The Goldman-Paulson fraud suit threatens to throw a spotlight on a realm of Wall Street that has escaped most scrutiny throughout the financial crisis: the hedge fund industry. Top hedge fund managers profit from Wall Street’s business model of fraud and collusion more than any CEO at the big banks, but tend to evade accountability because of the opacity of their industry and their extraordinary power.

One such hedge fund manager is Richard Perry. Perry, a former Goldman Sachs trader, became known as one of the subprime winners in 2007 — one of the hedge fund managers who saw the crisis coming, and placed profitable bets that the housing market would collapse. Perry reportedly shorted $3 billion in subprime-related securities, netting a $1 billion profit on the trade.

Around the same time, in late 2006 and 2007, Perry’s hedge fund, Perry Corp, began buying up shares in a certain financial management company that had a close business relationship with Goldman Sachs. His stake grew from 5% to 8% (around $30 million in early 2007), to the point where Perry Corp was disclosed as a major shareholder in the company in the prospectus for one CDO put together by Goldman in August 2007.

That company: ACA Capital, the same firm wrapped up in the Goldman Sachs-John Paulson CDO deal that the SEC has deemed fraudulent.

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It wasn’t my intention, launching LittleSis with Kevin in January 2009, to be so consistently absent from our blog. Early on we made the decision to divide up our growing organizational responsibilities, with Kevin taking on research, writing, and outreach — the activity that keeps LittleSis fresh — while I focused on adding to our website’s features and fixing bugs. Division of labor is a notoriously double-edged sword, and while it’s arguably helped our productivity it’s made it hard for me to write anything but PHP and SQL. Now that our urgent web development needs have dwindled, I’m feeling ready for a return the mean streets of sentences and paragraphs.

Today politics nerds have been scrambling to outdo each other digging up old archival videos now available on C-SPAN’s new Video Library. Naturally I went fishing for a juicy Larry Summers clip, and quickly found one from September 11, 1989 called The Politics of Message: Economics, part of a conference of Democratic Party leaders. The purpose of this event, as far as I can tell, was to gather key corporate Democrats — including Summers, Robert Rubin, Roger Altman, and Laura Tyson — to present economic talking points for the re-branded business-friendly party that Clinton brought back to power three years later, landing Summers, Rubin, Altman, and Tyson with top-level positions in the administration, where they put their theories to practice. Their collective influence in economic policy remains huge in the Obama administration. (Not that they don’t have some conflicting views or interests.)

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With the Geithner “wunderkind” and Summers “socratic genius” brands badly damaged, Obama faces pressure from a broad and growing spectrum to find new front men for his economic policy team.  This was in evidence last week when Paul Volcker and Austan Goolsbee were trucked in from oblivion to champion Obama’s new bank reform agenda.

Volcker and Goolsbee, though they’re only marginally more progressive than Geithner and Summers, present a serious threat to the power network behind Obama’s “bankers bonanza” economic policies.  Whereas Summers and Geithner owe their public lives to Robert Rubin–the man behind the curtain in Obama’s first year–Volcker and Goolsbee owe him relatively little, which is presumably why they were banished in the first place.  Establishing Volcker and Goolsbee more prominently in the White House coterie would present the first major threat to the Rubin axis in the West Wing, which, in addition to Summers and Geithner, includes administration insiders Peter Orszag, Michael Froman and Jason Furman.

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The front page of the New York Times says it all this morning: “The treasury secretary told a House panel that failure to provide A.I.G. with the $85 billion bailout would have been “catastrophic” for the economy.” Both Paulson and Geithner also defended their actions with the old warning about the imminence of a “second Great Depression.”

As I noted yesterday, Geithner is also telling us that a failed Bernanke confirmation effort would have catastrophic consequences for financial markets. Geithner and other Wall Street policy elites are old hands at this: they’ve used the same rationale for every massive financial bailout of the past generation, from the Mexican bailout to Long Term Capital Management to AIG.

Notably, they’ve used the same excuse to argue against financial regulation. When Brooksley Born wanted to regulate derivatives, Summers, Rubin, and Greenspan told her that she was going to cause a financial crisis. Of course, the opposite was true: they didn’t regulate derivatives, and it caused a massive financial crisis.

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Ben Bernanke’s supporters are warning that a Senate vote against the Fed chair will send financial markets tumbling.  Tim Geithner recently chimed in by telling Politico that markets would find a no vote “very troubling,” before saying that he was confident Bernanke would be reconfirmed. 

Geithner’s chief mentor, Robert Rubin, deployed the very same argument about Enron. Rubin, then a top executive at Citigroup, made an 11th hour call to the Treasury Department as part of a campaign by Enron and its creditors to stave off a looming ratings downgrade. The call was later criticized as an improper use of the former Treasury Secretary’s influence, but Rubin defended his actions, saying that he thought an Enron collapse would imperil world energy markets.

The financial apocalypse trick has been turned many times by Wall Street’s policy elites, but the Rubin example is especially apt today: the high-level campaign to avert Enron’s ratings downgrade in 2001 appears to have been coordinated by the same Federal Reserve official lobbying for Ben Bernanke’s reappointment.

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Matt Taibbi includes a devastating analysis of the role that Robert Rubin has played in shaping this young administration in his latest piece for Rolling Stone, Obama’s Big Sellout:

Despite being perhaps more responsible for last year’s crash than any other single living person — his colossally stupid decisions at both the highest levels of government and the management of a private financial superpower make him unique — Rubin was the man Barack Obama chose to build his White House around.

There are four main ways to be connected to Bob Rubin: through Goldman Sachs, the Clinton administration, Citigroup and, finally, the Hamilton Project, a think tank Rubin spearheaded under the auspices of the Brookings Institute to promote his philosophy of balanced budgets, free trade and financial deregulation. The team Obama put in place to run his economic policy after his inauguration was dominated by people who boasted connections to at least one of these four institutions — so much so that the White House now looks like a backstage party for an episode of Bob Rubin, This Is Your Life!

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While the American economy sank, Citigroup put US taxpayer money to work helping to sustain the Dubai bubble.  In December 2008, just weeks after Citigroup needed a second government bailout on top of the $25 billion it received through TARP, the bank made an $8 billion loan to Dubai.  It is believed to have $1.9 billion in exposure currently.

One year before the bank’s loan to Dubai, in November 2007, Citi and Robert Rubin were being congratulated by Wall Street for securing a 4.9% investment from Abu Dhabi (the capital of the UAE). Some saw through the buzz:

Investors seem delighted that Abu Dhabi is injecting $7.5 billion into Citigroup, bidding up stocks in general on new confidence that the mortgage solvency crisis might ease. We hate to spoil the party, but it strikes us as unfortunate, if not a tragedy, that America’s largest bank had to go hat in hand to Arab sheiks because of bad management and blundering U.S. monetary policy.

The Citi play is being spun as a master-stroke by Robert Rubin, the chairman of the bank’s executive committee.

Abu Dhabi stepped in at a crucial moment for Citi, then saw much of its investment vanish. Though their stake was carefully designed to avoid regulatory scrutiny (coming in at just below 5%), they clearly had no small amount of leverage over Citi.

Was Citigroup returning the favor to the UAE by lending to Dubai last year?

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It should be no surprise that State Dept nominee Robert Hormats and Robert Rubin are well-acquainted, both Bobs having served their country at Goldman Sachs during the eighties. During the nineties, when Rubin was in the Clinton administration, they were a sort of Washington-Wall Street tandem, consistently agreeing on what was best for global financial markets. Hormats would appear on cable TV saying what his old boss should do, Rubin would oblige, and Hormats would lavish praise on him. So Rubin’s fingerprints are all over an Obama pick, once again.

Hormats’s homages to Rubin appear to have been part of the vast Wall Street conspiracy to portray Rubin as public-minded policy god, despite his smug, frat boy bearing. At times, these words of praise have been completely over-the-top. Here are some highlights.

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While Goldman Sachs‘ managing partners prepare their lists for Fifth Avenue shopping sprees on bonus day, the firm’s public relations department is grappling with an image problem that has some staying power. Goldman’s record profiteering at a time of chronic unemployment and systemic crisis along with Matt Taibbi’s superb article on Goldman’s role in market manipulation and the high-profile arrest of former Goldman programmer Sergey Aleynikov, who allegedly downloaded Goldman code that can be used to manipulate markets (who knew?), have conspired to create a perfect storm of populist backlash directed at the firm.

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To paraphrase Paul Krugman, it looks like the zombies have won. Insolvent banks continue to roam the earth, sucking up unfathomable sums of taxpayer capital, provided to hedge fund intermediaries as nonrecourse loans. The scheme is designed to create inflated “auction” prices by incentivizing investors to over-bid on assets which carry almost no downside risk – for them, that is.

Geithner, Summers and company test-marketed the plan with friends and former colleagues on Wall Street thoroughly over the past month to find the formula that would send high finance into the fits of ecstasy we witnessed on Monday. Hedge fund directors were among Treasury’s most coveted focus groups.

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