Friday, June 24, 2011

Trotsky: The Fight Against Stalinism

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The collapse of the Soviet Union in 1991 was supposed to be proof that socialism can not work. The tiny minority of multi-millionaires that run the world have been trying to drive home a “lesson” to young people and workers ever since – that there is no alternative to the inequality, poverty and chaos of the market, and that global capitalism is the only system that can work.

They want us to believe that any attempt to get rid of capitalism would end up with dictatorship, bread queues and eventual collapse . . . just like Russia.

But the system that collapsed in Soviet Russia in 1991 was not socialist. Despite all the red flags, red stars and statues of Lenin, it was a million miles from socialism. By 1991 the rulers of the Soviet Union had trampled on every one of the principles of the socialist revolution led by Lenin and Trotsky in 1917.

The Soviet Union was not socialist – it was Stalinist.

What’s the difference? It’s hard to know where to start.

In 1917 the privileges of the rich were abolished, and their money was taken away to try to abolish the division between rich and poor. But under Stalinism the rulers of Russia salted away huge sums for themselves and lived in luxury compared to the rest of the people.

In 1917 housing was shared out and the second homes of the rich were confiscated and handed over to the homeless and the poor. By 1991 the rulers of Russia had the poshest flats in Moscow, and villas by the Black Sea.

In 1917 women were given full legal equality. Abortion, contraception and divorce were legalised. By 1991 the rulers of Russia held to the line that a woman’s duty was motherhood, and abortion was illegal once more.

In 1917 homosexuality was legalised. By 1991 it was illegal once again.

In 1917 other nations ruled by Russia were given the right to determine their own future and to separate from Russia if the people wished. By 1991 whole nations were being held inside the Soviet Union against their will, and Russians had privileges over other nationalities.

Workers control

Above all in 1917 the working class had control of society through delegate-based councils of workers’, peasants’ and soldiers’ representatives (the ‘Soviets’). In the Bolshevik Party members had full rights to debate out their different views and have a free vote over political decisions. By 1991 there was no democracy at all for the working class. Members of the Party (now called Communist party of the Soviet Union) had no rights at all to speak out against the line argued by the leaders at the top.

These were steps backwards, steps away from socialism. To build a socialist society, the working class will need to take power through workers’ councils or soviets, and then set about abolishing class distinctions. For this the maximum working class democracy is essential. The workers themselves will need to plan the economy. All divisions in the working class over race, sex or nationality will have to be overcome.

This process of transforming society in a socialist direction was underway after the 1917 revolution. But in the 1920s and 1930s, Stalinism threw the whole process into reverse.

What the capitalists never tell us about the history of the Soviet Union is that many of the leading Bolsheviks fought against this reversal and betray al of the revolution. They never tell us that there was an alternative to both capitalism and Stalinism.
That is why today REVOLUTION still thinks the history of Russia is important. It was a workers’ revolution – which means it is part of our history. And the struggle between Trotskyism and Stalinism is of burning relevance today, because it is filled with lessons for our future and the revolution that the workers and youth of the world are going to make in the 21st Century.

Rise of Stalinism

Russia had been a backward country before the revolution. The working class and the Bolshevik Party knew they had a huge job on their hands to modernise the country, build power lines and heavy industry, and to educate millions of illiterate peasants. But they were never left in peace to get on with the job.

14 capitalist countries invaded Russia and lined up with ‘White Armies’ loyal to the landlords and the former royal family in an attempt to destroy the workers’ republic. By 1921, under Trotsky’s military leadership, the Red Army of workers and peasants had won the Civil war.

But the Russian Revolution was to be defeated, not by enemies from the outside, but by a deadly enemy from within.
Josef Stalin was not single-handedly responsible for destroying the Russian Revolution. No revolution backed by millions of workers could be overthrown by the actions of one man. Stalin came to power because he represented a growing force inside the Soviet State: the bureaucracy.

Lenin, Trotsky and the Bolsheviks had always realised that socialism could not be built in one country, let alone one as backward as Russia. Capitalism is a world system. Socialism will only succeed when it can deliver a higher standard of living and a stronger economy than world capitalism.

The Russian Revolution blew into the fire of working class struggles all over the world. In Europe, great revolutions broke out. Soviet-type councils were formed in Hungary and Germany. Italian workers seized their factories in two years of mighty struggles. But one by one these opportunities went down to defeat because no strong workers’ party like the Bolsheviks was primed and ready to take over power.

The Soviet Union was isolated. Compromises had to be made with rich peasants so that food could be supplied to the cities. A layer of middle-men and office officials began to emerge who drew a relatively comfortable life from the situation. They owed their position to the Soviet State, so they did not want capitalism back. But at the same time, the whole need for these people only existed because Russia was isolated. They came to fear the possibility of revolution abroad, which would break Russia’s isolation. In particular they came to fear the working class itself. They began to suppress discussion, debate and democracy, both inside the soviets and inside the Communist Party.

Stalin was General Secretary of the Party. He expressed the interests of this bureaucratic caste ever more clearly. In his Testament, published after his death, Lenin said Stalin had too much power and should be removed from his post.

After Lenin died, Stalin then came forward with a “theory” that was an attack on everything the Bolsheviks had stood for. He claimed that Russia could build socialism on its own. “Socialism in One Country” meant that the world revolution was no longer necessary as far as the bureaucracy was concerned. Instead of world revolution, the Stalinists argued for peaceful co-existence with capitalism abroad.

Every time the Stalinists did a deal with one of the capitalist powers, Stalin put pressure on Communists abroad not to do anything to upset their new-found allies. By the 1930s this meant that the Stalinists were arguing against the working class taking power in countries like France and Spain. Instead, revolutions were to be limited to the goal of democracy, not socialism.

Trotsky fights back

In 1923, Trotsky opened a political war against Stalin and everything he represented. He demanded a return to real working class democracy in the party and in every walk of life. He called for a democratic plan to run the economy in the interests of the workers, not the bureaucrats. And above all, he rejected the theory of socialism in one country and upheld the fight for world revolution.

The Trotskyists were defeated by a campaign of bullying and terror. They were banned, imprisoned in labour camps, exiled and murdered. In a series of purges and stitched up “Show Trials” the Trotskyists were accused of being everything from agents of Hitler to saboteurs of industry. Every problem in Russia, every failure of the regime, was blamed on the Trotskyists. Stalin even whipped up disgraceful anti-Jewish propaganda, because Trotsky and several other leading oppositionists were from Jewish backgrounds. Thousands died in Siberia or with a bullet in the back of the head.

Trotsky’s son Sergei – a Soviet engineer with no interest in politics – was blamed for deliberately causing an accident at work and disappeared without trace. His son Leon Sedov – a revolutionary active in France – was murdered by a Stalinist agent.
Trotsky himself was thrown out of Russia and was then forced to move from country to country by capitalist governments who were just as scared of him as Stalin was. One by one Trotsky’s secretaries were assassinated by Stalin’s secret police.

Eventually they cut down Trotsky himself in Mexico in 1940.

At first Trotsky thought that the Stalinist sickness could be cured by reforming the Soviet Union. By the mid-1930s he came to realise that armed revolution was the only way to overthrow a vicious anti-working class dictatorship like Stalin’s. At the same time Trotsky insisted that capitalism had not yet been restored in Russia. After overthrowing the Stalinists the workers would need to preserve the state plan and state-owned industries, but should put them under working class control in order to get back on the road to socialism.

For Trotsky, the Soviet Union was neither capitalist nor socialist: it was a degenerated workers’ state run by bureaucrats. He explained that the Soviet Union could be called a workers’ state “in approximately the same sense . . . in which a trade union, led and betrayed by opportunists, that is by agents of capital, can be called a workers’ organisation.” The Soviet Union should still be defended if attacked by capitalist states, as it was when Nazi Germany invaded Russia in 1941. But there should be no support for Stalin or his gang. Unless the working class overthrew the Stalinist bureaucrats and put democratic workers’ councils back in power, Trotsky believed that eventually the bureaucrats themselves would lead Russia back to capitalism.

How right he was! After 1991 it was former Stalinist officials who were at the front of the rush to become capitalist multi-millionaires as the market and the profit system were steadily re-introduced across Russia and Eastern Europe, bringing mass unemployment, crime, inflation and corruption with them.

In the battle with Stalin, most would say that Trotsky lost. Some bright sparks even believe that Trotsky must have been wrong, because if he had been right he would have won. These people should think carefully. If anyone who loses a struggle is automatically in the wrong, then justice is on the side of some of the worst dictators and tyrants in history.

But Trotsky’s critics are wrong in another, even more important sense. It was not socialism that collapsed in 1991. It was Stalinism. So when millions of young people see through the capitalist system over the years to come, they will turn not to the ideas that have failed, but the genuine ideas of Bolshevism, to the ideas that Leon Trotsky fought and died for: working class democracy, equality, and world revolution.

Thursday, June 23, 2011

Edward Michael Harrington

Taken from:

Michael Harrington (19281989) was one of the few writers who could claim to have affected business and economic history. Born at the beginning of the Great Depression, Harrington retained youthful memories of that difficult period, and by the time he was 33, he had written one of his more important works, The Other America (1962). His book spoke about the "invisible poor" living in America at a time when most Americans were busy celebrating the country's wealth. In speaking out on behalf of the poor, industrial rejects, migrant workers, minorities, and the aged, Harrington drew the attention of at least two presidents to focus on the legislative issues of poverty in America: President John F. Kennedy (19611963), and President Lyndon Johnson (19631969).
Harrington was born in St. Louis, Missouri, and grew up in a middle-class Irish-Catholic family whose political affiliations were with the Democratic Party. He was heavily influenced by his Jesuit teachers, who maintained that all people can become successful if they are only given a chance. In college Harrington was drawn to the political left and he became a socialist. Over the 30 years that followed he was one of the most eloquent voices of socialism in America.
Harrington lived his adult life as a self-described agitator and organizer. He worked as a political and social activist who tried to achieve the greatest benefits for the poorest Americans. His goal was to create greater economic justice for those who lived in poverty in America, the richest country in the world. In his first autobiography, Fragments of the Century, he expressed this view of socialism in capitalist America: "To be a socialist . . . is to make an act of faith, of love even, toward this land. It is to sense the seed beneath the snow; to see, beneath the veneer of corruption and meanness and the commercialization of human relationships, men and women capable of controlling their own destinies. To be a radical is, in the best and only decent sense of the word, patriotic."

Harrington spoke directly to American business, asking for the creation of a truly "good" society. He was a writer of books, a lecturer, and the co-chairman of the largest socialist organization in America, the Democratic Socialists. Harrington advocated working with the Democratic Party to achieve liberal economic and business reform. He felt gradual, liberal reform would bring about social justice in a capitalist economy, which he feared would become susceptible to revolutionary overthrow if economic justice for all was not a part of the American way. As a principled anti-Communist, Harrington sought to help create ongoing reform in the existing system that would lead to full employment, the abolition of poverty, and a national health care system.
A scholar, a man of religious principle, a political and economic socialist, Harrington helped forward the principles of progressivism and equality in the twentieth century. He was an idealist who fought throughout his life for social justice in America, who fought for socialist reforms, but who, in the end, died of cancer in 1989 in the midst of a conservative turn in American politics.


Contemporary Authors. Farmington Hills, MI: The Gale Group, 1999, s.v. "Harrington (Edward) Michael."
Fermain, Louis A. and Joyce Kornbluh, eds. Poverty in America: A Book of Readings. Ann Arbor: University of Michigan Press, 1965.
Harrington, Michael. Fragments of the Century: A Social Autobiography. New York: MacMillan, 1973.
Harrington, Michael. The Other America: Poverty in the United States. New York: MacMillan, 1965.
Howe, Irving and Michael Harrington. The Seventies: Problems and Proposals. New York: Harper & Rowe, 1972.
to be a socialist . . . is to sense the seed beneath the snow; to see, beneath the veneer of corruption and meanness and the commercialization of human relationships, men and women capable of controlling their own destinies.
edward harrington, fragments of the century, 1973


  • The Other America: Poverty in the United States. New York: Macmillan, 1962.
  • The Retail Clerks. New York: John Wiley, 1962.
  • The Accidental Century. New York: Macmillan, 1965.
  • The Social-Industrial Complex. New York: League for Industrial Democracy, 1968.
  • Toward a Democratic Left: A Radical Program for a New Majority. New York: Macmillan, 1968.
  • Socialism. New York: Saturday Review Press, 1972.
  • Fragments of the Century: A Social Autobiography. New York: Saturday Review Press, 1973.
  • Twilight of Capitalism. New York: Simon & Schuster, 1977.
  • The Vast Majority. New York: Simon & Schuster, 1977.
  • Tax Policy and the Economy: A Debate between Michael Harrington and Representative Jack Kemp, April 25, 1979. New York: Institute for Democratic Socialism, 1979.
  • Decade of Decision: The Crisis of the American System. New York: Touchstone, 1981.
  • The Next America: The Decline and Rise of the United States. New York: Touchstone, 1981.
  • The Politics at God's Funeral: The Spiritual Crisis of Western Civilization. New York: Henry Holt, 1983.
  • The New American Poverty. New York: Holt, Rinehart, Winston, 1984.
  • Taking Sides: The Education of a Militant Mind. New York: Holt, Rinehart, Winston, 1985.
  • The Next Left: The History of a Future. New York: Henry Holt, 1986.
  • The Long Distance Runner Henry Holt & Company, 1988 0805007903
  • Socialism: Past & Future. New York: Arcade Publishing, 1989.

From Hiroshima to Fukushima: The political background to the nuclear disaster in Japan

This article from the World Socialist Web Site discusses how the US military, the nuclear industry, and other corrupting influences misguided the Japanese people, which in turn helped Japan, one of the most earthquake prone countries in the world, to become the "third largest nuclear power nation".

By a guest contributor 
23 June 20
This is the first of a two-part article on the historical antecedents of the Fukushima nuclear disaster.
Following the Japanese earthquake and tsunami disaster of March 11, the meltdown of the nuclear reactor in Fukushima continues to alarm people all around the world. The world witnessed the events virtually live as one reactor building after another exploded and one of the planet’s most high-tech countries tried to quell the 770 000 terabecquerel (1) radioactivity unleashed from the meltdown with bucket and hose. Japan was desperate to convince the world that everything was under control.
Following the media reports from Japan, many people ask themselves why governments chose to gamble on nuclear power in such an earthquake-prone country—after the US and France, Japan is the world’s third largest nuclear power nation—and why the people of this land appeared to be so indifferent to the dangers of nuclear energy.
These are the questions we want to pursue.

Goldman Sachs, Credit Default Swaps, & Greece

John Stewart's Daily Show tells it like it is. I find it completely pathetic that a political spin-off comedy show has more journalistic worthiness than our so-called actual news channel sources, i.e., CNN & FOX. Thank you John Stewart for actually telling the American people the real story behind Goldman Sachs and credit default swaps. Hopefully one day people will wake up and realize that investment banks like Goldman Sachs need the heaviest of regulations, and will stop listening to Republicans and Democrats alike that continually say deregulating is whats best for Wall Street, Main Street, and the economy, because clearly it is not in the best interest of the American people, and for that matter any country, financially or environmentally.

Here is an article that reveals more on the deregulating of Wall Street. This article speaks in great detail of what happened and how it came about.

***PLEASE NOTE ***This article is from: World Socialist Web Site
Please click on the title links to view the web site and the posted article.

Clinton, Republicans agree to deregulation of US financial system

By Martin McLaughlin
1 November 1999
An agreement between the Clinton administration and congressional Republicans, reached during all-night negotiations which concluded in the early hours of October 22, sets the stage for passage of the most sweeping banking deregulation bill in American history, lifting virtually all restraints on the operation of the giant monopolies which dominate the financial system.
The proposed Financial Services Modernization Act of 1999 would do away with restrictions on the integration of banking, insurance and stock trading imposed by the Glass-Steagall Act of 1933, one of the central pillars of Roosevelt's New Deal. Under the old law, banks, brokerages and insurance companies were effectively barred from entering each others' industries, and investment banking and commercial banking were separated.
The certain result of repeal of Glass-Steagall will be a wave of mergers surpassing even the colossal combinations of the past several years. TheWall Street Journal wrote, "With the stroke of the president's pen, investment firms like Merrill Lynch & Co. and banks like Bank of America Corp., are expected to be on the prowl for acquisitions." The financial press predicted that the most likely mergers would come from big banks acquiring insurance companies, with John Hancock, Prudential and The Hartford all expected to be targeted.
Kenneth Guenther, executive vice president of Independent Community Bankers of America, an association of small rural banks which opposed the bill, warned, "This is going to begin a wave of major mergers and acquisitions in the financial-services industry. We're moving to an oligopolistic situation."
One such merger was already carried out well before the passage of the legislation, the $72 billion deal which brought together Citibank, the biggest New York bank, and Travelers Group Inc., the huge insurance and financial services conglomerate, which owns Salomon Smith Barney, a major brokerage. That merger was negotiated despite the fact that the merged company, Citigroup, was in violation of the Glass-Steagall Act, because billionaire Travelers boss Sanford Weill and Citibank CEO John Reed were confident of bipartisan support for repeal of the 60-year-old law.
Campaign of influence-buying
They had good reason, to be sure. The banking, insurance and brokerage industry lobbyists have combined their forces over the last five years to mount the best-financed campaign of influence-buying ever seen in Washington. In 1997 and 1998 alone, the three industries spent over $300 million on the effort: $58 million in campaign contributions to Democratic and Republican candidates, $87 million in "soft money" contributions to the Democratic and Republican parties, and $163 million on lobbying of elected officials.
The chairman of the Senate Banking Committee, Texas Republican Phil Gramm, himself collected more than $1.5 million in cash from the three industries during the last five years: $496,610 from the insurance industry, $760,404 from the securities industry and $407,956 from banks.
During the final hours of negotiations between the House-Senate conference committee and White House and Treasury officials, dozens of well-heeled lobbyists crowded the corridors outside the room where the final deal-making was going on. Edward Yingling, chief lobbyist for the American Bankers Association, told the New York Times, "If I had to guess, I would say it's probably the most heavily lobbied, most expensive issue" in a generation.
While Democratic and Republican congressmen and industry lobbyists claimed that deregulation would spark competition and improve services to consumers, the same claims have proven bogus in the case of telecommunications, airlines and other industries freed from federal regulations. Consumer groups noted that since the passage of a 1994 banking deregulation bill which permitted bank holding companies to operate in more than one state, both checking fees and ATM fees have risen sharply.
Differing versions of financial services deregulation passed the House and Senate earlier this year, and the conference committee was called to work out a consensus bill and avert a White House veto. The principal bone of contention in the last few days before the agreement had nothing to do with the central thrust of the bill, on which there was near-unanimous bipartisan support.
The sticking point was the effort by Gramm to gut the Community Reinvestment Act, a 1977 anti-redlining law which requires that banks make a certain proportion of their loans in minority and poor neighborhoods. Gramm blocked passage of a similar deregulation bill last year over demands to cripple the CRA, and bank lobbyists were in a panic, during the week before the deal was made, that the dispute would once again prevent any bill from being adopted.
Gramm and other extreme-right Republicans saw the opportunity to damage their political opponents among minority businessmen and community groups, who generally support the Democratic Party. Gramm succeeded in inserting two provisions to weaken the CRA, one reducing the frequency of examinations for CRA compliance to once every five years for smaller banks, the other compelling public disclosure of loans made under the program.
The latter provision was particularly offensive to black and other minority business and community groups, who have used the CRA provisions as a lever by threatening to challenge mergers and other bank operations which require government approval. In most such cases, the banks have offered loans to businessmen or outright grants to community groups in return for dropping their legal actions. These petty-bourgeois elements have been able to posture as defenders of the black or Hispanic community, while pocketing what are essentially payoffs from finance capital and concealing from the public the details of this relationship.
The banks and other financial institutions did not themselves oppose continuation of the CRA, which they have treated as nothing more than a cost of doing a highly profitable business in minority areas. Loans tied to the CRA average a 20 percent rate of return. Financial industry lobbyists complained that they were being caught in a crossfire between the Republicans and Democrats which was unrelated to the main purpose of the bill.
The Clinton White House threatened to veto the bill if CRA provisions were substantially weakened, in response to heavy pressure from the Congressional Black Caucus and the Reverend Jesse Jackson, whose Operation PUSH has made extensive use of CRA in its campaigns to pressure corporations and banks for more opportunities for black businessmen. But eventually the White House caved in to Gramm, accepting his amendments so long as the program remained formally in place.
The White House similarly retreated on pledges that consumer privacy would be protected in the legislation. Consumer groups pointed to the potential for abuse of financial information once giant conglomerates were created which would handle loans, investments and insurance at the same time. For example: a bank could refuse to give a 30-year mortgage to a customer whose medical records, filed with the bank's insurance subsidiary, revealed a fatal disease.
The final draft of the bill contains a consumer privacy protection clause, but it is extremely weak, applying only to the transfer of information outside of a financial conglomerate, not within it. Thus Citigroup will be able to pass on financial information about its bank depositors to Travelers Insurance, but not to an outside company like Prudential. Even that limitation would be breached if there was a contractual relationship with the outside company, as in the case of a telemarketer which did work for Citigroup and was given private information about Citigroup depositors to aid in its telephone solicitations.
Threat to financial stability
The proposed deregulation will increase the degree of monopolization in finance and worsen the position of consumers in relation to creditors. Even more significant is its impact on the overall stability of US and world capitalism. The bill ties the banking system and the insurance industry even more directly to the volatile US stock market, virtually guaranteeing that any significant plunge on Wall Street will have an immediate and catastrophic impact throughout the US financial system.
The Glass-Steagall Act of 1933, which the deregulation bill would repeal, was not adopted to protect consumers, although one of its most celebrated provisions was the establishment of the Federal Deposit Insurance Corporation, which guarantees bank deposits of up to $100,000. The law was enacted during the first 100 days of the Roosevelt administration to rescue a banking system which had collapsed, wiping out the life savings of millions of working people, and threatening to bring the profit system to a complete standstill.
As a recent history of that era notes: "The more than five thousand bank failures between the Crash and the New Deal's rescue operation in March 1933 wiped out some $7 billion in depositors' money. Accelerating foreclosures on defaulted home mortgages—150,000 homeowners lost their property in 1930, 200,000 in 1931, 250,000 in 1932—stripped millions of people of both shelter and life savings at a single stroke and menaced the balance sheets of thousands of surviving banks" (David Kennedy, Freedom from Fear, Oxford University Press, 1999, pp. 162-63).
The separation of banking and the stock exchange was ordered in response to revelations of the gross corruption and manipulation of the market by giant banking houses, above all the House of Morgan, which organized huge corporate mergers for its own profit and awarded preferential access to share issues to favored politicians and businessmen. Such insider trading played a major role in the speculative boom which preceded the 1929 crash.
Over the past 20 years the restrictions imposed by Glass-Steagall have been gradually relaxed under pressure from the banks, which sought more profitable outlets for their capital, especially in the booming stock market, and which complained that foreign competitors suffered no such limitations to their financial operations. In 1990 the Federal Reserve Board first permitted a bank (J.P. Morgan) to sell stock through a subsidiary, although stock market operations were limited to 10 percent of the company's total revenue. In 1996 this ceiling was lifted to 25 percent. Now it will be abolished.
The Wall Street Journal celebrated the agreement to end such restrictions with an editorial declaring that the banks had been unfairly scapegoated for the Great Depression. The headline of one Journal article detailing the impact of the proposed law declared, "Finally, 1929 Begins to Fade."
This comment underscores the greatest irony in the banking deregulation bill. Legislation first adopted to save American capitalism from the consequences of the 1929 Wall Street Crash is being abolished just at the point where the conditions are emerging for an even greater speculative financial collapse. The enormous volatility in the stock exchange in recent months has been accompanied by repeated warnings that stocks are grossly overvalued, with some computer and Internet stocks selling at prices 100 times earnings or even greater.
And there is a much more recent experience than 1929 to serve as a cautionary tale. A financial deregulation bill was passed in the early 1980s under the Reagan administration, lifting many restrictions on the activities of savings and loan associations, which had previously been limited primarily to the home-loan market. The result was an orgy of speculation, profiteering and outright plundering of assets, culminating in collapse and the biggest financial bailout in US history, costing the federal government more than $500 billion. The repetition of such events in the much larger banking and securities markets would be beyond the scope of any federal bailout.

Monday, June 20, 2011

How Goldman Secretly Bet on the U.S. Housing Crash

WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time.

"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."

Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.

A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.

DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.
Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.

To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.

McClatchy's inquiry found that Goldman Sachs:
  • Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
  • Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
  • Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.
  • Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.
The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group while in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.

These decisions preserved billions of dollars in value for Goldman's executives and shareholders. For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have lost more than $150 million if his firm had gone bankrupt.

With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By repaying $10 billion in direct federal bailout money — a 23 percent taxpayer return that exceeded federal officials' demand — the firm has escaped tough federal limits on 2009 bonuses to executives of firms that received bailout money.
Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.


For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated an elite reputation as home to the best and brightest and a tradition of urging its executives to take turns at public service.

As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson, as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008, and former Goldman employees populate some of the most demanding and powerful posts in Washington. Savvy federal regulators have migrated from their Washington jobs to Goldman.

On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement division.

Goldman's financial panache made its sales pitches irresistible to policymakers and investors alike, and may help explain why so few of them questioned the risky securities that Goldman sold off in a 14-month period that ended in February 2007.

Since the collapse of the economy, however, some of those investors have changed their opinions of Goldman.

Several pension funds, including Mississippi's Public Employees' Retirement System, have filed suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently made "false and misleading" representations of the bonds' true risks.

Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds of millions of dollars" on those and similar bonds.

Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."

California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.

In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.

Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate, cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office focused on investment banks because they provided a market for loans that mortgage lenders "knew or should have known were destined for failure."

New Orleans' public employees' retirement system, an electrical workers union and the New Jersey carpenters union also are suing Goldman and other Wall Street firms over their losses.

The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively paid $2 billion for Goldman's risky high-yield bonds.

Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70 million; and Allstate, $40.5 million, according to the data from the National Association of Insurance Commissioners.

In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million.

Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted most traditional lending criteria in favor of loans that required little or no documentation of borrowers' incomes or assets.

While Goldman was far from the biggest player in the risky mortgage securitization business, neither was it small.

From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.

In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007, Goldman marketed at least $17 billion more for others.

It also was the lead firm in marketing about $83 billion in complex securities, many of them backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished industry data by Gary Kopff, a securitization expert.

In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the U.S. they were marketed with lower grades.

Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because the borrowers had high credit scores.

Goldman's securities came in two varieties: those tied to subprime mortgages and those backed by a slightly higher grade of loans known as Alt-A's.

Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans, which began to rocket upward this year, are causing a new round of defaults.

Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference, avoiding any images of employees flashing wads of bonus cash at casinos.

More recently, the firm has launched a public relations campaign to answer the criticism of its huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that Goldman's activities serve "an important social purpose" by channeling pools of money held by pension funds and others to companies and governments around the world.


For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime game before getting burned.

New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told Congress that his researchers discovered by early 2006 that many subprime loans covered the homes' entire value, with no down payments, and so he figured that the bonds "would become worthless."

He soon began placing exotic bets — credit-default swaps — against the housing market. His firm, Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared in 2007 and 2008. (He isn't related to Henry Paulson.)

At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky mortgages, the first of multiple strategies it would employ to reduce its subprime risk.

The company has closely guarded the details of most of its swaps trades, except for $20 billion in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults or ratings downgrades on subprime-related securities it offered offshore.

In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman DuVally said.

Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling off its inventory of bonds and betting against those classes of securities in secretive swaps markets.

DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing or financial market conditions would become."

In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old subprime index on a private London swap exchange, said several Wall Street figures familiar with those dealings, who declined to be identified because the transactions were confidential.

The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5 billion, Viniar disclosed last spring.

As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September 2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included more than $8 billion to settle swaps contracts.

DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure its own subprime risks and to take positions against the housing market for its clients. Until the end of 2006, he said, Goldman was still betting on a strong housing market.

However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February 2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages after the December meeting, though DuVally declined to say when.


Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret wagers.
Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the company's mortgage business "has extensive barriers designed to keep information within its proper confines."

However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading, also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly resigned for personal reasons.

The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities from March 2006 to February 2007.

The firm maintains that the requirement doesn't apply in this case.

DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional Buyers, a class of sophisticated investors that are afforded fewer protections than small investors are under federal securities laws. He said Goldman made all the required disclosures about risks.

Whether companies are obliged to inform investors about such contrary trades, or "hedges," is "a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of San Diego law professor who specializes in securities. One issue is how specific companies must be in disclosing potential risks to investors, he said.

Coffee, the Columbia University law professor, said that any potential violations of securities laws would depend on what Goldman executives knew about the risks ahead.

"The critical moment when Goldman would have the highest liability and disclosure obligations is when they are serving as an underwriter on a registered public offering," he said. "If they are at the same time desperately seeking to get out of the field, that kind of bailout does look far more dubious than just trading activities."

Another question is whether, by keeping the trades secret, the company withheld material information that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a Duke University law professor who also has served on the NYSE advisory panel.

If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational investor would not only consider Goldman's conduct material, but likely compelling a decision to take a pass on the recommendation to purchase."

Cox said that existing laws, however, don't require sufficient disclosures about trading, and that the government would do well to plug that hole.

In marketing disclosures filed with the SEC regarding each pool of subprime bonds from 2001 to 2007, Goldman listed an array of risk factors that grew over time. Among them was the possibility of a pullback in overheated real estate markets, especially in California and Florida, where the most subprime loans had been made.

Suits filed by the pension funds, however, allege that Goldman made materially false or misleading statements in its public offerings, failing to disclose that many loans were based on inflated appraisals and were bought from firms with poor lending practices.

DuVally said that investors were fully informed of all known risks.

"What's going to happen in the next few years," said San Diego's Partnoy, "is there's going to be a lot of lawsuits and judges will have to decide, should Goldman have disclosed more or not?"

(Tish Wells contributed to this article.)

(This article is part of an occasional series on the problems in mortgage finance.)
Read more:

Goldman Sachs Pushes Back Against Senate Report As Commentators Flip

First Posted: 06/10/11 10:57 AM ET Updated: 06/10/11 12:31 PM ET
Article from: The Huffington Post
NEW YORK -- Goldman Sachs is quietly pushing back against accusations that it may have broken the law, as employees of the firm have met with a pair of famous financial commentators and helped convince them the "vampire squid" is actually a victim.
Nearly two months after a Senate panel released ascathing assessment of Goldman Sachs, referring the findings to the Justice Department for possible criminal prosecution, Goldman's PR machine appears to be in full, if covert, swing. This week, celebrity journalist Andrew Ross Sorkin and widely cited analyst Richard Bove each changed his mind about the firm after meeting with Goldman employees.
"I have completely changed my attitude about whether they did something wrong," Bove told The New York Times. "Goldman Sachs is the scapegoat of our time."
Bove, who had placed a "sell" rating on Goldman's stock and had loudly expressed his pessimistic views on the company, recently got some special assistance: Goldman walked with him through the report, the Times says.
And now he has apparently recanted, releasing a new note that opens: "It is becoming increasingly apparent that a terrible wrong may have been done to Goldman Sachs."
This reversal comes just days after a similar revelation from the editor of the Times' financial blog,DealBook. Sorkin had earlier questioned Goldman's integrity, in a column he links to in his latest post. But now, he says, his mind is changed. He, like Bove, apparently met with Goldman:
But upon further reporting -- talking with executives at Goldman, who pointed me to other documents, and with officials in Washington, and then poring through the report, following the footnotes to the original sources and then cross-referencing them against other public records -- I have come to a different and perhaps unsatisfying conclusion for those readers looking for a big scalp: Mr. Blankfein wasn’t lying.
The whopping 639-page Senate report on the financial crisis, stuffed with damning emails from financial players, accuses Goldman of profiting off a massive bet against the housing market, misleading clients to whom it sold the investments it was betting against.

Not only that, but executives also misled Congress when asked to explain their actions, alleged Sen. Carl Levin (D-Mich.), chair of the Senate Permanent Subcommittee on Investigations, which composed the report.
New York City prosecutors served the bank with subpoenas this month, demanding additional documents. The Manhattan district attorney joined the Justice Department and the Securities and Exchange Commission in investigating the firm, Reuters reported.
When the Senate report was released in April, Goldman put up a relatively rote defense. A Goldman spokesman said the firm's executives were truthful in their testimony, and added that the firm disagreed with many of the panel's conclusions.
But now, in meeting with prominent commentators, it appears the firm is attempting to dismantle the conclusions the report has drawn.
The key dispute is over the nature of the bank's "short" position on the housing market. In testimony before Congress, chief executive Lloyd Blankfein said the Goldman "didn't have a massive short against the housing market, and we certainly did not bet against our clients." The statement seemed contradicted by emails printed in the report, which repeatedly refer to the firm's "net short" position.
In a 2007 email, Goldman's chief financial officer David Viniar referred to other banks' suffering, writing, "[It] tells you what might be happening to people without the big short," according to the Senate report.
But the Senate panel got its numbers wrong, Sorkin says. Goldman's 2007 revenue was actually much larger than the Senate panel said, suggesting that the percentage gained from mortgage-related products was less than the Senate had made it seem, Sorkin concludes, citing a Goldman filing with the SEC.
Sorkin says he approached Robert L. Roach, a counsel and chief investigator for the Senate subcommittee. Sorkin says Roach told him, "We made a mistake," calling the error a "typo." Elsewhere in the report, the figure for the 2007 revenue is consistent with Sorkin's finding.
Sorkin's conclusion is that Goldman's bets against the housing market were effectively a hedge against losses, not a net position. Bove concurs.
"Evidence is now mounting that the company did not have a net short position at the crucial time under study," Bove says in his recent note.
But even in light of that evidence, Bove thinks Goldman's outlook isn't bright: he maintains his "sell" rating on the company's stock.