Goldman Sachs and Other "Vampire Squids" Exposed

Last Updated Feb 4, 2011 4:37 PM EST

Griftopia by Matt Taibbi
Journalist Matt Taibbi famously compared Goldman Sachs to a "a great vampire squid" in his Rolling Stone expose of the investment bank. Last month, he expanded on his thesis and published a book, Griftopia: Bubble Machines, Vampire Squids and the Long Con that is Breaking that is Breaking America, a fierce, ferocious and positively incendiary attack on Wall Street and its influence on politics and politicians.

Intensively researched and passionately argued, the book expands on Taibbi's seismic Rolling Stone article to take on what we might think of as the follow-on to the military-industrial complex, a combination of those with money and those with power that is unprecedented in its reach and destructive force.

Alan Greenspan Portrayed as Vapid, and a Gas Bag
Taibbi pulls no punches. His chapter on Alan Greenspan is titled, "The Biggest Asshole in the Universe," and he portrays the once-revered Federal Reserve chairman as a despicable, intellectually vapid, shamelessly name-dropping gasbag. But he includes telling details of individuals whose lives have been destroyed by predatory lending or commodities manipulation. And his portrayal of the Tea Party is insightful and disarmingly sympathetic.

They're not all crazy. They're not even always wrong. What they are, and they don't realize it, is an anachronism. They're fighting a 1960's battle in a world run by twenty-first century crooks....In the meantime, an advanced new symbiosis of government and private bubble-economy interests goes undetected as it grows to exponential size and robs them blind....[T]hey've been encouraged to militancy by the very people they should be aiming their pitchforks at. A loose definition of the Tea Party might be fifteen million pissed-off white people sent chasing after Mexicans on Medicaid by the small handful of banks and investment companies who advertise on Fox and CNBC.
He points out that the inclinations of the Tea Party make them willing to follow orders ("try getting one hundred progressives at a meeting focused on anything"), but "The downside is, they see absolutely nothing weird in launching a revolution based on the ravings of a guy who's basically a half-baked PR stooge shoveling propaganda coal for bloodsucking national Behemoths like JP Morgan Chase and Goldman Sachs."

Taibbi's coverage of the sub-prime mess and even of Greenspan's failings is fine but it will not be news to those who read the financial press and excellent books like The Big Short (Michael Lewis), Crash of the Titans (Greg Farrell), Thirteen Bankers (Simon Johnson and James Kawk), and All the Devils are Here (Bethany McLean and Joe Nocera).

Oil Hikes Tied to Goldman Sachs Favors
Taibbi's more significant contribution is in his powerful chapters on the role that commodity index investing played in the spike in gasoline prices in 2008. Contrary to the rhetoric of the then-candidates for the presidency, Taibbi shows that the rise in prices was not attributable to the failure of government to allow more drilling (John McCain) or greedy oil companies and profligate consumer carelessness (Barack Obama) but to an undisclosed exemption Goldman Sachs got from the CFTC from the restrictions on a level of unprecedented speculation. Taibbi's description of the secrecy and impact of these rulings is jaw-dropping.

But that is quickly outdone by his next chapter, documenting the eating-the-seed-corn sale of state assets to meet short-term budgetary shortfalls. Just the description of a meeting with a bunch of American investment bankers pitching a sovereign wealth fund in the Middle East on buying the Pennsylvania Turnpike (really!) is alone worth the price of the book.

"You know how you used to have a job, and a house, and a car, and a wife and family, and there was food in the fridge -- and now you're six months into a drug habit and you're carrying toasters and TV's out the front door every morning just to raise the cash to make it through that day? That's where we are. While a lot of this book is about how American banks used bubble schemes to strip the last meat off the bones of America's postwar golden years, the cruelest joke is that American banks don't even have the buying power needed to finish the job of stripping the country completely clean."
Taibbi has a horrifying list of public assets sold to raise money for short-term budget crises, from parking meters in Chicago, Nashville, Pittsburgh, and Los Angeles to highways in Indiana, Florida, and Illinois and a port in Virginia. His description of the approval process for the Chicago parking meter deal is horrifying. In part that is because it is emblematic of his themes of the absence of transparency and accountability in a world driven by bankers' fees, as in his example of the regulator's response when asked by Congress for a copy of the secret exemption letter from the CFTC, 17 years after it was issued. The bureaucrat said he would have to clear it with Goldman Sachs first.

Yeats said it best: "The best lack all conviction while the worst are full of passionate intensity."

Thankfully, Taibbi has both conviction and passionate intensity, which fuel this book and help to make it compelling and, as he hopes, infuriating. He is willing to use the right term to describe the government's regulatory failures and capitulations: subsidy. For all of the rhetoric by Greenspan and others about the purity of the free market, Taibbi documents the use of corporate money to distort the market for the benefit of executives, not corporations.

Next Time Tell Us the Names of the Complicit on Boards

Taibbi does miss a few points, however. I was very sorry he left out the names of the members of the boards of directors of the companies he writes about. I know from experience how difficult it is to get access to board members and to information about what goes on in their meetings. But whether they were leading this activity or clueless about what was going on, the directors are a critical part of the story.

And Taibbi barely touches on the role of the shareholders. It is not coincidental that the rise of the corporate hegemony he documents happened at the same time as the rise of the large, passive, institutional investor. Capitalism is predicated on a market that responds promptly and knowledgeably, and that includes shareholders. But when institutions are too big, too conflicted (managed by the same Wall Street firms, doing business with portfolio companies), and, most of all, too risk averse to do so, inevitably corporate managers will take as much as they can.

The smoking gun at the center of all Taibbi writes about is the structure of incentive compensation -- in every example he cites designed to reward executives based on the number of transactions rather than the quality or value added of the transactions -- which is the fault of the boards and the shareholders. Without them, we have the what, the why, and the how, but not the who of the story and, worst of all, no idea about what to do next.

Have you read this book or one of the other Wall Street expose books? What did you think of them?

Related links:

  • Nell Minow

    Nell Minow, a member of the board of GovernanceMetrics International and founder of The Corporate Library, writes about corporate governance issues, focusing especially on CEO pay, executive compensation, shareholder rights and best business practices.You can follow her on Twitter at @nminow.