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Sat 1 Nov 2008 04:00 AM

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It’s good to be the king

S&P down 30 percent. Shanghai's stock exchange down 60%. Russia's down 65 percent. DAX down 35 percent. DFM down 40 percent. Yes, it is good to be the king. Just ask Mr. Paulson and Goldman Sachs.

S&P down 30 percent. Shanghai's stock exchange down 60%. Russia's down 65 percent. DAX down 35 percent. DFM down 40 percent. Yes, it is good to be the king. Just ask Mr. Paulson and Goldman Sachs.

The global meltdown we are witnessing is nothing short of catastrophic, but the question is not whether it could have been predicted. Nor is the question whether anyone will be punished for his role in it. The question is: did anyone make a killing out of it?

Before we look at the main question, let's quickly answer the first two questions.

Could it have been predicted?

Yes! If you accept the premise that companies are greedy and they set the rules to allow themselves to capitalise on their greed, then this question becomes rhetorical. Funny how the people who shouted the loudest to repeal the Glass-Steagall act in 1999, which blocked commercial banks from buying brokerages and insurance companies, are now saying we didn't know this would happen.

For the people with short memories: when in the 1980's Roland Reagan fought to allow Savings and Loans (S&Ls) in the US to act like banks, the result was that the system collapsed in 1987, with the Dow experiencing its biggest one day drop one frightening Monday in October, that year.

Greed got the better of good sense. Every Savings and Loans was indicted with an act of criminality. Every single one had a case of fraud to answer. It took about four years and a Gulf war under Bush Sr. to help the US out of its economic malaise.

And let's not forget Bush Sr. was Vice president for 8 years under President Reagan. Now we see under Bush Jr. the same thing happening again. How could it not, when commercial banks are allowed to own brokerages, insurance companies and the like?

The conflict of interest, coupled with greed, is too great. Under such circumstances, it seems ridiculous to ask if this could have been predicted.

Will the people who caused this crash be punished?

No! Not if history is anything to go by; the people who pocketed the most will hardly pay anything back. Look again at the Savings and Loans scandal of the 1980s, you will notice that an armed bank robber, on average, got a longer prison term than the Savings and Loans CEOs convicted of fraud. Do you really believe that times have changed?

Today, not one of the CEOs of the banks that brought on the global economic collapse have even apologised for their greed. The CEO of Lehman Brothers has said that he accepts responsibility for his firm's collapse. So what does that mean for him? Good PR, or will he serve time for all the lives he has ruined?

Will anyone benefit from this collapse?

How loyal should one be to a company that, over the years, has lined one's own pocket with $400+ million? Should one go out of his or her way to continue to make them stratospherically rich?

This is the conundrum facing Mr. Paulson and Goldman Sachs. When the crash began, Mr. Paulson could have saved Lehman Brothers, like Bear Stearns, by finding a buyer for it. Instead, he allowed it to go bust. Score one for Goldman Sachs, who lost a major competitor. Then, as AIG came running to the US government for a bail out, what did Mr. Paulson do?

He guaranteed them a safety line via Goldman Sachs and JP Morgan, to the tune of over $80 billion. Under the terms of the proposed deal, Goldman Sachs stood to make a profit from future transaction fees that AIG would have had to pay, but which the US government would have funded. Unfortunately for Paulson, the two banks could not pull the deal off, and so it fell back to the US Government to fund the bill directly.

Now that the $700 billion bailout package has been signed, guess who will run the administration of the bailout? The answer is Mr. Kashkari. You might ask who Mr. Kashkari is? Why, he is an ex-Goldman Sachs employee who was hand picked by Mr. Paulson.

Now, not only have Goldman Sachs taken over the Treasury, but Mr. Paulson has ensured that even after his departure, Goldman Sachs will have a considerable influence not only over the US economy, but also the global one, too. Let's not forget, while we're on the subject, that the US government has allowed Goldman Sachs to transmogrify from an investment bank into a proper bank.

This means that they now not only get government protection, but can also deal in financial vehicles that were previously not within their remit. Simply, this means more money in their pockets.

While we can decry all the bad that has happened in the global markets - and we might even argue that Goldman Sachs has lost a lot of money in the short run - the fact remains that Goldman Sachs has played the situation very skilfully, and is now positioned to reap big rewards when the markets correct themselves.

All I can say is that it must be good to be king.

This article represents the author's opinion and no one else's.

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