Web Extra: Read an Excerpt of David Stockman's New Book

Not surprisingly, the Goldman Sachs "occupation" of the US Treasury coincided almost exactly with the Fed's embrace of financialization, leverage, and speculation as crucial tools of monetary management. Its legates in Washington during this era, Robert Rubin and Hank Paulson, never once agonized over violating free market rules. They simply assumed that the good of the nation depended upon keeping the Wall Street game up and running.

Nor did the Goldmanites have even the foggiest appreciation of why the old fashioned guardians of the public purse, like Bill Simon, had been so resolutely anti-bailout. To his great credit, Simon appreciated the insidious effects of bad precedent and rightly feared that once the floodgate was opened crony capitalism would flourish. He also understood that every crisis would be portrayed as a one-time exception and that once officials started chasing market-driven brush fires, the policy process would quickly degenerate into analytics-free, seat-of-the-pants ad hocery and would frequently even border on lawlessness.

In fact, that is exactly what happened in the signature bailout episodes during Goldman's occupation of the Treasury. The $20 billion bailout of the Wall Street banks during the 1994 Mexican peso crisis orchestrated by Secretary Rubin was not only unnecessary, but was done against overwhelming opposition on Capitol Hill. In the end, the American taxpayer was thrown into the breach by Treasury lawyers who tortured an ancient statute governing the Economic Stabilization Fund until it coughed up billions for a bailout of Mexico and its Wall Street lenders. In so doing, Rubin simply thumbed his nose at Congress, implying that the greater good of Wall Street trumped the democratic process.

Likewise, the entire Paulson-led campaign to bail out Wall Street during the September 2008 crisis was an exercise in pushing the limits of existing law to the breaking point. Lehman was not bailed out mainly because Washington officials had not yet found a loophole by the time of its Sunday-night filing. But as the crescendo of panic intensified, the Treasury and Fed miraculously found enough legal daylight by Tuesday to rescue AIG.

Throughout the ordeal Paulson and his posse viewed themselves as glorified investment bankers, empowered to use any expedient of law and any drain on the public purse that might be needed to ensure the survival of the remaining Wall Street firms. Rampaging around the globe and browbeating bankers and governments alike on behalf of their half-baked merger schemes, they defiled the great office of US Treasury Secretary like never before.

GOLDMAN AND MORGAN STANLEY: THE LAST TWO PREDATORS STANDING This was a blatant miscarriage of governance. As will be seen, at that late stage of the delirious financial bubble which had overtaken America, Goldman Sachs and Morgan Stanley had essentially become economic predators. Their bankruptcy would have resulted in no measureable harm to the Main Street economy, and possibly some gain. It would have also brought the curtains down on a generation of Wall Street speculators, and sent them packing in disgrace and amid massive personal losses—the only possible way to end the current repugnant régime of crony capitalist domination of the nation's central bank.

Goldman and Morgan Stanley helped generate and distribute hundreds of billions in toxic assets—mortgage-backed securities and CDOs based on subprime mortgages—that were now resident on the balance sheets of a wide gamut of Main Street institutions like corporate pension funds and insurance companies, along with institutional investors spread all over the planet. The TARP and Federal Reserve funds that were pumped into Goldman and Morgan Stanley, however, did nothing to ameliorate the huge losses being incurred by these gullible customers.

Instead, the Washington bailouts rescued the perpetrators, not the victims; that is, the bailout benefits were captured almost exclusively by the Wall Street insiders and fund managers who owned the common stock and long-term bonds of these two firms. Yet it was these punters who deserved to take punishing losses. It was they who enabled Goldman and Morgan Stanley—along with Bear Stearns, Lehman, and the investment banks embedded inside Citigroup and JPMorgan—to grow into giant, reckless predators.

As will be seen in chapter 20, only twenty-five years earlier these firms had been undercapitalized white-shoe advisory houses with balance sheets which were tiny and benign, but now their designation as "investment banks" reflected an entirely vestigial nomenclature. They had long ago morphed into giant ultra-leveraged hedge funds which happened to have retained relatively small-beer side operations in regulated securities underwriting and M&A advisory services.

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