‘Goldman Sachs rules the world’

Goldman Sachs made $4bn by short-selling the market on subprime mortgages, leading critics to say the financial giant profited from an economic crisis it helped to create [GALLO/GETTY]

As economists worry about a break-up of the euro zone and protesters on the other side of the pond crash Wall Street, one self-described independent trader summed up the growing schism between the financial elite and the rest of the world by telling the BBC: “Governments don’t rule the world; Goldman Sachs rules the world.”

While Alessio Rastani has never worked for a major firm in the City of London – and actually lives in a small house owned by his girlfriend – his candid comments have gone viral on the internet, in a possible sign of the times. He might be considered a fraud and admits to wanting media attention, but his comments still have people talking.

“I go to bed every night dreaming of another recession,” Rastani told the BBC. “It’s an opportunity … When the market crashes, when the euro and the big stock markets crash… you can make a lot of money from this.”

In less than 12 months, the savings of millions of people is going to vanish and that is just the beginning.”

Rumours have been circulating on the internet, since the video went viral earlier this week, wondering if Rastani is a member of the “Yes men” – a satirical protest group who pretend to be corporate executives – but that does not seem to be the case. The rhetoric is either a candid portrayal of a rotten system or the musings of an attention hungry nobody, depending on who you ask.  

“This idea of the testosterone fuelled alpha male in suspenders and a tie as the ‘independent trader” is not the reality, said a former Goldman Sachs trader who spoke on the condition of anonymity. “This guy [Rastani] wants to be a caricature of Michael Douglas in the movie Wall Street.”

Goldman’s ‘decline’

Robert Shiller, professor of economics at Yale University, told Al Jazeera that the “person interviewed is young and unknown” and “yet he makes some very provocative statements”. Other analysts, including the former Goldman Sachs trader, concur with Shiller.

“If Goldman ruled the world, they wouldn’t have made the losses they suffered in 2008,” the former Goldman trader who now works for a hedge fund told Al Jazeera. “He is right that governments don’t rule the financial world … markets are driven by opinions.”

In a 2009 interview, Goldman Sachs’ chief executive Lloyd Blankfein explained his banking career as “Doing God’s work”, while Sidney Weinberg, the firm’s high profile managing partner from the 1930s to the 1960s described the fund’s strategy was “long-term greedy”.

But another former Goldman trader, who spent six years working in the City of London and has since moved to another major investment bank, doesn’t think Weinberg’s analysis holds true for the Goldman of today.

“In the 1980s and 90s, it was the most prestigious firm … Whenever a trader would see Goldman taking the other side of a bet, it would scare them,” the trader told Al Jazeera. “Over the past six months the perception of the bank has completely changed.”

After the BBC aired the Goldman video, the trader and his colleagues received a tersely worded memo from their employer. “My office got an e-mail saying ‘this is exactly what we don’t want you doing’. We can’t access the clip at work. A lot of places have really clamped down on these kinds of things because of the climate.”

Across the western world banks, bankers, speculators, hedge funds and brokers are generally loathed by the public. A Pew Research poll in April 2010 found that only 22 percent of US respondents rated banks and other financial institutions as having “a positive effect on the way things are going in this country”. Banks scored lower in public confidence than other generally distrusted groups including Congress, the federal government, big business, labour unions, and the entertainment industry.

Unsurprisingly, former Goldman traders blame reckless individuals for problems in the financial system, rather than the broader institutional framework which allows massive profits and socialised risks.

The second ex-Goldman financier points to the recent case where a UBS trader lost $2.3bn in client funds through risky bets. “There are thousands of people who worked in the financial industry; a minor percentage of that group has responsibility for the crisis,” the second trader said, adding that he has “contempt for a lot of bankers”.

Playing both sides

But critics say rot runs to the financial system’s core. By exploiting superior position, legal loopholes and insider knowledge, firms like Goldman have, at times, made money betting on a recession.

“A variety of strategies exist to profit from downturns; these are often lumped under the term ‘shorting the market,” Richard Wolff, professor of economics emeritus at the University of Massachusetts, told Al Jazeera. “Instruments exist that allow investors to bet on a downturn and profit if and when the downturn occurs (in a specific stock or bond or derivative or in groups of them).”

Goldman, for example, invested in subprime mortgages in the US, initially making money from selling a product which kick-started the 2008 recession, and then made more money betting against the market, as they allegedly knew the trouble they had caused.

“Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts,” Goldman Sachs Chief Executive Lloyd Blankfein said in an e-mail dating from November 2007 and uncovered during a US Senate investigation in 2010. By shorting the market on subprime loans, Goldman reaped a profit of $4bn, while its rivals were hemorrhaging cash from the loan scheme.

“I think the biggest failure of the last five years has been the lack of regulations,” said the first former Goldman trader.

At the height of the boom, then UK finance minister Gordon Brown claimed that “we will never return to the old boom and bust” economics. The economy went bust soon afterwards.

“The crystal ball is more cloudy than it has ever been in the last five or ten years,” the second Goldman trader said when asked about the possible demise of the euro zone and Rastani’s comments that average people’s savings will evaporate. “The underlying issue is that people cannot see a fundamental driver of growth in the next five years.”

Despite allegations that they rule the world, there isn’t much Goldman Sachs can do about that.  

Follow Chris Arsenault On Twitter: @AJEchris