Blatant Fed Corruption

Written By Briton Ryle

Posted October 1, 2014

In 2011, Goldman Sachs was hired by oil and gas pipeline company El Paso to advise it on a $21 billion merger offer from larger competitor Kinder Morgan.

The deal gave El Paso shareholders a 37% premium above the share price at the time.

Now, 37% is a pretty decent profit. But that didn’t stop El Paso shareholders from filing a suit claiming that the deal was unfair and benefited Kinder Morgan.

Unknown at the time was the fact that Goldman Sachs held a $4 billion stake in Kinder Morgan. And the lead advisor to El Paso, a Goldman Sachs employee named Steve Daniel, also had a $340,000 personal investment in Kinder Morgan.

If you think Goldman Sachs may have encouraged El Paso to accept less-than-ideal terms, thereby screwing shareholders, you might be onto something…

And if you think there’s a conflict of interest for Goldman to have had a big stake in Kinder Morgan while it advised El Paso, well, how could that not be a conflict of interest?

At this point, we all know Goldman Sachs has a pretty bad reputation when it comes to making money. The “vampire squid” — as it’s been called due to its predilection to sucking profits out of any deal — often makes its money by screwing over investors.

Like with the Abacus mortgage bond deal from 2007. Investors who bought this bond lost over $1 billion, but not because of the housing crash… not exactly.

The mortgages that went into the bond were handpicked by hedge fund manager John Paulson, and because he knew what was in those bonds (i.e. less than top-quality mortgages), he took a huge “short” position that would profit if (when?) the value of the bonds went down.

Any surprise that John Paulson was lauded as having seen the housing crash coming when he made a personal profit of $1 billion during the crash? He may have seen it coming, but he sure as heck helped it along with the rigged Abacus deal.

Oh, and Goldman settled with the SEC for $550 million related to the Abacus deal.

Conflict of Interest

There’s an old joke on Wall Street: If you have a conflict, Goldman Sachs has an interest.

As it happens, a Federal Reserve regulator named Carmen Segarra was specifically assigned to look into Goldman’s conflict-of-interest policy. So she started to examine Goldman’s deals, like the Kinder Morgan/El Paso deal.

Or the time Goldman Sachs said the New York Fed had signed off on a transaction with Spanish bank Santander. Whether that was an outright lie or just a mistake is unknown, but the NY Fed never signed off on any deal with Santander.

So, not surprisingly, the Fed regulator, Segarra, concluded that Goldman Sachs has no conflict-of-interest policy.

Then her Fed bosses took Goldman’s side and reportedly fired her when she wouldn’t change her findings.

Surprised? You shouldn’t be. Goldman Sachs and the New York Fed have a pretty cozy relationship…

The Revolving Door

I’ve written before about the revolving door between Washington and Wall Street. But it’s no different at the Federal Reserve. In fact, it might be worse…

The current president of the New York Fed is a man named William Dudley. He was a Goldman Sachs partner and the firm’s chief economist for 10 years before former Treasury Secretary Tim Geithner hired him at the Fed. Dudley makes $410,000 a year as Geithner’s successor as NY Fed president.

Then there’s E. Gerald Corrigan. Corrigan was head of the New York Fed from 1985 to 1993, and he was head of the Basel Committee on Banking Supervision from 1991 to 1993. He joined Goldman Sachs in 1994 and made partner in 1996.

Corrigan and Geithner were pals and had lunch together, according to the New York Times. And it was that relationship that prompted insurance giant AIG to come to Goldman for cash in September 2008 when the financial system was crumbling.

The New York Times reports that AIG had originally been seeking a loan from JP Morgan because, as the AIG CEO said, “the potential conflicts of interest [with Goldman Sachs]… were too great.”

A Goldman spokesman told the Times, “We don’t believe anyone at Goldman Sachs asked Mr. Geithner to include the firm in the [AIG] assignment.” Personally, I don’t believe that for a minute.

AIG ultimately got $170 billion in federal assistance. Some of that cash paid AIG bonuses, and $30 billion in cash went right out the door — $12 billion alone went right to Goldman Sachs.

And I will never forget Tim Geithner, as Treasury Secretary, repeatedly defending the decision to let AIG pay off its trading partners (Goldman Sachs was the biggest) and then letting Goldman and others pay massive bonuses with that cash.

During one of Geithner’s 22 appearances before congressional sub-committees in the wake of the crisis, Florida Republican John L. Mica said, “We’re getting a lame story… I don’t know why we shouldn’t request your resignation.”

Of course, he and Congress never did. And Geithner’s now making the big bucks with private equity firm Warburg Pincus.

This is just one story of corruption between Wall Street, the U.S. government, and the Federal Reserve. There are plenty of others.

Who do we go to when the regulators are just as corrupt as the bankers they regulate? And who will take a stand when our congressional leaders are just hoping to skim a few crumbs off the Goldman Sachs lunch tables?

I wish I knew. But we, as Americans, are suffering for this blatant corruption. 

Until next time,

Until next time,

brit''s sig

Briton Ryle

follow basic @BritonRyle on Twitter

follow basic The Wealth Advisory on Youtube

follow basic The Wealth Advisory on Facebook

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

Angel Pub Investor Club Discord - Chat Now