The Crash of 1929, and Goldman Sachs

Because I’m strange, I’ve been reading John Kenneth Galbraith’s The Age of Insecurity, from 1976. Galbraith turns a great phrase. But here’s what shocked me the most. Of course the dirty work of Goldman Sachs in the last decade is well-known yet lauded in terms of Big Washington Government promotion positions (and back again). But what was Goldman Sachs’ involvement in the original 1929 stock market crash and subsequent Depression?

It takes one much smarter and adept than I to comprehend all this stuff, but I thought you might find the following interesting (pg 208-209). Remember, this is written in 1976, not 2009 by Matt Taibbi. From a section entitled Everybody Ought to Be Rich:

“Most exciting of all were the holding companies and the investment trusts [in the very late 1920s]. Both were companies formed to invest in other companies. And the companies in which they invested, invested in yet other companies that, in turn, invested in yet others. The layers could be five or ten deep. Along the way bonds and preferred stock were sold. The resulting interest payments and preferred dividends took some of the earnings of the ultimate operating company; the remaining earnings came cascading back to the common stock still held by the promoters. Or this happened as long as the dividends of the ultimate companies were good and rising. When these fell, the bond interest and preferred stock soaked up all the revenues and more. Nothing was left to go upstream; the stock in the investment trusts and holding companies then went, often in a week, from wonderful to worthless. It was an eventuality that almost no one had foreseen.

Sound painfully familiar? Read the next line:

The metaphor for all these promotions was Goldman Sachs.

Yes, Goldman Sachs. I, too, couldn’t believe it when I read that.

There had been nothing like it since the South Sea Bubble; there would be nothing like it again until I.O.S. (Investors Overseas Service) and Bernie Cornfeld.”

Galbraith died before the crash/collapse of 2008—which was one hell of a ‘nothing like it again’ moment. Maybe the king of those moments, thus far.

“The golden age of Goldman Sachs was the nearly eleven months beginning December 4, 1928. On that day the Goldman Sachs Trading Corporation was formed. This was an investment trust with the function only of investing in other companies; $100 million of stock was issued, of which 90 percent was sold to the public. This was put in other stock selected in accordance with the superior insights of Goldman Sachs. In February, the Trading Corporation was merged with the Financial and Industrial Securities Corporation, another investment trust. Assets were now $235 million. In July the combined enterprises launched the Shenandoah Corporation. Preferred and common stocks to a total of $102.3 million were authorized, again for investment in other stock. The public share was oversubscribed sevenfold so yet more was issued. In August Shenandoah in turn launched the Blue Ridge Corporation—for $142 million. A few days later, back at the Trading Corporation [that being Goldman Sachs] $71.4 million more in securities was issued to buy another investment trust as well as a West Coast bank.

“Shenandoah, which had been issued at $17.50 and had risen to $36.00 eventually went down to fifty cents. This was quite a loss. The Trading Corporation did worse. In February 1929, aided by some purchase of itself, it had reached $222.50. Two years later it could be had for a dollar or two. “He took my fortune,” said one saddened commentator of his broker, “and ran it into a shoestring.” A principle in this vast expropriation—a director of both Shenandoah and Blue Ridge—was John Foster Dulles.[!] A more introspective man might have wondered. Dulles emerged with his faith in the capitalist system unshaken. We shall encounter him again.”

DARK THURSDAY

For Goldman Sachs, as for stocks in general, the day of reckoning was Thursday, October 24, 1929. [the crash].

This is where Galbraith goes wrong. Goldman Sachs and the rest are actually remarkably capable of avoiding any sort of day of reckoning. Indeed, they appear to gain and massively profit by these days of reckoning. One must tip a hat: this takes stunning skill, power and ruthlessness.

The following is hardly news. Nonetheless, a short and unverified list of Goldman Sachs Alumni in government, for all their good works. This from that bastion of conspiratorial thought, Time magazine, in 2009:

Among the biggest beneficiaries of the AIG pass-through, at $12.9 billion, was Goldman Sachs, the investment-banking house that has been the single largest supplier of financial talent to the government. Critics have been quick to note — and not favorably — the almost uncanny influence of former Goldman executives. Initial phases of the rescue were orchestrated by ex–Goldman chairman Hank Paulson, who was recruited as Treasury Secretary in part by former White House chief of staff and Goldman senior exec Josh Bolten. Goldman’s current boss, Lloyd Blankfein, was invited to participate in meetings with the Fed. AIG’s Liddy is a former Goldman director and an ex-CEO of Allstate. Another alum, Mark Patterson, once a Goldman lobbyist, serves as chief of staff at the Treasury, while Neel Kashkari, who runs TARP, was a Goldman vice president.

And, of course, Obama was well-supported by Goldman Sachs in his 2008 campaign. They were his largest or second largest contributor. History, indeed, is cyclical.

Share

2 Responses to “The Crash of 1929, and Goldman Sachs”

  1. Karen says:

    Hi Pete!

    How cute that in Mr. Galbraith’s text about events leading up to the 1929 crash, all the monetary amounts were in millions; amounts that wouldn’t make Wall Street look up from its collective desks (or screens). And Goldman Sachs is quite the little phoenix, no?

  2. Hey Karen!

    Great to hear from you. Yeah – as kids: “I want to be a millionaire!” Won’t even buy an average house in North Vancouver anymore. And Goldman Sachs, yeah. Maybe a Phoenix. I doubt they even went down. Either way, they keep ongoing, rewarded constantly for all of this. Nice work if you can get it.

    Pete

Leave a Reply