How Goldman Sachs Stole Silicon Valley

Mar.30.12 | About: Goldman Sachs (GS)

The recent New York Times op-ed from former Goldman Sachs (GS) director Greg Smith paints the investment bank in a rather negative light. Smith basically says the firm profits from ripping off their clients -- from knowingly giving their clients sub-optimal results.

This might be worth considering when one observes that Goldman Sachs is now a major player in Silicon Valley, being one of the primary investors pushing Bubble 2.0. Goldman, along with DST and billion dollar VC funds like Andresseen Horowitz, Sequoia Capital, Kleiner Perkins, Accel, and Greylock, could be seen as the "smart money" driving the bull market in social media -- the force with the muscle and intent to push a market higher. It's worth noting that all of the aforementioned firms have at least one -- usually more than one -- staff member or special advisor who was previously on Goldman's payroll or had received significant fees from Goldman prior to joining the respective fund. With Goldman's influence so pervasive, and with Greg Smith's scathing op-ed, it may be worth considering the potential implications of what it means that Goldman bought these shares at a lower price than what the firm is now recommending their clients buy them at.

But the true kicker in the story of how Goldman stole Silicon Valley is in understanding where the firm gets its money from -- specifically where it got a not insignificant portion of the funds needed to purchase equity stakes in all the most promising Internet stocks at noteworthy valuations. The Financial Crisis Inquiry Commission, created by the US government to investigate the financial crisis of 2008, found that Goldman Sachs kept $2.9 billion of the money it was given for the AIG (NYSE:AIG) bailout as profit for its own speculative positions -- not those of its clients. Because this was for a speculative position in which Goldman put up $20 million from its own account, and received $2.9 billion from taxpayers when AIG failed, some have argued this money should be returned to US taxpayers.

So what did Goldman do with this money? Probably a lot of things, as the firm is involved in many types of businesses around the world. Though presumably, having an extra $2.9 billion is useful if you want to buy some Internet stocks at rather optimistic valuations. The infographic below puts this number in perspective.

(Click to enlarge)Click to enlarge
Image via InformedTrades

Now's probably a good time to include a reminder about how Goldman has an illustrious history of engineering bubbles. See this article.

So if you're in one of the stocks that's been pumped up by Goldman Sachs or Digital Sky Technologies -- and this includes Facebook (FB), Zynga (ZNGA), LinkedIn (LNKD), Groupon (GRPN), as well as many others in the pipeline -- watching the actions of Goldman and DST may be especially important. Once they exit their position, it might be time to book profits and move on. Follow the money. Or, if you believe, as I do, that a great systemic reset is coming, just stick to gold (PHYS).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long physical gold.