The “Goldman Conspiracy” is the perfect B-School case study of Wall Street’s secret contagious pathology, with insiders like Blankfein, Paulson and others pocketing billions more of the firm’s profits than shareholders, evidence the new “mutant capitalism” has replaced Adam Smith’s 1776 version which historically endowed the soul of American democracy as well as our capitalistic system. But sadly for America, Goldman’s disease is rapidly becoming a pandemic spreading beyond Wall Street’s “too-greedy-to-fail” banks, infecting our economy, markets and government, as it metastasizes globally.

What are the symptoms of this growing “soul-sickness,” this “pathological mutation of capitalism” Bogle fears? Recently we reviewed the consequences of this “soul-sickness.” Several months ago we collected and paraphrase news reports about fifteen symptoms spreading “soul-sickness” further beyond the boundaries of this Goldman case study, and reform failures prove the disease is speading: These are the 15 signs of a moral pathology undermining not just banking, but American democracy and capitalism.

1. Gross denial of any moral damage caused by their rampant greed
Seeking Alpha: ‘Goldman is America’s most hated corporation. We cheer as Rolling Stone’s Matt Taibbi calls Goldman “a giant vampire squid wrapped around the face of humanity.” Banks triggered a global crisis. Main Street suffers. Greedy bank CEOs raid the Treasury then stuff $30 billion in their bonus pockets, up 60% from last year.’ They are our 21st century General Motors, convinced ‘What’s good for Goldman is good for America.’ We saw how that arrogance ended. Wall Street has similar suicidal symptoms.

2. Narcissistic egomaniacs with secret “God complexes”
London Times’ John Arlidge interviewed Goldman CEO Blankfein: ‘He paid himself $68m in 2007, now worth more than $500 million, yet insists he’s a blue-collar guy. He says banking has a ‘social purpose,’ just a banker ‘doing God’s work’.’ When I was at Morgan Stanley in the seventies the firm ran an ad: “If God Wanted To Do a Financing, He Would Call Morgan Stanley.” Today, all of Wall Street is dual diagnosed: They’re morally blind money addicts who believe they’re “God’s chosen.” AA would say: They haven’t “bottomed,” won’t recover from their disease till a disaster hits, with another market meltdown and the “Great Depression 2.” Then maybe they’ll “quit playing God.”

3. Paranoid obsessives about secrecy, guilt and non-disclosure
Bloomberg: “New York Fed’s Secret Deal: Taxpayers paid $13 billion more than necessary when government officials, acting in secret, made deals with banks on AIG, buying $62 billion of credit-default swaps from AIG. The government would eventually cover about $180 billion in AIG swaps backing toxic CDOs when Paulson and Bernanke double-teamed to bailout Goldman, saving them from bankruptcy.

4. Power-hungry need to control government using “Trojan Horses”
Wall Street Journal: ‘For a year Goldman said it wouldn’t have suffered damage if AIG collapsed. But a new report throws kills that claim. TARP inspector general found that then New York Fed Chair Geithner gave away the farm. If AIG had collapsed, Goldman would have had to cover the losses itself. They couldn’t collect on the protection of AIG swaps.’ Yes, Goldman was bankrupt. But ‘friends in high places’ always save them.

5. Borderline personalities who regularly ignore “conflicts of interest”
New York Times: ‘Before becoming Treasury secretary in 2006, Hank Paulson agreed to hold himself to a higher ethical standard than his predecessors. He specifically said he’d avoid his old buddies at Goldman where he was CEO. Later Congress saw many conflicts of interest, not just meetings but favorable treatment for his buddies at Goldman.’

6. Pathological liars incapable of honesty even with own investors
McClatchy News: “Goldman secretly bet on the U.S. housing crash after peddling more than $40 billion securities backed by 200,000 risky home mortgages. But they never told their investors they were also secretly betting that a drop in housing prices could wipe out the value of those securities.’ Paulson knew, stayed silent. ‘Only later their investors discover Goldman’s triple-A investments were junk. Did Goldman’s failure to disclose its bets on an imminent housing crash violated securities laws?’ BU Professor Kotlikoff says: This is fraud, should be prosecuted.’ But won’t in the new “mutant capitalism.” Members of AA say you know when an alcoholic is lying: Their lips are moving. Same with Wall Street: Think Liar’s Poker. It’s in their DNA. They’re compulsive liars trapped in a culture of secrecy. They lie, the lies cascade, memory slips, more lies are necessary, they cannot stop lying. Goldman sure can’t … look, their lips are moving again.

7. Sole fiduciary duty to insiders, not investors, never the public
NY Examiner: ‘Goldman was at the heart of the sub-prime market, selling sub-prime junk as no-risk AAA bonds, then gambling, hedging, shorting their investors. Goldman traded like Enron. That set up the meltdown. The Fed and Goldman’s ex-CEO at Treasury saved Goldman. Taxpayers got stuck with the bill. McClatchy’s Gordon uncovered Moody’s making billions selling triple-A ratings. Bailout overseer Elizabeth Warren called this reckless gambling. Trend forecaster Gerald Celente calls it mafia-style looting.’

8. Moral issues are mere PR glitches, violations of “don’t get caught” rule
USAToday says ‘Goldman Sachs should be celebrating. Yet, the mood at the investment bank seems to be one of crisis about the public backlash over employees’ bonuses. So Goldman’s on a PR blitz in a bid to undo the damage. They canceled their Christmas party. Also launched a $500 million program for small businesses. Get it? They can’t see their moral failings, only a PR problem, so they hire PR agents and crisis managers first.

9. Charitable donations are tax and PR opportunities, not moral issues
New York Times: Examined Goldman charitable foundation’s tax filing: ‘Thick as a phone book with more than 200 pages of trades. ‘Never seen anything like it,” said Verne Sedlacek, president of Commonfund, a $25 billion fund for universities and nonprofits. The money to Goldman’s foundation is dwarfed by insiders’ bonuses. The foundation got $400 million, gave away $22 million.’ Bonuses were 20 times more. Even the New York Post said ‘Goldman’s Born Again Image is Laughable.” They’re sleaze-ball cheapskates.

10. When exposed in a massive fraud, feign humility, fake an apology
CBS MoneyWatch: ‘Blankfein now says he’s “sorry for the role Goldman played in the housing crisis: We participated in things that were clearly wrong.” “Wrong?” Sounds more like he’s admitting to something “clearly criminal.” Reread: Isn’t he admitting guilt to a fraud; cheating millions of homeowners, shareholders, taxpayers? Then laughs at us with phony “restitution,” a fund of $100 million annually for five years to small business owners.’ Financial Times says ‘$100 million is the profits from one good trading day. In 3Q’09 they had 36 days better than that.’ Unfortunately, these crooks will get away it.

11. When bankruptcy threatens, bribe friends in “Happy Conspiracy”
Barron’s: While Geithner was ‘showcasing what a great investment Washington made in Goldman the 23% return on the $5 billion of the taxpayers money. Buffett’s deal made him a fabulous 120% return. Goldman’s stock ran up to $180 from $115, a gain of $2.8 billion. Add 8% discount on warrants, another $3.2 billion to him.”

12. Engage co-conspirators to cover-up, distract, do your dirty work
Reuters: ‘Former Merrill Lynch CEO John Thain was fired after a scandal over the billions Merrill bonuses. He says big insider bonuses don’t cause excessive risk-taking nor the financial crisis.’ He blames ‘poor risk management, excessive leverage and too much liquidity for too long. But even if they tie bonuses to long-term performance, that won’t prevent the next collapse.’ Why? They’ll find new ways to break the moral code.

13. As money-hungry vultures they will prey on vulnerable Americans
McClatchy News: ‘An obscure Goldman subsidiary spent years buying hundreds of thousands of subprime mortgages, many from the more unsavory lenders. They repackaged them as high-yield bonds. The bottom fell out. Now, after years of refusing to disclose they owned the mortgages, the secret is out and Goldman has become one of America’s biggest, greediest foreclosers.’ Yes, the vampire squid wants pounds-of-flesh.

14. Treat everyone not in the “Happy Conspiracy” with “tough love”
HuffPost’s Leo Leopold warns: ‘Each day reveals how we’ve traded away our sense of decency and the common good in exchange for pure greed. Unemployment means hunger. The Agriculture Department reports 49 million Americans don’t have enough food, up 13 million over the last year, highest number ever.’ Wall Street treats anyone not in the “Happy Conspiracy” as morally-defective capitalists in need of “tough love.”

15. Addicts consumed by money: “Jesus would throw them out …”
New York Times’ Maureen Dowd: ‘Goldman’s trickle-down catechism isn’t working. We have two economies. In the past decade Wall Street’s shared little with society. Their culture is totally money-obsessed. There’s always room for a bigger house, bigger boat. If not, you’re falling behind. It’s an addiction. And Washington’s done little to quell it. Geithner coddles wanton bankers. Obama’s absent. Saturday Night Live was tougher. And as far as doing God’s work: The bankers who took taxpayer money, pocketing obscene bonuses: They’re the same greedy types Jesus threw out of the temple.’

Question. Warning: Washington, Main Street, none of us has “clean hands.” We’re all in bed with the “Happy Conspiracy,” touched by greed, turning a blind eye to Wall Street’s rapidly metasticizing moral and spiritual pathology: So ask yourself, do you believe America’s widespread “lack of a moral compass” will eventually trigger another, bigger market and economic meltdown, pushing America into the next “Great Depression II?”

first pub: MarketWatch 11’09

The false and misleading promises of neuroeconomics
But so far, the works aimed at helping Main Street investors have approached the world of behavioral finance with one core assumption: If you, the investor,simply become more aware of your irrational behavior, apply some simple psychological rules, minimize that self-sabotaging behaviors, and act “less irrational,” then you will be able to beat The Street, beat the market, beat the averages … become a winning investor and get rich. The thrust of these earlier behavioral finance books is simple: A little education on behavioral psychology, a lot of self-discipline and that good old American “can-do” spirit! The implication is, of course, that if you, or any other of America’s 95 million Main Street investors study hard, understand and practice the basic tools these experts teach, you will be reborn “less irrational” and fully capable of “outwitting the markets.”

Unfortunately, you can’t fix an irrational mind using the brain’s own “flawed rationality”—certainly not against an enemy — Wall Street’s Happy Conspiracy — that’s doing everything it possibly can to keep Main Street investors ‘irrational and woefully uninformed,’ which is a clearly stated goal of behavioral finance psychologists and quant mathematicians now working for Wall Street. Seriously, ask yourself: Can Main Street investors ever “fix” their brains, make themselves more rational and beat Wall Street? The correct answer is “no,” but that’s not the real problem with behavioral finance.

Main Street will never win a head-on battle against Wall Street
The press, media and pundits all operate from the false assumption that Wall Street and Main Street are fighting this war on a level battlefield, equipped with equally powerful weaponry—and that if the Main Street investor just studied hard, understood and applied some apparently rational tools to his irrational thought processes, he will become a winning market investor. Sorry folks, but that is pure fiction. In a head-to-head battle, this psych-ops war is a total mismatch—what the military refers to as “asymmetric warfare”— a disaster for Main Street, like walking the streets of Baghdad alone.

Forced to fight ill-equipped and alone, the average investor doesn’t have a chance against Wall Street’s overwhelming firepower and organization. It’s not a fair fight. Wall Street has a 100:1 advantage in weapons, strategies and the ability to control the odds. Main Street, on the other hand, has no allies and no armies fighting on its behalf. We are fighting solo, armed with muskets against the Wall Street War Machine with its equivalent of stealth bombers, bunker busters, Apache GunShips, NightVision, satellite-guided cruise missiles and more. But … if Main Street doesn’t get suckered into fighting Wall Street on Wall Street’s terms, indeed, doesn’t fight Wall Street at all … the rules of engagement, and the chances of beating Wall Street increase.

You cannot “fix” an irrational mind with “rational tools”
Unfortunately, the media, press and behavioral finance experts continue reinforcing the old strategies, rules and tools that keep the Wall Street War Machine in business—by supporting the illusion that if all those 95 million “little guys” investing all over Main Street America just got a little “less irrational,” a little more disciplined, they could overcome the handicaps of their irrational and woefully uninformed minds and win.

That’s the wrong approach—it doesn’t work folks! Never will work. Investors rationality is not the problem. Even if Main Street investors do increase their rational powers, they will still lose. They can never win against Wall Street playing by Wall Street rules of engagement in an asymmetrical war. Main Street will keep on losing as long as they play at Wall Street’s casino by Wall Street’s rules because Wall Street controls the odds and is defended by heavily-armed “guards,” the quants and their amazingly sophisticated high-tech weaponry.

In short, it’s time to stop kidding ourselves and look at the Wall Street Psych-ops War Machine for what it is, this huge federation of 25 loosely-connected organizations bound by the motto that “Greed is Good” and by the “Iron Law of Wall Street.” They will use various elements of these behavioral finance principles to manipulate, control and dominate Main Street Americans, and take advantage of them. And they are doing it one at a time, like snipers picking off unsuspecting targets on the streets of Baghdad.

The outdated conventional wisdom of behavioral finance
If you want more of the conventional thinking on behavioral finance in America today, you are encouraged to review these books, many of which we’ve reviewed on DowJones/MarketWatch.com over the years. Read them, you may learn a lot about yourself and your enemies, but keep in mind that they are actually giving false hope to individual investors—by keeping alive Wall Street’s outdated and delusional theory of the “rational investor,” including the Taleb’s books, the Black Swan and Fooled By Randomness:

• The Black Swan. Nassim Nicholas Taleb (NYU professor of mathematical finance)
• Investment Madness. John Nofsinger (Washington State University finance professor)
• Capital Ideas Evolving. Peter Bernstein (Wall Street risk management guru)
• The Myth of the Rational Markets. Justin Fox Fortune/Time columnist)
• Mean Markets and Lizard Brains. Terry Burnham (Harvard University economics professor)
• Predictably Irrational. Daniel Ariely (MIT behavioral economics professor)
• Your Money and Your Brain. Jason Zweig (Wall Street Journal columnist)
• Animal Spirits. George Akerlof & Robert Shiller (Yale University professors)
• Train Your Mind, Change Your Brain. Sharon Begley (Time science columnist)
• Investor Therapy. Richard Geist (Harvard University Medical School)
• Beyond Greed & Fear. Hersh Shefrin (Santa Clara University professor)
• Mind Over Money. John Schott, M.D. (Harvard Medical School psychiatrist; money manager)
• The Owner’s Manual for the Brain: Pierce Howard (Center for Applied Cognitive Studies)
• American Mania. Peter Whybrow (UCLA Professor of Psychiatry)
• The Advertised Mind, Eirk de Plessis (Market Research executive)
• Advances in Behavioral Finance, vol. II, Richard Thaler, ed. (University of Chicago)

The behavioral finance principles that follow are not the only ones, but from a practical point they just happen to be ten often popping up in the press that appear to work most successfully for—and are exploited by—Wall Street’s War Machine in its relentless and secretive battles to control the mind of the American Investor. There are exceptions, but these will help you round out your understanding of how Wall Street controls your mind and your money.

1. Investors always behave irrationally, emotions rule.
2. Irrational exuberance feeds bulls, fear drive bears
3. Market cycles are historically unpredictable
4. Main Street investors cannot beat professional traders
5. Optimism sabotages the investor’s thinking mind
6. The more you trade the less you earn
7. Conflicts-of-interest are everywhere—trust no one
8. Primitive emotions rule investor’s brains, not the facts
9. Irrational investors need therapy—to surrender the fight
10. Quant math geniuses already control the investor’s mind

Don’t believe me? Okay, then keep on fighting them, but if you keep on playing their game, you will lose—until you stop sabotaging yourself. Just remember, if you play Wall Street’s game by Wall Street’s rules you will only win what Wall Street decides to let you win—the leftovers from the “Iron Law of Wall Street.” Everything favors them. They control the game and the odds, its fixed, you can’t beat The Machine.

What should you do? Know their rules … then stop playing their game by their rules,  play a new game—your game by your rules.

As Nobel Economist Paul Samuelson once put it: “Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office.” And even tougher when you’re playing against Wall Street’s quants who have huges bonuses on the line, gigabits of data about the behavior patterns of individual investors, sophisticated software technology, substantial leadtime, and are playing the game fulltime.