History Repeating: In Goldman Sachs We Cannot Trust...

GOLDMAN SACHS BUSINESS PRINCIPLES ( # 5 of 10)

"We stress creativity and imagination in everything we do. While recognizing that the old way may still be the best way, we constantly strive to find a better solution to a client's problems. We pride ourselves on having pioneered many of the practices and techniques that have become standard in the industry. -Goldman-Sachs Website, 2009.

HISTORY:

Goldman-Sachs is a financial institution that survived the Great Depression. John Kenneth Galbraith in his popular book, The Great Crash 1929 has a chapter dedicated exclusively to them entitled: In Goldman-Sachs We Trust.

Here we see a pattern emerging dating back nearly a century:

1928:

"Goldman, Sachs, and Company (GS&C) created a new venture called "Goldman, Sachs, Trading Company" (GSTC) and originally issued 1M shares at $100/share on Dec 4, 1928 but GS&C bought it all and then sold 90% of it to the public for $104 [apparently thinking this was a way to make a quick buck -- they had not yet learned about the concept of "leverage" as it is used/abused today]. Only 2 months later (Feb 21, 1929) GSTC merged with a company called Financial & Industrial Securities Corp. -- the resulting assets were $235M. Just before the merger, Feb 2 the stock was $136.50 and 5 days later on Feb 7 it was $222.50"
Massive value increase even though tangible real value was much less. Incredible spikes seem to follow the firm. Maybe they have the Midas touch?

“This remarkable premium was not the undiluted result of public enthusiasm for the financial genius of Goldman, Sachs. Goldman, Sachs had considerable enthusiasm for itself, and the Trading Corporation was buying heavily of its own securities. By March 14 it had bought 560,724 shares of its own stock for a total outlay of $57,021,936. This, in turn, had boomed their value. However, perhaps foreseeing the exiguous character of an investment company which had it investments all in its own common stock, the Trading Corporation stopped buying itself in March. Then it resold part of the stock to William Crapo Durant, who re-resold it to the public as opportunity allowed.”

1929:

Seven months later, after the October crash (including a 2:1 stock split), the price of the stock ultimately fell to approximately 1 3/4. The Goldman-Sachs Trading Corporation (GSTC) was an investment trust, a forerunner of the modern mutual fund. According to Galbraith, Goldman-Sachs' stock lost 97% of its going-public value., less than a year after its public offering.

1932:

But in a time with no SEC, virtually anything went on Wall Street during the Great Depression. Of course, we all know how the story ends. Years later in Washington Mr. Sachs had this to say to Senator Couzens at the Committee of United States Senate Hearing:

Senator Couzens: Did Goldman, Sachs and Company organize the Goldman Sachs Trading Company?

Mr. Sachs: Yes, sir.

Senator: And it sold its stock to the public?

Mr. Sachs: A portion of it. The firm invested originally in 10 percent of the issue.

Senator: And the other 90 percent was sold to the public?

Mr. Sachs: Yes, sir.

Senator: At what price?

Mr. Sachs: At 104...the stock was later split two for one.

Senator: And what is the price of the stock now?

Mr. Sachs: Approximately 1 3/4.

Deja-Vu perhaps?

2008:

Goldman Sachs seems to have a pattern of passing the proverbial buck after they have rinsed all profits from their venture and moved out of the way before the train derails.

(Excerpt:"In Goldman Sachs We Trust: The Story of a $222 Stock going to $1 During the Great Depression," mybudget360.com,8.2009. Image: Profiteer Illustration, Library of Congress, 1929).

The United Bank of America: A Call To Civil Service...

“Democracy is the road to Socialism.” -Karl Marx

"In what now looks like the final phase of the credit crunch, one thing has become clear: Many of the world's major banks will end up in state control.

Britain is furthest down the track. This week, Royal Bank of Scotland Group Plc and HBOS Plc ceded majority control to the government in exchange for financial support. Already, the state is making demands. It will have the right to seats on the board, to fix dividends, and be allowed to set executive pay.

Other countries are likely to follow. Germany has put its own rescue package in place, and Chancellor Angela Merkel has said the way bankers pay themselves will have to change. Even U.S. Treasury Secretary Henry Paulson has promised the government will take a direct stake in banks such as Citigroup Inc. and Goldman Sachs Group Inc.

In effect, bankers are about to become civil servants. That will require a huge culture change. In a second, banking will have to switch from being a raucous, entrepreneurial and aggressive industry into a dull, safe and conservative one.

For that to happen, their brains will have to be completely rewired. Everything a generation of bankers grew up expecting will be forgotten. A new set of rules is being written.

The initial moves will be cosmetic. Out will go the round- the-clock, work-hard-play-hard culture. In its place will come the nine-to-five day with a break for tea and biscuits. Meetings will be sacrosanct, and the keeping of minutes precise. The gender-awareness officer will no longer be a figure of fun, but rather the most powerful person in the workplace. As for taking clients to lap-dancing clubs, don't even think about it.

It's a new world, get used to it.

-Matthew Lynn (Excerpt: "Bankers Find Their New Calling as Civil Servants," Bloomberg News, 10.15.08. Image: - Deathagony1917,DeviantArt.com,2008).