Government by Banker

Dec 1, 2008

As the financial system and economy collapses, the federal government has pledged 7.2 trillion dollars to financial companies and banks in loans, investments and guarantees. This mind-boggling sum of taxpayer money represents more than double the entire federal budget, including Social Security, and almost half the entire U.S. economy.

Just as stupefying are the links between the few people who have been making the decisions about this taxpayer money. The recent massive bailout of Citigroup was worked out by three people: Treasury Secretary Henry Paulson, Timothy Geithner, the president of the Federal Reserve Bank of New York ... and Robert Rubin, who today sits on the board of that same Citigroup which got the money. The three of them made the decisions to inject 20 billion dollars of taxpayer money directly into Citigroup’s coffers, and to issue a U.S. government guarantee for 300 billion dollars of Citigroup’s bad debt.

“This is a small, close-knit world,” commented a professor from Georgetown University. That’s for sure! All three have longstanding ties in business and government. Both Paulson and Rubin had worked together at the same Wall Street investment bank, Goldman Sachs, and they both headed Goldman Sachs before they were appointed to head the U.S. Treasury (Rubin by Bill Clinton and Paulson by George W. Bush). Geithner worked for Rubin when Rubin was U.S. Treasury Secretary. And, as head of the New York Federal Reserve, Geithner brought over several high officials from the same company, Goldman Sachs, to fill important positions at the Fed.

These ties extend into the bowels of the government and Federal Reserve system. For example, Josh Bolten, Bush’s chief of staff, who chose Paulson to head the Treasury Department, used to work at Goldman Sachs. Paulson, in turn, staffed the Treasury Department with underlings from Goldman Sachs, starting with Neel Kashkari, who is in charge of administering the bailouts.

Decisions these people made when in the government benefitted Goldman Sachs. No surprise! In October, the federal government allowed one of Goldman Sachs’s main competitors, Lehman Brothers, to fail without a government bailout. Two days later, the U.S. Treasury and Federal Reserve stepped in to prop up and take over AIG, the insurance giant that was in the process of collapsing under a mountain of bad debt. AIG also happens to be the main trading partner with Goldman Sachs, and Goldman Sachs stood to lose tens of billions of dollars if AIG had gone broke. Paulson then appointed a former Goldman Sachs official to run AIG.

Some writers for the New York Times and Washington Post have suggested this is a conspiracy. No–it’s just the way the government is run. After all, Goldman Sachs is by far the biggest investment bank in the country with connections throughout the economy. Its size and influence in the financial world allows it to play a dominant role in the government.

The bigger and more dominant companies with the most government connections take advantage of the financial crisis to drive their competitors out of business, while buttressing their own position–with the backing of the full force and resources of the government.

Don’t expect this to change under the Obama administration. Goldman Sachs contributed more money to the Obama campaign than did any other company, $874,207, according to the Center for Responsive Politics. Obama’s new head of the Treasury Department will be the same Timothy Geithner, who has been so central to the bailout of Wall Street, and who had all those close ties to Goldman Sachs through Rubin and Paulson.