How the vampire squid is controlling our lives: They helped cause the crash. Then profited from it. Now, from the Bank of England to the Fed, ex-Goldman Sachs chiefs are pulling the levers of power
Amid the recent management shake-up at the top of the Bank of England, as it was dragged into the investigation of the alleged fixing of the £3 trillion-a-day foreign-exchange markets, one crucial appointment went almost unnoticed.
While public attention was understandably focused on an Egyptian-born mother of twins becoming only the second female deputy governor of the bank, the far more influential appointment was that of economist Ben Broadbent.
As the new deputy governor for monetary policy, he is now the predominant voice on the future direction of interest rates.
Influential: Ben Broadbent, the Bank of England's new deputy governor for monetary policy, who spent a decade during the boom-and-bust years as senior economist at Goldman Sachs
His work will have a huge effect on the lives of the British people, for he will have a key role in deciding when the record five years of super-low mortgage rates will end — a decision that will inevitably lead to home-owners facing considerably bigger monthly bills.
But there is one crucial fact that should concern us about the Cambridge and Harvard-educated Broadbent: he spent a decade during the boom-and-bust years as the senior economist at the global headquarters of the investment bank Goldman Sachs.
He joins an elite few who hold senior positions in the world’s most powerful central banks — from London to New York, Frankfurt and beyond — and all of whom come from this one company, which was controversially described by Rolling Stone magazine as ‘a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money’.
The fact that so many alumni of the world’s most profitable — as well as most ruthless and cunning — investment bank wield such a level of influence in these central banks is nothing short of remarkable.
Because Goldman Sachs is an institution that, as I will explain, not only helped cause the financial crisis in 2008, but also profited from it — hugely enriching its own staff while leaving a trail of chaos for taxpayers to clear up.
Do we really want one of the most controversial financial institutions on the planet, which was eventually fined a record £343 million for shamelessly misleading investors during the crisis, to have so many of its ex-staff holding the levers of power in the City of London?
What makes the choice of Broadbent an issue of major public concern is that his period at Goldman saw the New York investment firm deeply embroiled in some of the most shocking financial scandals of recent years.
First, there was the crisis triggered by the sub-prime mortgage disaster, when vast quantities of loans were made by U.S. banks to homeowners who could never pay them back.
This reached disaster point in 2007-8, once the loans had been sold on by banks and institutions around the world — by which time they had been packaged up as financial instruments or ‘derivatives’ so complicated that no one could tell how toxic they were.
Goldman Sachs played a key part in inventing these poisonous derivatives, which were a major factor in triggering the financial crisis.
But even more morally offensive was that once people finally began to realise how dangerous these derivatives were, Goldman Sachs started making money by speculating in the market that they would collapse in value.
So not only did the bank help create the crisis, it also profited from it.
'God's work': Goldman Sachs fast-talking CEO Lloyd Blankfein stunned the world last year when he offensively boasted - amid his banks return to fat profits - that that's what he and his employees were doing
It was the same Goldman Sachs that, during the financial crisis in 2008, when, like all financial institutions, its shares were falling, accepted a $10 billion bailout from the U.S. government.
Handily, many of its former staff — such as Hank Paulson, who was then U.S. Treasury Secretary — happened to be in key posts in the government when the decision was made.
Then there is the fact that Goldman Sachs reportedly arranged with the Right-wing Greek government to present the national accounts in the best possible light so that Greece could join the Eurozone in 2001. The bank was subsequently involved in elaborate schemes that masked the true horror of the country’s public debt crisis, which saw Greece having to be bailed out by the EU and left in economic ruins.
Despite this, Goldman bosses were able to pick up $111 million in bonuses soon afterwards, which were understandably branded an outrage as they were awarded during the worst recession for 80 years — one that had mainly been caused by irresponsible bank behaviour.
'A vampire squid wrapped around the face of humanity, jamming its blood funnel into anything that smells like money' - Matt Taibbi in Rolling Stone
Influence in high places, though, did not stop Goldman from being heavily fined by the Wall Street regulator, the Securities & Exchange Commission (SEC), in 2010 for selling dodgy complex securities, based on sub-prime mortgages, to clients including the hapless Royal Bank of Scotland.
What makes the behaviour of Goldman Sachs so shameless is the arrogance with which it has sought to protect its reputation and the claims its bosses like to make for its integrity.
The group’s chairman and chief executive, the smiling and fast-talking former trader Lloyd Blankfein, stunned everyone last year when he offensively boasted — amid Goldman’s return to fat profits — that the bank was doing ‘God’s work’.
Perhaps it is this arrogance that enables former Goldman executives, such as Ben Broadbent at the Bank of England, to rise ineffably to the very top jobs in international finance.
With the approval of Chancellor George Osborne, 49-year-old Broadbent was plucked from his relatively obscure role as an external member of the Bank of England’s Monetary Policy Committee and promoted over the head of the Old Lady’s best and brightest internal prospects.
His elevation to the top economic role at Britain’s central bank means he will now be making the crucial interest rate, inflation and growth forecasts for the Bank’s quarterly Inflation Report — on which key decisions are made that affect millions of people.
Broadbent’s promotion must have seemed the most natural thing in the world to the Bank of England’s Canadian governor Mark Carney.
Carney, after all, is himself an Old Goldmanite and a member of the most exclusive club in world economic policy-making — much more influential than David Cameron’s kitchen cabinet of Old Etonians.
Carney spent the largest stretch of his career — from 1990 to 2003 — working for Goldman Sachs in Tokyo, New York and London.
Alumni: Bank of England Governor Mark Carney, spent the longest stretch of his career working at Goldman Sachs. The chairman of the European Central Bank, Mario Draghi is another former Goldman Sachs banker
The choice of Goldman bankers for senior roles at the Bank of England is a novel development for an institution that has always frowned on any suggestions of dual loyalty or conflicts of interest.
When Gordon Brown was Chancellor (from 1997 to 2007), he steadfastly refused to appoint the person many regarded as the most talented economist of his generation, Gavyn Davies, as governor of the Bank of England.
Brown feared a political backlash because of Davies’s role as the millionaire chief global economist at Goldman Sachs, and the fact that his wife, Sue Nye, was a special assistant to the Chancellor.
However, despite 13 years in a variety of roles at Goldman, and a successful stint as governor of the Bank of Canada, Carney was given not only the Bank of England role but also the job of chairman of the Financial Stability Board.
This is the body established by the G20 committee of rich and emerging market nations to try to reform global banking — including the rapacious bonus culture — in the aftermath of the 2007-9 credit crunch.
Indeed, Old Goldmanites seem to be everywhere. When Broadbent and Carney meet fellow central bankers, there will be a number of familiar faces around the table.
The chairman of the European Central Bank, Mario Draghi, who is credited with rescuing Euroland from total implosion with his promise to do ‘whatever it takes’ to save the euro, is another former Goldman Sachs banker.
Arguably, he is the most powerful figure in European finance, having forced Euroland interest rates down to rock-bottom levels and bought the government bonds of Europe’s struggling ‘Club Med’ economies before exchanging them for cash. He is now trying to tackle Europe’s near-bankrupt banking system.
|The Goldman Sachs booth at the NYSE: The banks culture of ever-more complex securities and trades was at the core of the financial crisis|
In the U.S., there is the amiable Bill Dudley, the former head of U.S. economics at Goldman, who is now president of the Federal Reserve Bank of New York, the operating arm of America’s central bank.
Goldman boss Lloyd Blankfein once explained to me that one of the advantages of paying Goldman Sachs’s bankers so lavishly — they sit at the top of the bankers’ pay league — was that the ‘partners’ can retire young and very rich, and then go off to jobs in the public service.
There is, however, a deeply disturbing paradox in the fact that Goldman bankers are now effectively running the world’s monetary system.
The Goldman culture of creating ever-more complex securities and trades, coupled with absurdly high pay and bonuses as incentives for the bank’s workforce, were at the very core of the financial crisis that brought the world to the brink of economic collapse and led to a long period of painful austerity.
None of these former Goldman economists and executives, who are now the overlords of the global economy, seems to have predicted the fact that the world was sitting on a financial time-bomb.
It seems very strange that when there are so many talented economic thinkers, Nobel prize winners and lifelong central bankers to be called upon, it is nearly always Goldmanites that carry off the plum jobs.
Allowing such a cultish group to control the levers of global finance shows, I would suggest, a worrying lack of imagination and judgment by the ruling class of politicians that appointed them.
The concentration of such huge economic power in the hands of a small cabal of economists and financiers, drawn from such a narrow pool of interests, is deeply unhealthy.
However honourable the motives of this group, there remains a fear that when the next crisis comes — as it inevitably will — their concern to protect their cronies in the banking world will take precedence over their responsibility to look after the long-suffering public.