Greg Gordon: There is nothing that can prohibit or stop the Wall St. firms from making secret bets


Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to our final segment of our series of interviews with Greg Gordon, investigative journalist with McClatchy Newspapers. Thanks for joining us again, Greg.

GREG GORDON, INVESTIGATIVE JOURNALIST, MCCLATCHY NEWSPAPERS: My pleasure, Paul.

JAY: In this series of articles, you made very clear Goldman Sachs created, along with other Wall Street firms, essentially what I would call a kind of Ponzi scheme. They more or less had to know that all these mortgages that were underlying billions, if not trillions, of dollars of global capital flow, both in terms of loans and reinsurance of loans, was all something based on something rather untenuous, which was eventually people aren’t going to be able to pay these mortgages. And they had to know the real estate market couldn’t sustain this. So let’s just jump ahead to now. First the Bush administration and then the Obama administration has more or less bailed out Wall Street on all of this. They didn’t suffer, except for—the companies that went down of course suffered, but Goldman Sachs came out a clear winner. In terms of the regulatory environment, the law, the culture of this kind of business, has anything really changed? What stops this from all happening again?

GORDON: Well, I don’t know if it would happen in the same way, because 150 mortgage companies have gone bust and now there’s a great fear. I mean, real estate values are way down. So we’re not anywhere close to an overheated housing market. In fact, a lot of people right now would probably pray for that, because the housing market slump is what triggered the economic morass that we’re now in. But when you talk about the bigger picture, the bigger picture is that there’s really nothing that proscribes or prohibits these Wall Street firms from making secret bets, from insuring each other or ensuring others with what are known as credit default swaps. They’re insurance-like contracts that will provide protection to you if some investment that you got too deep into goes south. Then you could turn to this counterparty that you bought the protection from and say, “Pony up. We’re losing $2 billion over here, so you have to make us whole. Give us our $2 billion back.” So these things are still out there. And the regulatory proposals, the legislation that seems to be making its way toward passage at this point, is not going to solve all the problems of the secret bets. And the big problem here is or the one big issue here is: are current securities laws sufficient regarding disclosure? If somebody bets the other way and then sells a very similar product, not the same product, but a very similar product to the one that they’re betting against, should they be required to disclose that to investors? And a lot of the securities experts that we talked to essentially said that if they disclose that they were betting the other way, a lot of investors might take a pass.

JAY: And in terms of the writing of these laws and the regulatory authorities, so many of the same players, they go from Goldman Sachs, they go into government; they go from government, they go back into Goldman Sachs. I mean, the people writing the rules more or less are the people who have been playing the game.

GORDON: Well, it was noteworthy to us that a young man, who appears to be quite brilliant, named Adam Storch, who worked at Goldman Sachs in New York, has just been named to a senior management job in the enforcement division at the Securities and Exchange division. Now, it’s just the appearance of this that raises questions. He’s not the enforcement chief. We don’t know that he’s going to play havoc with the cases. But there are appearances like this all over Washington, and there’s one firm that always sticks out: Goldman Sachs. Treasury secretaries come from Goldman Sachs. The current World Bank chief Robert Zoellick is a Goldman alum. The head of the Commodity Futures Trading Commission is a Goldman alum. Now, Goldman has always encouraged its people, after they gain a lot of wealth, to go down to Washington and perform some public service and help your country. And that’s a very noble thing. When you have a situation like this where major decisions about who lives and who dies on Wall Street are being made in Washington and they’re being made by Goldman Sachs alums or with participation of Goldman Sachs alums, and some of these alumni are having phone calls with Goldman’s chairman, Lloyd Blankfein—and in the case of former Treasury secretary Hank Paulson, there were 21 phone calls made that occurred between him and Blankfein on the week of September 15, 2008, when all these big decisions about whether to rescue AIG and whether Lehman was going to go south were made.

JAY: Well, I would think that hundreds of thousands, if not millions, of people who are losing their homes during all this crisis might question whether the term “public service” is appropriate. But, at any rate, I guess we will find out more. So, quickly, just one final question. There are some class-action cases, I think, taking place now. Is this likely to break out? Or is Goldman going to kind of pay off where it has to be paid off and just carry on?

GORDON: Congress reformed the securities laws, and it’s a lot tougher to bring a securities lawsuit, for trial lawyers to succeed in a securities lawsuit. It’s going to be really interesting to see how these security suits go against Goldman Sachs, other Wall Street firms, and also the ratings agencies. Moody’s has been sued by the California Public Employees pension system. There are going to be some big decisions to be made by courts around the country in these suits.

JAY: Thanks very much for joining us, Greg.

GORDON: It’s my pleasure.

JAY: And thank you for joining us on The Real News Network.

DISCLAIMER:

Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.


Greg Gordon

Greg Gordon, an investigative reporter, has spent 33 years uncovering waste, fraud, abuse and misconduct in Washington. Since joining McClatchy's national staff in 2006, he has helped expose Wall Street's role in the 2008 financial crisis, partisanship in the Justice Department and gaps in US homeland security. In 2010, he and colleagues Kevin Hall and Chris Adams were honored as finalists for the Pulitzer Prize for their financial reporting, which included Gordon's four-part series detailing Goldman Sachs' selloff of tens of billions of dollars in securities backed by risky home mortgages while it secretly bet that a housing downturn would send the value of those securities plummeting.