William D. Cohan is skeptical of Greg Smith’s claim that he only recently discovered that Goldman Sachs put its own interests ahead of its clients. Goldman, Cohan says, has a 143 year history of duping clients, and Smith, if he is to be believed, just did not use his Stanford education to check the publicly available facts. (“Goldman Sach’s long history of duping its clients,” Washington Post).
One major example of Goldman’s treachery, according to Cohan, that might have been overlooked by Smith, involved the 1970 bankruptcy of Penn Central Railroad. Goldman underwrote its commercial paper and sold it to its clients as safe. After Penn filed for bankruptcy, Goldman continued to sell Penn’s commercial paper to clients at 100 cents on the dollar, knowing that Penn was rapidly running out of cash. These clients were some of Goldman’s original “muppets,” Cohan wrote.
By virtue of its inside position as an underwriter, Goldman knew Penn’s true dismal financial situation. Goldman, then a partnership, had $10 million of Penn’s paper on its books ? 20 percent of the partners’ capital. Goldman partners demanded that Penn buy it all back at par but did not make a similar demand for its customers, nor did Goldman tell them that it had taken care of itself while leaving them holding the bag.
The clients sued Goldman. “Incredibly, Goldman thought it could win the lawsuits and allowed [some of] them to go to trial.” Goldman faced $80 million in claims with only $50 million to cover them. “There was real fear that the liability for the Penn Central lawsuits could put the firm under,” former Goldman partner and Clinton Treasury Secretary Robert Rubin told Cohan. By a combination of luck, insurance money and settlements, Goldman hung on and became what it is today.
Cohan concluded: “Anyone who watched the 11-hour evisceration of Goldman’s top executives by Sen. Carl Levin’s Permanent Subcommittee on Investigations in April 2010 will immediately recognize similar greed and self-dealing in the Penn Central incident as in the months leading up to the 2008 financial crisis, when Goldman made a huge bet against the mortgage market in December 2006 ? netting the firm $4 billion in profit ? while it continued to sell mortgage-backed securities to its customers at 100 cents on the dollar. Only the amounts were different: millions at stake in the 1970s vs. billions in 2007.”