The Goldman Rule

The Goldman Rule

The Merkley-Levin amendment would stop investment banks from peddling securities they themselves are betting will fail.  Banks are mobilizing to defeat it, and a vote is expected any day now.


The approval of Senator Bernie Sanders’ amendment to audit the Fed is an important victory, and the 96-0 vote is something to celebrate and admire. The audit will show not only where the money flowed, but also potentially shed light on the conflicts of interest and incestuous relationships between Wall Street and the Fed that riddled those decisions.

But I’m inclined to agree with The Nation‘s William Greider who called the audit amendment a “free vote” since it was clearly going to pass—an easy way for conservative Senators to join authentic reform advocates like Sanders and portray themselves as “down with the people.”

Put it this way—who has constituents out there who are pro-bailout, pro-bank, and pro-Fed?

A far more difficult vote is expected any day now on an equally important amendment to the financial reform bill—one which will be much more revealing in terms of who is doing the people’s work and who is doing the banks’ bidding.

The Merkley-Levin amendment—introduced by Democratic Senators Jeff Merkley (OR) and Carl Levin (MI) and cosponsored by Sanders, among others—would rein in proprietary trading (i.e. subprime securities, derivatives) by “regular” banks; impose capital requirements on “systemically important” nonbanks (think Goldman, AIG, Morgan Stanley) so when their crappy bets don’t pan out we don’t have to pick up the tab; and prevent investment banks from betting against the very securities they peddle to their clients (call it “The Goldman Rule”).

Here is how the Senators’ press release describes key aspects of the legislation:

•         Bars banks, bank holding companies, and their affiliates and subsidiaries from engaging in high-risk speculation involving any stock, bond, option, commodity, derivative, or other security or financial instrument. Also bars those entities from investing in or sponsoring a hedge fund or private equity fund.

•         Requires massive, systemically-critical nonbank financial institutions (i.e., giant Wall Street investment houses whose failure will damage the banking system and access to credit) to set aside additional capital to decrease the risk posed by speculative trading. 

•         Prohibits conflicts of interest such as we saw when Goldman Sachs bet against the packages of securities they assembled and sold to their clients.

According to Senate staffers, the banks have mobilized against this amendment big time. A senior Dem aide told me “a movement is afoot to force us to meet a 60 vote-threshold” on the amendment. Of the previous 20 amendments, only one—Senator Durbin’s good provision on interchange fees—was forced to reach 60 votes rather than a simple majority.

“Wall Street is scared of this amendment and will bend or change the rules anyway necessary to stop it,” said the aide. “We are facing a 60-vote threshold because they don’t think they can win without stacking the deck.”

The aide said the latest word is that the vote will come in the next few days, and it would be great to not only call your Senators and demand that they support the Merkley-Levin amendment, but also to call Majority Leader Harry Reid and tell him you want an up or down vote—force the Republicans to filibuster. The vote is expected to be close. Let your Senators know that their vote on this will clarify for you whether they put the people or the banks first.

You can also check out Public Citizen’s whip count and report back on your calls to your Senators here.

Now, for your entertainment pleasure, your outrage, and your motivation to get involved in passing this amendment—in case you missed it, check out this ABRIDGED hearing transcript of Chairman Levin pressuring Goldman CEO Lloyd Blankfein to simply acknowledge that there is a conflict of interest between selling clients securities your own people call “crap”, and not disclosing that your firm is betting against—and will profit from—those very securities tanking. (You can watch the full exchange here by scrolling to the 6:30 mark.)

It’s really astounding. These people can’t be trusted—and the stakes here really can’t be overstated. Call your Senators today.

LEVIN: We’ve heard example after example where Goldman was selling securities to people and then not telling them that they were taking and intended to maintain a short position against those same securities. I’m deeply troubled by that. And it’s made worse when your own employees believe that those securities are "junk" or "a piece of crap" or "a shitty deal," words that those e-mails show your employees believed about a number of those deals. Do you think [your clients] know that you think something is a piece of crap when you sell it to them and then bet against it?   

BLANKFEIN: There were individual e-mails that were picked out and some people thought something. But I will tell you… 

LEVIN: I’m just asking you a question. Do you think, if your people think something is a piece of crap and go out and sell that and then your company bets against it, do you think that that deserves your trust?   

BLANKFEIN: The act of selling something is what gives us the opposite position of what the client has. The nature of the principal business and market making is that we are the other side of what our clients want to do. 

LEVIN: It’s not just that you sold something which obviously meant someone was buying it. There’s a seller and a buyer. That’s not what we’re talking about. We’re talking about betting against the very thing that you’re selling. Betting against it. Going short against it without disclosing that to that client.   Do you think people would buy securities from you if you said, "You know, we want you to know this. We’re betting against this very thing we’re selling to you.”… My question is is there not a conflict when you sell something to someone and then are determined to bet against that same security, and you don’t disclose that to the person you’re selling it to? Do you see a problem? 

BLANKFEIN: In the context of market making, that is not a conflict. What the clients are buying is they are buying an exposure. The thing that we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are. I don’t think our clients care or they should care. 

LEVIN: That you are betting against a security you’re selling to them? They don’t care?   You’re selling securities many of which are described as crap by your own sales force internally. And you don’t think that’s relevant to a client? 

BLANKFEIN: You know, we live in different context. And this is a professional—

LEVIN: Put this in the human context. 

BLANKFEIN: In the human context the markets work on transparency with respect to what the item is…. The people who were coming to us for a lift in the housing market wanted to have a security that gave them exposure to the housing market. And that’s what they got….

LEVIN: You don’t believe it’s relevant to a customer of yours that you are selling a security to—that you are betting against that same security? You just don’t think it’s relevant and needs to be disclosed. Is that the bottom line? 


LEVIN: …What do you think about selling securities which your own people think are crap? Does that bother you? 

BLANKFEIN: I think they would—again, it’s a hypothetical? 

LEVIN: No. This is real! We heard it today. “This is a shitty deal.” “This is crap.” 

BLANKFEIN: I think that the investors that we are dealing with on the long side or on the short side know what they want to acquire…. And as far as whether something is a weak security going bad, we are selling securities all the time that are weak. That we ourselves don’t like. It’s just a function of the price in the market….

LEVIN: We’re talking where you were the seller of the security, and you—Goldman Sachs—believes [it’s] a piece of crap…. And whether there’s not an obligation then to disclose to the people you’re selling to in that deal. "Hey, we, Goldman—we may be selling it to you, but we believe that this thing is going the other direction. We’re taking the short position." You don’t see any conflict in that? 

BLANKFEIN: My understanding is that that is disclosed. That we can have a short or a long position in those securities. 

LEVIN: And when you take a short position, do you think that should be disclosed? Where you’re betting against that same security yourself, do you think that ought—yes or no? Do you think it ought to be disclosed or not? 

BLANKFEIN: If somebody bought—as a market maker… 

LEVIN: No. Let’s just—just try my question. 

BLANKFEIN: All right. Have to be able to… 

LEVIN: No. Just try my question. Can a deal where you are selling securities, and you are intending to keep the short side of that deal, which is what happened here in a lot of these deals. Do you think you have an obligation to tell the person that you’re selling that security to in that deal that you are keeping the short position in that deal? That’s my question.  

BLANKFEIN: No. I don’t think we would disclose that…

LEVIN:. You’ve made a decision to bet against—to take the short side of a security that you’re selling. And you don’t think that there’s any moral obligation here? Put aside the legal obligation. You don’t think there’s an obligation to tell the person that you’re selling this to that you are betting against that security by maintaining a short position in it?

BLANKFEIN: I don’t think so…As a market maker we are buying from sellers and selling to buyers. 

LEVIN: But I’m saying you are selling to somebody and you are taking the opposite position. You are betting. You are going out and getting a default swap. You are betting against the very security that you are selling to that person. You don’t see any problem? You don’t see that you have to disclose? When you put together a deal, and you go looking for people to buy those securities. That just adds insult to injury when your people think it’s a pile of junk…. But the underlying injury is that you have determined that you are going to keep the opposite position from the security that you’re selling to someone. You just don’t see any obligation to disclose that?

BLANKFEIN: I don’t believe in a disclosure obligation.

LEVIN: Do [clients] have a belief at least when you’re going out peddling securities that you want that security to succeed? Don’t they have that right to assume that if you’re going out selling securities, that you have a belief that that’s something which would be good for that client? 

BLANKFEIN: I think we have to have a belief, and we do have a belief that if somebody wants an exposure to housing… 

LEVIN: You know what? You’re out there selling it to them. You’re out there selling these securities. This isn’t going to walk in [their] building… You’re picking up the phone. You’re calling all these people. You don’t tell them that you think it’s a piece of junk. You don’t tell them that this is a security which incorporates or which in some way references a whole lot of bad stuff in your own inventory—bad lemons I think the word was called. You’re out there looking around. Over and over again we have emails. You’re out there looking around for buyers of stuff….Where you are betting against what you’re selling. This isn’t where you’re just selling something from your inventory. This is where you are betting against the very product you are selling. And you’re just not troubled by it. That’s the bottom line. There’s no trouble in your mind or your heart. 

BLANKFEIN: I can’t endorse your characterization…  

LEVIN: It’s a question. Not a characterization. I’m saying you’re not troubled. 

BLANKFEIN: I’m not troubled by the fact that we market make as principle, and that we’re the opposite end. And when somebody sells, they sell to us. Or when they buy, they buy from us. 

LEVIN: And where you are betting—keeping a betting interest against the security. It’s not just they’re buying from you. That’s not my issue. They’re buying something from you where you solicit them to buy, and then you are betting against. You are keeping the short side. You are going out and getting a default swap. You are taking a position against the very security that you are selling. And you are not troubled?   And you want people to trust you?  

BLANKFEIN: Senator, I think people… 

LEVIN: Why would—I won’t trust you. If you came to me and wanted to sell me securities. And you didn’t tell me that you have a bet against that same security…  

BLANKFEIN: Senator… 

LEVIN: You think—you don’t think that affects my… I just got to keep repeating this. I’m not talking about generally in the market. I’m saying you got a short bet against that security. You don’t think the client would care? 

BLANKFEIN: I don’t. Senator, I can’t speak to what—what people would care. I would say that the obligations of a market maker are to make sure your clients are suitable and to make sure they understand it. 


BLANKFEIN: But we are a part of the market process. We do hundreds of thousands, if not millions of transactions a day as a market maker. 

LEVIN: This is much more than a market maker. You’re keeping a proprietary interest in a position that is exactly opposite of what you are selling. OK. We’re going round and round. 

BLANKFEIN: I think, Senator… 

LEVIN: We’re going round and round on this, and I don’t think we’re going to get an answer from you, basically, that you have any concern about that kind of a situation. 

Senator McCain?

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