By Catherine Austin Fitts

It makes sense to pause in the outpouring of news about Goldman Sachs to ponder what has happened and the nature of the game that is afoot.

Goldman is the visible target in a game of economic warfare. Who is on the other side is not clear. For want of a better term, let’s call the other party “Mr. Global.”

Mr. Global has arranged for Goldman to be “swarmed” – attacked or threatened with attack by multiple parties, including government agencies, the media and private players, including competitors. Presumably, Mr. Global has serious private and governmental intelligence capabilities and resources. However, Goldman Sachs does too.

We watched the Chairman and CEO Lloyd Blankfein yesterday confirm in testimony on the record that reform was needed, which included passing the financial services reform bill put forward in the Senate by Senator Dodd.  We can presume that Mr. Global has made it clear to Goldman that unless they get on board with promoting the bill that things will not go well for them.

So Goldman came to heel in a big way. They sat down, thumped their tail on the floor and licked the hand that feeds them. And they did it in the most public way as all the financial markets watched. Their stock is up this morning. They bought some breathing space. How much is not yet clear.

What could make Goldman sit down and obey? Was it the lawsuit from the SEC? Perhaps. We think it is more than that. Let’s look at where the real terror struck.

First, we have a Goldman director resign over an investigation related to insider trading. What’s the media message? Goldman Sachs directors engage in insider trading.

Then, we have the SEC file a civil fraud complaint against Goldman. What’s the media message? Goldman risks losing insider status. Goldman sc**ws their clients. Goldman’s stock is losing you money. Shareholders lose money. Bondholders could too. If you do business with Goldman Sachs, that could lose you money too. You might go on Mr. Global’s hit list now if you support one of his targets instead of benefiting from inside information by doing business with a player in Mr. Global’s good graces.  Note also that the stock options of board and management drop in value. Maybe working at Goldman is not such a good deal. If you are a young officer and push for fees, will they protect you? Look at what is happening to the young VP who got named in the lawsuit.

Then, it comes out that Goldman got a Wells Notice in the summer of 2009 from the SEC regarding the allegations in the fraud suit and never disclosed that in their SEC filings. Very significant tactical error on Goldman’s part, by the way.

Meantime, we have investigations or the threats of the same announced by other sovereign governments and state Attorney Generals. The German State bank severs ties. This is generally called “pile on” and indicates that Mr. Global’s reach is global at the highest levels.

And then, it just happens to come out in the media that there are questions about whether the Board knew about the Wells notice. You see, if they did not, then they are not competent. They are not watching the store. If they did, well, then they are hiding things that shareholders should have known.

And then, last Friday, two shareholders bring lawsuits against the CEO and the Board of Directors.

And then, it comes out that between the time that Goldman got the Wells notice and before the time that the SEC brought suit and the stock dropped a whole lot, members of the Board of Directors sold millions of dollars of stock.

And to make things even better, the Senate dumps out tons of e-mails related to the lawsuit that are full of juicy quotes. Since the Senate is also doing an investigation, they are free to lobby the media in support of the SEC’s side of the lawsuit. This is a nice pincer movement.

Sullivan & Cromwell, Goldman’s lead counsel, has its hands full. Subpoena discovery to the SEC, to the Senate, to the UK and other foreign government investigators, now to private parties. And some are leaking to the press. If there is one difference in the subpoena compliance to different parties, there could be questions about obstruction of justice. This could get pretty complicated. Enough of it, particularly if discovery shifts into current events, and you can wreck havoc with electronic e-mail systems.

Do you see a story emerging here?

Now the Board has a reason to get nervous. It is not just the company that is a target. Board members are targets. Sullivan & Cromwell is representing Goldman. Are they deemed to represent the members of the board as well? Have individual board members decided that they need their own counsel individually or collectively? What happens to them if the company fails? If the swarm continues, driving up their cost of capital, causing a loss of clients and revenues, who knows what could happen.

Then, of course, there is the unstated dread that Mr. Global has the SEC or another investigating government agency say those two game changing words to a media outlet, “criminal allegations.”

Not everyone on the Board is as rich as the senior management. Goldman Sachs may have a lot of resources. The individual Board members cannot be assured that Goldman Sachs will stand behind them, particularly if their interests are not aligned with senior management, or if the company goes down.

Mr. Global has laid down the tracks to put space between the board members and management and the largest shareholders. Non-alignments within your leadership group are a dangerous thing to manage when you are in the middle of a food fight with Mr. Global.

Which brings us to wonder who is Goldman’s errors & omissions (E&O) insurer.

The Board of Directors looks to the E&O insurer to pay for their legal defense in the event of lawsuits. However, an E&O insurer can claim that they don’t have to fund a defense if there is fraud involved. And indeed, fraud as a legal matter may not be involved. However, Mr. Global’s arranging for a governmental agency to claim that fraud is involved may be enough to derail the funding of a defense by the E&O insurer.

Who is the E&O insurer the Board is depending upon? (Bloomberg/Business Week indicates it may be AIG. If that is a case, there could be some very interesting twists to this story) Are they funding counsel and does that include counsel other than Sullivan & Cromwell? These are more questions worth asking.

Beyond legal defense, the intimation from Mr. Global is that now the media may turn to explore Board members’ dirty laundry – whether the policies involving their work and career, where their profits come from or their personal problems and mistakes. We all have them.

For example, perhaps the media would be interested in how Jim Johnson got the housing bubble going as Chairman of Fannie Mae and how that relates to Goldman’s profits in the mortgage markets. How about a discussion of Ruth Brown’s magnificent job of deflecting criticism about the sources of funds in Brown University’s endowment? Indeed, it was Brown University that made money on prison stocks that were the beneficiaries of the drug raids that accompanied the subprime mortgage frauds that Fannie Mae and Goldman Sachs financed. (See “Brown University – Cashing Out on Cornell Corrections” here)

Given what we have seen so far, it is a fair to say that Mr. Global’s intelligence capacity includes a “control file” on each member of management and the Board. Which means this Board is not in a position to have and does not have the constitution for a real fight.

So, we had quite a show yesterday in Senate Testimony with the CEO kissing the ring, supporting the reform bill and showing no offense at the hypocrisy of Congress. (Among other things, Lloyd Blankfein deserves more than a little recognition for keeping a straight face when it was suggested that Goldman aspire to the ethical standards of Jackson Stephens of Stephens, Inc. of Arkansas.)

If the reform bill is adopted into law as proposed, it will make the Federal Reserve much more powerful. Goldman Sachs is a member (and presumably shareholder) of the Federal Reserve Bank of New York, the most powerful bank in the system. The New York Fed serves as depository for the U.S. government and as agent for the Exchange Stabilization Fund, the mother of all slush funds. Mr. Global apparently wants to make sure a more powerful Fed does not have to contend with a more arrogant Goldman Sachs. As the Fed accumulates even more power, are the forces in control at the Fed shifting?

America is learning quite a lot from watching the show. More on that later.

Round One is over. Let’s see what emerges in Round Two.

Related Listening:

Catherine Austin Fitts – Goldman Whac-A-Mole
FlashPoint

Related Reading:

GS&Co-SEC Talk Settlement

Thumbing Down on Blankfein

Goldman Sachs Said to Be in Talks to Hire Law Firm Paul, Weiss
Bloomberg.com (3 May 10)

Goldman Shows It Can Still Lobby Hard
The Wall Street Journal (29 April 10)

Pricing Goldman Allegations

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