashed a Town
    By Stephen Gandel Monday, July 05, 2010

    Starting in July, Liza Kuzela of Cedar Rapids will pay $0.44 more a month to have her trash collected. The amount is trivial, but the reason is not. Two years ago, Cedar Rapids lost $2.6 million on an investment tied to a Goldman Sachs bond deal Abacus that the Securities and Exchange Commission claims was rigged to fail. When the bond went bust, hedge-fund manager and Goldman client John Paulson pocketed a billion dollars. Kuzela, her neighbors and others around the country with no ties to Wall Street are picking up the tab. The case of Cedar Rapids and Goldman illustrates how everyday Americans end up paying for Wall Street’s big paydays.

    Goldman sold its bond deal to German bank IKB. That bank then packaged the bond along with some other risky ones into a structured investment vehicle called Rhinebridge. SIVs sell the type of commercial paper that city and other local government typically buy. So when a broker from Wells Fargo suggested Cedar Rapid buy $6 million of Rhinebridge notes with the reserve account of the town’s dump, Cedar Rapid Treasurer Sue Vavroch did just that. She had never heard of Rhinebridge and had no way of knowing she was essentially gambling her town’s money on sub-prime mortgage bonds. Within months, the town had lost 45% of its money.

    As a result, the city has had to raise the fee it charges residents to pick up trash and recycling in order to help replenish the dump’s reserve cash fund. Goldman denies it did anything wrong, and says there is no direct connection between the bank’s deal and the rising garbage rates in Cedar Rapids.

    God does indeed work in mysterious ways. One of those ways appears to involve playing rigged games of hot potato with daisy-chained toxic investments. It’s the banality of the sublime.

    Posted by Pterrafractyl | August 10, 2012, 1:35 pm

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