Gold News

Goldman Sachs Knows Its Own

AIG has earned $1.2 billion per Congressional insult so far. Time for vigilante justice...

"Kill them all. Surely the Lord will know his own."
   - Papal legate Arnaud-Amaury, leading the Albigensian Crusade of 1209, when asked what to do with the citizens of Beziers, a mixture of loyal Catholics and heretical Cathars.

TO MODERN EARS, the quote above seems horrifyingly cold-blooded, writes Eric Fry, reporting from Laguna Beach, California, for The Rude Awakening...

Perhaps it sounded a little outré to ancient French ears as well. Certainly, the idea of shooting first and only identifying enemies later does not mesh with our modern American sense of fairness and justice.

On the other hand, dispensing hundreds of billions of taxpayer dollars to the world's most incompetent companies does not square with our American sense of fairness either. Especially not when these incompetent companies distribute their bailout funds to other incompetent companies or to criminally negligent executives.

So maybe it's time to shoot first and ask questions later, metaphorically speaking of course. Maybe its time to kick AIG's pampered, self-serving executives to the curb, and let bare-fisted capitalism sort it out. The truly talented individuals at AIG would likely achieve future successes elsewhere. The rest would not.

So let's fire them all. Surely capitalism knows its own.

Alternatively, we could simply allow bankrupt firms to declare bankruptcy. A radical concept, perhaps, but one worth trying. Instead of bankruptcy, however, our elected officials have enabled AIG to pull off the greatest heist in US history – some $170 billion and counting.

By comparison, when the Reno Gang committed the Great Train Robbery of 1868 near Marshfield, Indiana, the outlaws netted only about $100,000 in gold and cash – or about 1.5 million of today's dollars.

Shortly after the robbery, the Pinkerton Detective Agency hunted down the outlaws – all ten of them – and brought them into custody. But the wheels of justice did not turn quickly enough to satisfy the locals. In three separate incidents, vigilante gangs kidnapped members of the Reno Gang from custody and lynched them. The final hangings occurred inside the jail that housed four members of the gang. Fifty hooded men swarmed the jail, dragged the four men from their cells, and whisked them into the

We Americans don't practice vigilante justice anymore. In fact, we don't practice justice at all if the criminal wears an Italian suit and lives in a zip code beginning with the digits "1-0-0". Instead, we haul them before Congress and hurl insults at them for an hour or two, then send them on their way. Our number-crunchers here at the Rude Awakening have calculated that AIG has received about $1.2 billion per Congressional insult.

But the judicial process is not the only thing that has changed since the Reno Gang was preying on Midwestern locomotives 140 years ago. For one thing, there are no trains to rob. For another, the best robbers never fire a shot. The bandits at AIG never even drew their six-shooters from their holsters. Instead, they relied on an "inside man" to get the job done. They called him "Hank", and each day for several years, he hitched up his pony at the hitching post reserved for "The Treasury Secretary".

Hank didn't know a six-shooter from a peashooter, but he had the fastest Thesaurus in the West (or East) – and that was more than enough to empty the pockets of his unsuspecting victims. Firing off phrases like "unacceptable systemic risk" and "international financial catastrophe", Hank's terrified victims would tremble uncontrollably until gold spilled from their pockets.

As far as we know, Hank never received a nickel of the booty. But he still received a huge payday. Until the day he dies, Hank Paulson will be a hero in the streets of Lower Manhattan, and a saint in the halls of Goldman Sachs.

Here's why:

If Paulson never threw $150 billion at AIG, AIG would never have thrown $12 billion at Goldman Sachs to settle various trades and derivatives positions. If Goldman never received those funds, or the tens of billions of other dollars that Paulson made available to his former partners through various emergency lending facilities, Goldman Sachs might have followed Lehman Bros. into investment banking heaven.

Goldman is not unique, of course, and such "counterfactual" guess-work must always remain precisely that – a guess. But Paulson's multi-syllabic thievery benefited lots of other bandits as well. And who knows? Maybe we are all better off maintaining a financial system run by bandits than letting it crumble away, only to await a new gang of bandits to build the next system.

In this particular instance, however, I believe we would prefer the devils we don't yet know. Could they be any worse than the ones who have led us to this place?

Fire them all. Surely capitalism knows its own.

Eric J.Fry has been a specialist in international equities since the early 1980s. A professional portfolio manager for more than 10 years, he wrote the first comprehensive guide to American Depositary Receipts, International Investing with ADRs. Today he reports on Wall Street from California for the renowned Daily Reckoning email service.

See full archive of Eric Fry articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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