The S.E.C. filed a civil suit against Goldman Sachs today for fraud. Apparently Sachs is being accused of secretly creating a collateralized debt obligation (C.D.O.) it knew was going to fail, selling it to investors without telling them, and then betting against it. Goldman made 25 of these deals, but the one being litigated is Abacus 2007-AC1. Apparently
As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.
Goldman is protesting that this was simply a bet like any other, and that they had no idea which way the housing market was going to swing. The protestations of the major investment banks (the ones that are left) ring very hollow these days; Yves Smith over at Naked Capitalism has been writing some good pieces on Magnetar Capital, a hedge fund that seems to have been behind about 50% of the subprime C.D.O demand during the most toxic phase (2006-7) and gave heavily to Rahm Emanuel’s campaigns in the same period.
This isn’t shocking in the abstract. Goldman Sachs and Magnetar are capitalist institutions set up to make a profit, and gaming the market is a way to do so even if it is typically considered reprehensible. One could argue that it was bound to happen given the larger structural environment in which they found themselves: lessened regulation coupled with cheap interest rates, and a public willing to sink money into home buying even at the expense of going into ridiculous amounts of debt.
The bubbles that allowed this to happen are part of a larger financial phase of capitalism that Giovanni Arrighi dubbed the C-M’ stage, where finance and investment capital are the dominant and most productive sectors and the economy is largely controlled by that group of capitalists. As investment in the material economy becomes riskier, money flows to financial transactions, which are increasingly profitable – sometimes highly so because of system-rigging by the institutions themselves. Arrighi himself explained, in one of his last interviews, that
The idea was that the leading capitalist organizations of a particular epoch would also be the leaders of the financial expansion, which always occurs when the material expansion of productive forces reaches its limits. The logic of this process… is that when competition intensifies, investment in the material economy becomes increasingly risky, and therefore the liquidity preference of accumulators is accentuated, which, in turn, creates the supply conditions of the financial expansion.
Goldman, Magnetar, et al and their actions will probably be seen in retrospect as the cresting of the financial wave of U.S. hegemony. This is not to say that the U.S. won’t continue dominance for a great while, but rather that it will be difficult, if not impossible for the United States to return to the peak years of the late-90’s to mid-oo’s in both profitability and control over the financial markets. What’s saving the United States at this moment is slow disintegration of the European Union as a competitor, and the sluggishness of the Chinese economy (tellingly, they have $2.3 trillion in capital reserves). Remember, ittook the U.K. a few decades to finally cede its place on the world stage. Why would we expect this to be any different?