Goldman Sachs: A Fraudulent history repeats itself - The Legacy of Ashanti Gold
Goldman Sachs has a long history of setting up its clients for a fall...and making handsome profits. The US financial bailout is merely a repeat of the Ashanti Gold debacle 10 years ago. by Tully
(libertarian)
Tuesday, April 20, 2010
The only ones who should be surprised by Fraud allegations levied against Goldman Sachs are insiders who have become so arrogant as to think that they were somehow untouchable. Personally, I am wondering why it has taken so long.
Together, much of the Wall Street Bailout process was designed by Treasury Secretary Timothy Geithner, Past President of the NY Federal Reserve Bank; Stephen Friedman, an ex-Goldman Sachs officer who still serves on the Board of the NY Fed; Hank Paulson, an ex-Goldman Sachs operative who designed the hedge funds that plunged the financial markets into turmoil in the first place; and Goldman Sachs financier Robert Rubin. As the crisis unfolded, Goldman Sachs continued to market these Hedge Funds to uninformed clients, even after becoming aware that mortgage-backed securities were crumbling. And when When AIG was bailed out...the primary beneficiary was Goldman Sachs.
And I have to ask: does this surprise anyone? This is a world-wide pattern that Goldman Sachs has utilized to enrich itself at the expense of everyone else for years. And perhaps there is no better example of this than the destruction of Ghana's largest company a decade ago: Ashanti Gold.
In 1998, Ashanti Gold was the 3rd largest Gold Mining company in the world. The first "black" company on the London Stock Exchange, Ashanti had just purchased the Geita mine in Tanzania, positioning Ashanti to become even larger. But in May 1999, the Treasury of the United Kingdom decided to sell off 415 tons of its gold reserves. With all that gold flooding the world market, the price of gold began to decline. By August 1999, the price of gold had fallen to $252/ounce, the lowest it had been in 20 years.
Ashanti turned to its Financial Advisors - Goldman Sachs - for advice. Goldman Sachs recommeded that Ashanti purchase enormous hedge contracts - "bets" on the price of gold. Simplifying this somewhat, it was similar to when a homeowner 'locks in' a price for heating oil months in advance. Goldman recommeded that Ashanti enter agreements to sell gold at a 'locked-in' price, and suggested that the price of gold would continue to fall. [link edited for length]
But Goldman was more than just Ashanti's advisors. They were also sellers of these Hedge contracts, and stood to make money simply by selling them. And they were also world-wide sellers of Gold itself.
In September 1999 (one month later), 15 European Banks with whom Goldman had professional relationships made a unanimous surprise announcement that all 15 would stop selling gold on world markets for 5 years. The announcement immediately drove up gold prices to $307/ounce, and by October 6, it had risen to $362/ounce. [link edited for length]
Ashanti was in trouble. At Goldman's advice, they had bet that gold prices would continue to drop, and had entered into contracts to sell gold at lower prices. These contracts were held by a group of 17 other world banks. Ashanti found themselves being forced to buy gold at high world prices and sell it at the low contract prices to make good on the contracts. The result? In a few weeks time, Ashanti found itself with 570 million dollars worth of losses. It had to beg the 17 banks not to force the execution of the contracts. [link edited for length] Who served as the negotiator for the 17 banks and Ashanti? Goldman Sachs. The same company that designed the contracts for Ashanti(making a profit in their sale.
The basic bankruptcy of Ashanti drove its stock price from an all time high of $25 per share to a paltry $4.62 per share. Thousands of investors - your blogger among them - lost their investments almost overnight as Ashanti was declared insolvent.
In the end, Ashanti was purchased by their largest African competitor, AngloGold, a British company headquartered in South Africa, who bought them for a song. The Financial Advisors to AngloGold? You guessed it: Goldman Sachs.
The destruction of Ashanti Gold by Goldman Sachs was saturated with fraud and conflicts of interest: Goldman Sachs served as Ashanti's Financial Advisors; profitted form the contracts they designed and marketed for Ashanti; was involved in the manipulation of the gold prices on which the contracts depended; represented Ashanti's creditors when the contracts went bad; and profitted as the Financial Advisors to the company that picked up the Ashanti corpse for pennies on the dollar.
The Bailout of Wall Street - little understood by many Americans, and supported grudgingly by members of both political parties who operated on only fractions of the full picture (not unlike the Iraq invasion) - has Goldman Sachs' legacy all over it.
Prosecution of Goldman Sachs and Regulation of the Financial Industry is not evidence of "Big Government," "Socialism," or more "Washington Take-over."
It is an appropriate - and overdue - safeguard against Fraud and Theft, which, the last time I looked, was not antithetical to the principles of liberals, moderates, conservatives, or libertarians.
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I have always countered to people who want more regulation of otherwise free market capitalism. They claim this financial crises is proof positive that capitalism will run wild and rogue. That capitalism neat could never work because it would inevitably cause society damage.
I have always said, this crises is not an example of capitalism run rampant; rather it is an example of fraud perpretrated on a massive scale, and the financial cops who were supposed to police these transactions already, simply didn't do their jobs.
This not a problem with capitalism, but one of fraud and incompetant policing to prevent fraud.
I'm disappointed in this article. I agree that this is an example of fraud. I agree that this fraud went unchecked by an inept regulator.
Where I disagree is in the assertion that added regulation is warranted or effective in addressing the fraud.
In fact, it is quite easily obvious that the SEC was not only unwilling or incapable of preventing this fraud, but complicit in it and likely also to have played a pivotal role in GS's power to run such a scheme.
Goldman would never have grown to such scale had it not been for its relationship with the SEC, just like EVERY industry that is heavily regulated, the regulator becomes the tool of the industry, not vice-versa.
So, contrary to the last two lines of Tully's (loosely libertarian) article, it VERY MUCH IS THE "BIG GOVERNMENT" solution to employ regulation as a means of policing fraud that never would have had the girth, complexity, and power it had without the ineffective, polluting influence of corrupt regulators in the first place.
A truly free market limits the damage this kind of scheme can inflict, not only because there is less likely to be such a behemoth, but also because risk cannot be packaged insincerely without peer scrutiny. Goldman had inside help in the form of a regulatory structure so complex that only THEY understood how to manipulate it. Why? Because they had a hand at creating it.
Anyone can win a game of monopoly if they bribe the banker to white out the rules on the underside of the box and insert their own.
