A revoltin’ development: Goldman and the beginning of end for the Obama coalition on the Hill

Sometime next year, probably a few months after the unemployment rate in the United States passes 10 percent, Goldman Sachs may well generate the $10 billionth dollar of profit that it has made since the American taxpayer helped bail it out at the nadir of the financial crisis. At least it will if keeps making $3 billion a quarter in profit as it did last quarter. 

With 2010 being an election year, the Republican Party will be vigorously hammering the Obama administration on record unemployment (it’s quite possible real unemployment…including those who don’t report, etc…will be approaching 20 percent, it’s already 16.5 percent now). They will say the stimulus was wasteful and that new taxes on the wealthy are just the tip of the iceberg. And, if midterm elections hold true to form, the Obama administration will lose the big advantages the Democratic Party currently has in the Senate and the House. (Watch for Mitt Romney selling his business and management credentials to lead this charge and position himself successfully to be the Republican candidate in 2012.)

The Republicans won’t actually win a majority in either house. But they won’t have to. As we have already seen with health care and climate reform, even with current advantages the Obama team barely can force their own initiatives through given divisions within the Democratic Party. 

And those Democratic divisions should grow. Because in all likelihood…if the left has any hint of a spine left…they will be furious that Obama not only fumbled his lead but that he is copping out on health care and climate, seeking to be the Henry Clay of the modern era (and let’s remember, the fates of the compromises engineered by “the Great Compromiser” were not so great.) Meanwhile, Obama will also be seen by many as the guy who Wall Street had dancing on a string. Because nothing says “you been played, suckah!” like reading stories such as those in today’s Wall Street Journal or the FT of Goldman’s bounties. The taxpayer couldn’t get played in this instance without the willing shnookery of the Obama administration (and the historically clueless shnookery of the U.S. Congress not to mention that of the Bush administration…let’s be fair, the nation’s capital is shnook central).

In other words…if things play out as described….2009 could be the legislative high water mark of the Obama administration with the election paralyzing action next year and progress on the Hill much more difficult thereafter.

As for Goldman’s record payday, I’ve asked this before and I will ask it again: Where is the outrage? I’m a dyed-in-the-wool capitalist. I love free markets. I hope a free market marries one of my daughters some day. But if some people have too many advantages and others simply can never catch up, the markets aren’t free, regardless of law or intent. Even if the advantages are in part derived from talent and hard work, fairness can remain an issue if other components of the success are linked to access, influence, history and other intangibles.

Few companies in American history…perhaps Standard Oil, perhaps J.P. Morgan’s bank, but probably not G.M. in its prime…have had more high-level influence on public policy than Goldman Sachs. This may have seemed fairly benign when markets appeared to be operating as they should and Goldman merely seemed a source of talent for the government. 

But now we have a different perspective. In a story from the front page of today’s Wall Street Journal: “With competitors such as Lehman Brothers Holdings Inc. and Bear Sterns Cos. Gone and others like Citigroup Inc. flailing, Goldman appears to be pulling off one of the biggest market grabs in Wall Street history.” And so we must ask, how did we get here? Is it purely a coincidence that former Goldman CEO Hank Paulson oversaw the management of a financial crisis that allowed several of Goldman’s biggest competitors to be destroyed but included goodies like the $12 billion passed through AIG to its prime counterparty Goldman, why aren’t there more questions?

Goldman over-leveraged. Goldman advocated for the system that produced the crash…self-regulation by banks, proliferation of risky vehicles, a trading culture that passed risk along and left tidy profits for the traders. When the system blew up, Goldman, its advocate (including a busload of former execs who helped write the rules in the USG), and one of its prime beneficiaries, went to the government and asked for help. It got it. It used it. And then, apparently not as badly off as it once had seemed, it paid off the government cash when it seemed there would be too many strings attached.

Now it is using the new-found freedom and vitality to gain an edge on its remaining competitors, many of them still struggling. (In fact another banking crunch is possible due to margin issues, consumer credit issues and commercial real estate issues among others.) Throughout, it was a Goldman guy at Treasury in the Bush administration, a Goldman guy at White House chief of staff at the end of the Bush administration, a Goldman guy in charge of TARP, and when Tim Geithner left the NY Fed to replace Hank Paulson, it was a Goldman guy who replaced him. 

And now, when the rest of the economy is in ruins, who is it that is striding about announcing record profits and record bonuses? And why is there no talk of any commensurate return on investment to the taxpayers who, they argued at one point, were needed to save their hides? (If you ever wanted proof of the premise behind my book Superclass, look no further. These guys operate as ultra-citizens in our society, virtually able to tell the government to heel and fetch in ways the rest of us can only fantasize about.)

Some will surely argue this is the American way, that Goldman has earned every penny. No. While Goldman has legitimately earned much of it, and there are many great and good folks working hard at Goldman who have made important contributions through government service. (In particular I applaud the pending appointment of the vice chairman of Goldman International Bob Hormats as Under Secretary of State for Economics, a great and talented guy.) Fair-minded individuals must also conclude they played the system, their huge profits came at the expense of others who could have used the government bailout money who had no access to it, no clout, no Treasury Secretaries hailing from their failing auto parts dealership or struggling stationery store. Further, Goldman’s profits are simply not the broad-based benefit for America, they are a benefit for Goldman employees and shareholders.

Goldman is the most influential financial institution in a community of banks that sucked the system within an inch of its life with greed and to whom the U.S. government seemed to feel a prime responsibility was to rescue them…”to mitigate systemic risk.” Crap. What about the risk to the system caused by the inequities created here? These ultra-citizens — Goldman is one, think of Exxon registering record profits while the country squirmed in the midst of an energy crisis…and then demanded tax breaks along the way — are operating apart from  and above our system, using it for their benefit, putting people at risk, exacerbating inequality. While they may help America in some respects…we need to wise up and recognize when we are being used and abused.

And sooner or later, with deficits mounting (Happy Trillion Dollar Deficit Day everyone!) and the government in need of revenue in some form other than loans from abroad, there will be more tax hikes. And companies that operate with sense of entitlement and moral blankness that distinguishes their counterparts in modern fiction…in the Twilight movies say, or “True Blood”…will be the ones who will find that they are increasingly the targets. And what’s more, I think they should be. 

My sense is that it is going to take the next wave of crisis…the growing unemployment…the very very slow growth of the recovery whenever it happens…perhaps the next downspike…to mobilize the left and to paralyze the traditional defenders of these folks. (Admittedly a big shift to the right in next year’s elections could protect the ultra-citizens in our society, the organizations that have trumped the people in American democracy. And thus watch who supports that shift.)

Obama can still avoid these outcomes…a shrunken edge in Congress, an even more fragmented party, this year’s watered-down programs being the high point of a one term administration…but not if he doesn’t realize that at the moment his “let’s get Wall Street back to the way it was” approach could be the death knell for his popularity with much of his base, much as it was for his Republican opponents last fall. It’s time to recognize something not working as planned with this recovery in which the top enjoys record rebounds while the bottom still plummets. 

In the old time TV and radio series “The Life of Riley,“ William Bendix’s character would regularly say what I thought this morning while reading about the Goldman bonanza: “What a revoltin’ development this is.” The question on my mind is: When does the revoltin’ in response begin?

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