How Close Are WS And Washington?

Just How Close Are Wall Street And Washington?

By John.Crudele@NYPost.Com | 18 December 2008

We now know how Bernie Madoff invested so profitably. Will we ever know how Goldman Sachs worked its magic? I'm not suggesting that Goldman did anything akin to what Madoff allegedly pulled off— an astounding pyramid scheme that may have cost investors $50 billion and hopefully will turn out to be the grand finale for all that was evil with the investing world over the last decade.

Nope, Goldman is a perfectly legit firm that just happened to have astounding results when all the other firms in its industry were gasping for air. It has been, in fact, the envy of Wall Street for the longest time. And Goldman has a perfectly reasonable answer for its winning streak, which it has been willing to share with anyone who asked: its people were just better than anyone else at 'understanding' trends, particularly that the mortgage market was about to implode.

But, as I've mentioned in this column many times before, Goldman also happens to be incredibly well connected in Washington. This is no secret. Not only was present Treasury Secretary, Hank Paulson, once the chairman of Goldman, but so too was Robert Rubin, who served in that role in the Clinton administration and went on to Citigroup.

Goldman alums, in fact, are sprinkled throughout high levels of government. And I'm sure that these folks are the most honest people Wall Street has ever known. They are, no doubt, a national treasure. Yet, there are lingering questions that the Bush administration, and Paulson in particular, need to answer before they leave office and are sucked into that profitable world of book writing, lecturing and board sitting.

During an interview on CNBC on Aug. 21, 2007, for instance, Paulson said, "I think it's my job to talk regularly with market participants, but also talk regularly to key regulators and make sure that we are seeing the same issues, the same problems and working towards the same solutions." Fine, the Treasury secretary is allowed to talk with regulators all he wants. But, as I asked back then, what did Paulson mean when he said that he was talking with "market participants?"

Did that mean he might have been conveying— even accidentally— sensitive information to people who could profit from it? Maybe even with people from his old firm? And did he really think this was his "job" as Treasury secretary? In particular, I asked whether Paulson felt it was necessary to share information with market participants about an impending interest-rate cut— the first in this series— that he may have learned about during a lunch with Federal Reserve Chairman Ben Bernanke on Aug. 16.

The stock market erased most of a 300-point loss that day. And that was back when reversals of that magnitude were unheard of and big drops were far from ordinary. A long time ago, The Post requested the minutes of meetings held by the President's Working Group on Financial Markets [[aka, the 'Plunge Protection Team' or 'PPT': normxxx]], a secretive team that Paulson headed and often spoke of before the last election.

Since the new president was picked, however, there have been hardly any references to the Working Group even though the financial crisis has been intensifying. We've gotten nothing in response to our requests. Goldman [reported] a huge quarterly deficit today. And I'm sorry for its loss.

But I wouldn't be doing my job unless I asked again: What were the connections between Washington, Wall Street firms and Goldman in particular, during the last decade? If journalists and regulators had asked more questions back then maybe some of this shocking stuff wouldn't be happening today.

The Federal Reserve [met] today and all I can say is: Forget the interest rate cuts.

Ben Bernanke's gang [was] expected to reduce the federal funds rate by 0.50% to 0.75% [it was actually 0% - 0.25%]. The Fed, of course, [surprised] the financial markets.

But the funds rate— at which banks lend to each other— is already [effectively] near zero [it was already at the 0% - 0.25% rate, in fact] and has been for some time. This rate is irrelevant anyway since any bank that needs money only has to ask Washington. The problem with cutting interest rates— and this will be the 10th time in little over two years— is that the policy is having unintended consequences, as well as being ineffective.

The dollar has been declining in value since mid-November. [[Not undesirable from BB & Company's point of view.: normxxx]]

The Fed has been engaging in a frightening policy of money printing. And if that isn't enough to scare off foreign investors, the losses created outside this country by Bernie Madoff's alleged pyramid scheme certainly will. As I've been warning for a long time, foreigners could decide that investing in the US is just too risky. And then interest rates here will climb rapidly [[unless, of course, BB and Company start buying LT USTs hand over fist, as he has "threatened" to do!: normxxx]]