Goldman Sachs and The BRICs: Concept Investing and Regional Hegemony

Tim Tolka April 8th 2013 SRP

Introduction By grouping Brazil, Russia, India and China together in the BRICs concept in 2001, Jim ONeill, the former Chairman of Goldman Sachs Asset Management (GSAM), played a large role in increasing financial flows to and between these rising powers. In order to make his case, ONeill and his colleagues Dominic Wilson and Roopa Purushothaman (2003) pointed to the favorable population demographics and sustained economic growth, predicting that these countries would rival or even eclipse the Western industrialized countries economies dominant share of global wealth by 2050. The markets recognized the prescience of his observations, and a host of investment banks and hedge funds formed their own BRICs funds, fueling a wave of investment flows into the BRICs often through special purpose entities (SPEs) based in offshore financial centers (OFCs). They do this in order to avoid problematic regulations such as the Securities Act of 1933 and the Investment Company Act of 1940 (GS website). All of the risks are disclosed on a webpage that precedes entering into the website, which can only be accessed by qualified investors and advisors outside of the USA. Again, this is customary, especially in the context of alternative investments, and GS could not be much more transparent without dissuading investors entirely. As a market-maker, GS creates special purpose vehicles (SPVs), such as the unspecified private vehicles ONeill (2011, 206) mentioned among his personal investments in China. SPVs such as the Real Estate Investment Trust (REIT), Real Estate Mortgage Investment Conduit (REMIC), or Financial Asset Securitization Investment Trust (FASIT), as well as other conduits have been created by lenders in the financial services industry in order to give investors exposure to certain risk adjusted returns. During the decade from 2000-2010, $70 billion dollars flowed into the BRICs economies and BRICs equities grew four times faster than Americas equities in the Standard and Poors
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500 Index (Patterson and Chen 2011). Goldman Sachs Group (GS) has since opened offices in the BRICs, in a significant rearrangement of attention, resources, and strategy, through which 80% of GS growth is expected to come from the BRICs, according to Lloyd Blankfein, the Chief Executive (Meyer and Choudhury 2012). This refocusing of exposure and market surveillance took place against the backdrop of the dotcom bust and the subprime mortgage crises in the USA. GSAM, as a massive entity within the GS superstructure, was perfectly placed to channel capital into profitable investments into the currencies, commodities markets and banking sector of BRICs economies (GS 2013) during the period from 2003-2007, which were the years of strongest productivity in the BRICs with India and China growing at 9% (Sharma 2012, 38), Brazil at 4%, and Russia at 7.5% (World Bank). Contrasted against the average growth from 1980, the strongest of the BRIC countries is China, which has grown at an average rate of 9.8 per cent, followed by India at around 5.8 per cent and Russia also at about the same level as India. Brazil grew at a relatively slower rate of 2.4 per cent. However, an important element of the BRICs thesis is that these markets have undergone structural changes such that past economic performance is not as reliable as a guide in the case of the BRICs, on which more below. Shifting productive capital to the semi-peripheral nations when there is a crisis in the core is a trend long noted by analysts and economic historians (Worth and Moore 2009, 15). This strategy was not lost on investment bankers and stockbrokers, who, as essentially stateless investors, were in a prime position to act as the vanguard of this shift of the markets trajectory. However, as an investment concept, the BRICs serves a hybrid purpose; it is partially a marketing slogan but also predicated on economic research. Many analysts have suggested that it is more marketing than economics (Sharma 2012). Pierre Delage, writing for Forbes, asserted, the BRICs was invented as an upside down speculative acronym by bankers who like to create
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concepts to market to clients, (Delage 2012). Albert Edwards, from Socit Gnrale joked that BRICs is becoming known as a Bloody Ridiculous Investment Concept (Also Sprach Analyst 2011). Defending the BRICs concept, others such as the International Monetary Fund (IMF) (Gardner 2011), Organization for Economic Cooperation and Development (OECD 2010, Moulds 2012) and the Center for International Governance Innovation (CIGI 2011) have maintained that the BRICs growing share of global productivity is undeniable and part of a fundamental shift from a unipolar global economy to a multipolar global economy. As the growth of the BRICs has recently slowed, Goldman has come out with two more investment concepts, the Next Eleven (N-11) and the MIST (Mexico, Indonesia, South Korea, and Turkey), which suggests more marketing than content as well as symbolically sounding an alarm that the BRICs decade was coming to a close, which was presaged by the flight of $15 billion in 2011 alone (EPFR quoted in Patterson and Chen 2011). Despite the fact that restless capital often nests in US assets when bubbles burst in Emerging Markets (EM), the Eurozone debt crisis and the slow recovery of the US economy has put the hegemony of the West in a state of contingency (National Intelligence Council 2012), which although not new (Zizek, Laclau, Butler 2000), offers support to the contention that new regional groupings among emerging markets and new regionalisms (Soderbaum 2004), are hastening the decline of Western hegemony. This research charts the origins and development of the BRICs concept within and employed as an investment strategy by Goldman Sachs. The research will begin with Jim ONeills creation of the BRICs concept, how he elaborated and defended his forecasts, and how he has reacted to the BRICs economic data over the years. We will also focus on the activities and organization of Goldman during the years since the emergence of the BRICs, as well as how
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the firms marketed its premium products and services to the market. In order to establish the validity of the concept as a regional grouping, we will examine the evolving productive relations between the BRICs countries as a bloc and between the BRICs and the core Western economies. I will then discuss the future of BRICs as a bloc and as an investment concept, as well as that of the N-11 and MIST in light of the results of this analysis.

Research Questions 1. What are the purposes, content, and implications of the investment concepts the BRICs (Brazil, Russia, India, China), the Next-11, and the MIST (Mexico, Indonesia, South Korea, Turkey), as formulated and promoted by Goldman Sachs? 2. Will this mediating position as a market maker and money mover allow Goldman Sachs Group to influence or even govern the economic performance of the BRICs economies? 3. Does the role of hedge funds like those of Goldman Sachs Group ultimately benefit the BRICs economies or make them more unstable?

Objective This research contributes to the debate on the political economy of the BRIC countries and on the role of the financial services industry, especially investment funds, in the context of globalization and crisis management. It contributes also to the literature on hedge fund strategy, sovereign wealth funds, foreign direct investment (FDI), and critical globalization studies.

Hypothesis

The BRICs concept has had manifold ramifications, but one that receives less focus is how the BRICs, the N-11, and MIST form a type of portfolio which Goldman Sachs specializes in; concept investing. Although not all analysts have accepted the BRICs and its descendants uncritically, a critical analysis of the rise and subsequent fall of the BRICs may bring to light the inner mechanisms at work, in the research of Goldman Sachs Global Economics (GSGE), in the investment flows to and between the BRICs, and in the recent economic outcomes for the BRIC countries. The argument will be made that Goldman Sachs and other market actors fueled FDI into BRICs funds for long-term investment, while simultaneously maximizing revenue in the short-term with high frequency trading (HFT) with positive feedback investment strategies, which is a natural yet excessively optimistic market response to positive economic reports that are usually followed, according to finance scholarship, by destabilizing rational speculation (de Long et al. 1990). Then the effects of this process for BRICs economies in the long-term will be discussed with reference to regulation, regionalism, and global macroeconomic stability.

Research Strategy The project will proceed with careful reading of GSGE theses on the BRICs, investigation of various strategies, vehicles, and entities within Goldman Sachs Asset Management (GSAM), as well as documentary research of investment and economic publications, and filings with the Securities and Exchange Commission (SEC). The concepts utilized in this research will be developed in the introduction, in which theorists of critical International Relations theory, such as William I. Robinson and Jan Aart Scholte, as well as research from Foreign Policy and the Center for CIGI, will be used in order to conceptualize the nature of the global economy and the relations between rising economic powers and the major
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Western nations. The conclusion will revisit key literature from International Relations theory in order to discuss them with regard to the logic and conclusions of experts and economists from the financial services industry.

Literature Review In order to elucidate the ways and means by which investment banks and hedge funds, in this case, Goldman Sachs Group (GS) and its subsidiary GSAM, have attempted to mold rising powers, this research will make use of conceptual frameworks from the literature on globalization, specifically dependency theory, world systems theory (WST), and critical globalization studies. Dependency theory and world systems theory popularized the concepts of the core, the semi-periphery, and the periphery, which was useful for theorists to characterize the structural relationships and differences between wealthy, middle income, and poor countries. In this context, it is compelling to pose the BRICs as semi-peripheral countries, particularly in their their role as a safety valve for the core economies when crises arise, as Wallerstein observed (Wallerstein 1979, quoted in Owen and Moore 2009, 17). Furthermore, it is informative to consider the mix of peripheral and core activities of development and commerce which characterize their economies and how core activities tend to be concentrated in certain areas, as in Bangalore, India or the Southern coast of China. However, the classic critiques by Ernesto Laclau (1977) and others of world systems theory (WST) that it was reductionist, deterministic, and state-centric, seem to be reinforced by the concept and dream of the BRICs. The newly industrialized countries (NIEs) of the semi-periphery, according to WST, is a repository for the cores hegemonic expansion, but also at times a regional hegemon in its own right, as the particular cases of China and Brazil demonstrate (Romero 2007). Some argue that the concept of
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the semi-periphery is, like much of the original dependency theory, consigned to the dustbin, (Owen and Moore 2009, 19), because of its mechanical recasting of the complex relationships in our world. However, world systems theorists have also offered partial revisions and supplementary concepts that may help us understand the forces at play in the BRICs regionalization initiatives, such as the internationalization of the state (Cox 1987), transnationalization of classes (Robinson 1998), transnational hegemony (Robinson 2005, Hveem in Soderbaum and Shaw 2003, 85-87), new constitutionalism (Gill 2008), and reverse dependency (Nederveen Pieterse 2000), which shed light on processes inherent within globalization, but which also challenge the explanatory power of these concepts, not only but partially because of the heterogeneity and dynamic interaction between regionalism and globalization. Nevertheless, it will be useful to refer to the economic activities, market sophistication, and rising middle classes of the semi-periphery against the poverty and underdevelopment of the periphery and the de-industrialization, asymmetric exclusion, and disembedded markets now characteristic of the core (Worth and Moore 2009, 45). The formulation by Jan Aarte Scholte (2006, 61) of transplanetary activities and connections between people. Transplanetary activity consists of transmissions, transactions, and linkages on a global scale, which are instantaneous, making distance irrelevant, and simultaneous, reducing friction and transaction costs (61). For Scholte, transplanetary communications and commerce gives rise to the concept of supraterritoriality as a defining characteristic of globalization, the global-ness or globality of globalization. In the case of GS, the transplanetary networks consist of linkages between financial, regulatory, and political elites that supervise and facilitate FDI. The planetary network of GS and GSAM, extending from concrete holdings of real estate and facilities to the cyber realm of securities and databases,
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enables a uniquely dynamic form of market surveillance and global arbitrage, from which GS harvests revenues. As with the technology industry in general, neither regulators nor the legal system are able to keep pace with the innovations in anti-competitive behavior made possible by new technologies like high frequency trading (HFT), about which more shortly. GS embodies the concept of stateless transnational capital William I. Robinson (1996, 1998) developed. Robinson focused on the process of globalization as Scholte did, although with a more critical lens. In contrast to the benefits and challenges of globalization, Robinson is drawn to the costs for labor during the transition, from a global capitalist economy to a global capitalist society, (Robinson 1996, 15, emphasis in the original). He writes: This involves breaking up and commodifying non-market spheres of human activity, namely public spheres managed by states, and private spheres linked to community and family units, local and household economies. This complete commodification of social life is undermining what remains of democratic control by people over the conditions of their daily existence, above and beyond that involved with private ownership of the principal means of production (15). Here Robinson hits on a principal strategy of GS, taking temporary or medium-term ownership of public infrastructure, either through its lending/distressed assets arm, called Special Situations Group (SSG), which is housed in Fixed Income, Currencies, and Commodities (FICC), or through the hedge fund arm, GSAM. Examples of this increasing commodification of what were formerly national assets domestically owned have become commonplace in recent years. The further step of commodification of social life is easily observed through GS investment in Technology, Media, and Telecommunications division and the recent launch of GS social impact bonds, as a vehicle to fund the rehabilitation of prisoners in New York State. The last sphere for commodification, according to Robinson, is the community, family, and household economies, which are now directly and indirectly affected by GS activity in the futures market for food and energy commodities.
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Internationalization is another concept that has been criticized for its vagueness, but it is defined as the process by which the elites begin to orient their thoughts and behaviors to the world market (Cox and Sinclair 1996, 301 quoted in Brand 2007). The BRICs summits are evidence of the intensification of this process, even if resolutions substantially affecting global power distribution have yet to be accomplished in them. Internationalization, as defined above, sounds similar to the competition state by Phillip Cerny (1997, 2005), in which the macroeconomic policy has been shaped in order to attract stateless capital, although each of the BRICs has a unique macro-environment to mediate the effects of transnational capital. Not every BRIC is a competition state, if governance by market logic is the benchmark, but every BRIC has been greatly internationalized. Hugo Radice explains the relationship between competition states and transnational capital: In certain circumstances and to a certain degree, there is an alignment of a given state with a set of capitals firmly rooted in their territory... In other circumstances and degrees, states provide reciprocal support to capitals based in each others territories, as well as coordinating the management of trade, financial flows and relative currency values (Owen and Moore 2009, 37) The competition state represents a process of internationalization outward and liberalization inward, because it aims to draw in and harness capital, which bolsters and allows the expansion of the internationalization processes. This is especially true in the BRICs where from 2003-2007 equities grew at four times the rate of those of the USA (Patterson and Chen 2011), and where domestic MNCs are keen to hedge against political uncertainty and other risks that have increased in emerging markets as the risk of expropriation has decreased (Henisz and Zelner 2010), by investing in assets and securities in developed countries. The commodification of social life and the strictures of neoliberal globalization on the discretionary spending of nation-states are vividly captured by new constitutionalism of
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Stephen Gill (2000, 2008). For Gill, globalization can be characterized by its embrace of market discipline as the new constitution of nation states and the three Cs of the power of capital, credibility, consistency, and the confidence of investors (2000, 4). Gill explains the relationship between the three, It involves the ways that public policy has been redefined so that governments seek to prove their credibility, and the consistency of their policies according to the criterion of the confidence of investors, (Ibid.). With the new constitution of disciplinary neoliberalism, according to Gill, the policies of nations from EM are codified by the best practices of the IMF and the institutional framework recommended by the World Bank, with hedge fund managers as inspectors of the level of market discipline attained or missed. Gill insists that new constitutionalism privileges large capital and the investor as the dominant political subject, (Ibid.) by allowing these actors to define what policies are credible for nation states. This aspect of globalization is replicated in global juridical networks, creating an increasingly global constitutional jurisprudence, driven by information, enforcement, and harmonization networks, according to Anne-Marie Slaughter (2004, 63). Although the BRICs are highly dissimilar economically and politically, they have similar demographics, are all experiencing rapid urbanization, and share a common desire to counter US hegemony (Copelovitch 2010, 4). In these respects, the BRICs concept has been employed in an attempt to harness the forces of regionalism, as a buffer against sweeping globalization (Cooper et al 2008). This research will utilize the thinking of Fredrik Soderbaum (2003) on the new regionalism, as well as Robinsons extension of this concept to international class formation. In order to describe the proletarianization of the peasant class in the context of globalization, reference will be made to Robert OBrien (Cooper et al, Eds. 2008), William Martin (1990), and Hveem (Soderbaum and Shaw Eds. 2003) on the separation and cleavage of
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labor and the elite with regionalization projects. I will argue that the BRICs concept, in the hands of GS, is a global governance project which uses regionalization to its advantage, allowing the firms hedge funds to buy, sell, and speculate on BRICs assets to the detriment of long-term economic welfare and social equality among BRICs population. This research will depend on finance theory with regard to investment strategies and economic historiography on financial crises. Long et al (1990) argued that uninformed investors could be expected to trade on positive feedback, which informed rational speculators anticipate, causing a wave of destabilizing rational speculations that can bring down prices below fundamentals. The authors referred to George Soros, who, in 1987, described the strategy which had made him successful for two decades, betting not on fundamentals, but on future crowd behavior, (Long et al., 2). Soros found just such an opportunity in the 1960s Real Estate Investment Trust (REIT) booms, in which the truly informed investment strategy... was not to sell short in anticipation of the eventual collapse of conglomerate shares (for that would not happen until 1970) but instead to buy in anticipation of further buying by uninformed investors, (2). The poor reasoning of uninformed or noise investors was explained as follows: Instead of extrapolating price levels to arrive at a forecast of future prices, subjects switch to extrapolating price changes. This switch to chasing the trend appears to be a virtually universal phenomenon among the subjects that Andreassen and Kraus study, (Andreassen and Kraus 1988, cited in Long et al. 4). The same results were replicated in the housing market before the market crash of 1987, and we saw it yet again in the subprime crisis, with new structured financial products, REMICs and derivatives, which amplified the damage. This is consistent with literature from finance theory on self-feeding speculative bubbles, back to Bagehot (1872), who wrote, Owners of saving... rush into anything that promises speciously, and when they find that these
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specious investments can be disposed of at a high profit, they rush into them more and more, (Quoted in Long et al 1990, 380). This research will also draw on extant literature concerning hedge funds. Reca, Sias, and Turtle (2012) argue that hedge funds engage in crowded trades and herding less than other investors, although a recent study found empirical evidence that hedge funds exited the US equities market jointly in the third quarter of 2007 (Ben-David, Franzoni, and Moussawi 2012). However, despite instantaneous transplanetary communication, having a research office in the region of investment improves profitability of hedge funds by 3.72% a year, because managers can remain informed of the latest developments and engage in constructive shareholder activism (Teo 2009). Some voices have heralded shareholder activism on the part of hedge funds to be a potential boon to the global economy, while others argue that hedge funds weaken the integrity of capital markets by victimizing developing countries with destabilizing speculation (Ghosh 1999, 2). By examining long-horizon stock returns around hedge fund activism documented with filings by portfolio investors from 1993-2006, Greenwood and Schor (2007) argued that the combination of hedge funds short investment horizons and their large positions makes M&A the only attractive activity. As GS and its competitors have fought for underwriting and M&A deals that become more sporadic, this kind of coercive activism would be a strategic advantage. Sovereign Wealth Funds are an actor with rapidly rising clout in the global economy, which has been intensified by the crisis in the West. Since this group of investors is a strategic group for GSAM, this research will refer to the literature on SWFs. The oldest SWFs came about as a result of the massive oil revenues of several Middle Eastern countries which created them in order to avoid being damaged economically by dutch disease (ONeill 2007). The difference between SWFs and Central Banks and other monetary authorities that have invested forex
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reserves since before SWFs, is that SWFs can invest in riskier assets (Mohan 2008). Unsurprisingly, GSAM endeavored to cast them in a positive light, despite the aversion of many Western policy makers, arguing that the existence and benefit of SWFs was another reason voting rights in the multilateral arena should be reallocated in favor of the economic power of the BRICs. Conceding that the scenario of a SWF relocating an American manufacturing company in a foreign market for political reasons is scary, Mohan would agree with ONeill. Referring to the stabilizing effect of investments by SWFs from China, Singapore and West Asia, Mohan argued that SWFs benefit the global economy by giving nations a stake in each others prosperity, (2008, 10). The concerns of critics of SWFs revolve around transparency and disclosure, as well as whether state owned funds attract great managers and deliver good performance, which would undermine the arguments of free market ideologues (Mohan 2008, 11). A legal framework to govern SWFs, recently articulated by Bassan (2012), is gradually taking shape to address these issues, by some of the same manners described by Slaughter (2004) as constituting the new world order of global governance, which makes use, not only of political executives and foreign ministers, but also of lawyers, accountants, financial advisors, and extensive vertical and horizontal government networks (Slaughter 2004, Backer 2011). These insights are important to keep in mind when considering GS and the BRICs. Credit easing in one market and overborrowing in another can be a destabilizing combination (Cripps, Izurieta, and Singh 2011), especially when investors hold securitized, diversified, and leveraged alternative investment portfolios through the shadow banking system, where GSAM operates. Gennaioli, Shleifer, and Vishny argue, in a forthcoming paper, that the shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crisis and liquidity dry-ups when investors ignore tail risks, (Gennaioli et al,
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forthcoming, 1). The authors construct a model of the shadow banking system where intermediaries assemble riskless securities issued from safe projects that are pooled into investment portfolios which satisfy investor demand when investors wealth is limited. However, as investor wealth expands, intermediaries cannot generate enough collateral with safe projects, and an intermediarys own risky projects cannot serve as useful collateral for riskless debt because they are vulnerable to idiosyncratic risk. To meet the demand for riskless debt, intermediaries diversify their portfolios by buying and selling risky loans to eliminate idiosyncratic risk, (Gennaioli et al, 2-3). In EM or semi-peripheral countries, equity markets offer a limited array of options, but there are a large number of medium-sized enterprises not served by the local banking sector. With emanations of GS surging into BRICs markets, GSAM could buy out diverse local projects with varying levels of idiosyncratic risk, in order to allocate capital for the BRICs fund, pooling these assets together through securitization vehicles, such as trusts, corporate entities, and limited liability companies associated with the firm (Goldman, Sachs & Co. December 2012, 29). ONeills initial iteration, Building Better Economic BRICs, envisioned a more equitable distribution of decision making power in the multilateral sphere, pointing out that the BRICs contribution to global wealth was three times larger on a PPP basis and arguing that the BRICs contribution to global wealth would exceed that of the the G7. The authors additionally predicted that the BRICs weight in the global economy would grow, raising important issues regarding the impact in the global economy made by the fiscal and monetary policies in the BRICs by 2011 (2001). Dominic Wilson and Roopa Purushothaman (2003) extended the thesis in several respects. First, it provided a growth timeline until 2050, arguing that in less than 40 years the BRICs could be bigger than the G6 in dollar terms and that the fastest growth would happen in
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the first 30 years. The could was contingent upon governance, Wilson and Purushothaman specify: The key assumption underlying our projections is that the BRICs maintain policies and develop institutions that are supportive of growth. Each of the BRICs faces significant challenges in keeping development on track, (2003). Most prophetically, the authors predicted that the weight of the BRICs in investment portfolios could rise sharply.

Goldman Sachs and the BRICs: I. Goldman Sachs: A Hedge Fund or An Investment Bank? Goldman Sachs Group (GSG) claimed $949 billion in assets in 2011 (SEC filing September 2012, 4), yet the form and composition of this conglomerate of entities can be difficult to map out. It is unclear how many GS entities these numbers does not include, but it seems obvious that the revenues continue to be derived from trading. According to Abelson, Multi-Strategy Investing (MSI), which is a multi-billion dollar proprietary investment platform, and the Special Situations Group (SSG), a subsidiary of MSI, are not included in GS filings with regulators (Abelson 2013). MSI invests across distressed assets, corporate credit, middle market loans, and equities (Hedge Fund Journal 2012, 5). As with MSI and SSG, GSAM is most likely an off-balance-sheet subsidiary entity, although GSG claims revenues from all of them in the form of management, advisory, or incentive fees (SEC filing September 2012, 87). Therefore, GSG includes the hedge fund division composed of more than 150 entities (ISDA 20) associated with GSAM, many registered in New York (SEC filing GS Global Alpha Dynamic Risk Fund Offshore Ltd. 2012) and London (GS Dynamic Opportunities website), as well as many others of unknown scale registered in Cayman Islands, Switzerland, Hong Kong,
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Singapore, Luxembourg (GS Global High Yield Portfolio from Bloomberg 2013), and various other OFCs. Estimating the size of the extant funds which remain undisclosed is difficult, because GSAM declares on its website that it has assets under management (AUM) recorded at $716.1 billion (GSAM Worldwide website 2012), but most of the funds that contribute to this number are secretive organizations with a small number of employees, officially unknown to the SEC. One source attests to 20 hedge funds within the GSAM entity, (Stowell 2013, 133), but the real number may be much higher. The managers of a few of the hedge funds are selected through GS Alternative Investment and Manager Selection (AIMS), but this only accounts for $31 billion of the total (GS website, IB Times 2009, Roy Linkedin.com profile). The relationship of these entities to GSG is often that of third party investors or majority shareholders, although a few of the firms hedge funds are fully funded by GSG profits (SEC filing September 2012, 86). Although GS was the last firm to go public in 1999, the firm began trading on its own account in 1991, when GS opened what would become the first in a series of private equity funds carrying the Goldman Sachs brand name, (Ellis 2008 cited in McGee 2010, 125), which represented another transformation of the investment banking business model. Suzanne McGee (2010) traced the evolution of the investment banking industry through the 1970s bear market and in the aftermath of Mayday, when the SEC ended the era of fixed trading commissions in the stock market (59), which was accompanied by permutations in client relationships and strategy. GS competitors were instrumental in motivating the firm to adopt the new norms in the industry, focusing on products instead of services, and transitioning from a client-centered to a client-competitive approach, described by McGee as a move from intermediary to... becoming its own client (124). Although GS proprietary trading escalated quickly, from a late entry into the market, to a $20 billion dollar fund allocation two decades
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later that even dedicated buyout firms such as KKR and Blackstone would find hard to match in size, (125). GS hesitated to start its own hedge funds, worried that its clients would be outraged if they found out that a GS hedge fund had shorted their company, but as Goldman alumni started leaving the firm for hedge funds and its competitors dove into the business, GS again followed suite, starting in the 2000s, and began to embrace the practices previously considered taboo (124-126). After the tide shifted, McGee observes that, among the cognosc enti it had become almost clich to refer to Goldman Sachs as a hedge fund disguised as an investment bank, (126) because Goldman became highly dependent on private equity investing, its hedge funds, and its proprietary trading business. After the financial crisis, the legislative environment threatened to turn hostile to proprietary trading, and because of this, the firms structure has been rearticulated and recategorized. GS has even excised the word trading from the firms vocabulary. Gary Cohn, the companys President, insisted in a 2009 interview, the vast, vast majority of our revenue and income from our client facilitation, activities (Deogun 2009 cited by McGee 2010, 126). An investment manager at GS quoted in the Economist referred to enlightened positioning around client flow, which sounds like a euphemism for proprietary trading against clients. The reason for the odd metamorphosis in language is in response to the restrictions of the Dodd-Frank Act, which has caused the firm to remove trading from its vocabulary and reorganize its command and ownership structure with respect to certain entities, such as Principal Strategies, and all the positions of global macro proprietary trading desk in the Fixed Income Currencies and Commodities (FICC) division (Goldman 2010), although the decline in the proportion of trading revenue relative to the total is vastly less than the pronouncements of the firms CEO would lead one to expect (Abelson 2013). According to Bloomberg, At Goldman Sachs, money
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management accounted for 14.9 percent of net revenue in the first nine months of 2012 compared with 11.5 percent in the same period two years ago, according to company filings. Trading revenue at the New York-based firm was 55 percent of net revenue, down from 59 percent, (Bhaktavatsalam 2012). Nevertheless, although the names change, the strategies remain the same. GS is a market-maker for certain financial products which are elaborated by the work of internal research analysts and sometimes surreptitiously shorted by investment entities related to the firm, a practice publicly repudiated in the case of Abacus 2007 and Fabrice Tourre (SEC 2010), but inevitably an ongoing strategy in the industry (Corporate Europe Observatory 2010). Susan McGee (2010) stresses that the shift from focus on services to focus on products is the motivating factor behind the decline in importance of the client in the investment banking industry. Among many frank revelations from industry insiders, she describes the evolution of the industry: Certainly, no one recognized the implications of the changes within the Wall Street institutions that accompanied the shift in focus. The emphasis on products, rather than services, meant that relationships with clients became slightly less important with every month that passed. It took years, but by the end of the transition, few people were surprised when Goldman Sachs CEO Lloyd Blankfein implied during his testimony on the Hill and to FCIC [Financial Crisis Inquiry Commission] panelists that the firmss clients needed to do their own due diligence. Clients were on their way to becoming little more than counterparties (McGee 2010, 59). The implied remark McGee refers to is this one: Blankfein: Well, we have a responsibility to be open and to tell people what theyre having. But in our part of the market... Chairman Angelides: Not to insure good product unto itself? Blankfein: Good product that doesthat creates the exposure that these professional investors are seeking. Right now you could buywe would underwrite distressed product as long as we disclose it, help somebody move that distressed product off their
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balance sheet, and give it to somebody, a sophisticated investor, knowing what the product did would give them that exposure. (FCIC 2010, 109).

The kind of exposure he was alluding to was the loss-incurring kind, as was obliquely specified later: Blankfein: So to that extent we were played a part in making that market all of us as syndicators doing what the capital markets do, which is give people access to capital. And so that was a role that... (FCIC 2010, 109). These statements indicate that investment banking has changed and that GS has gone with the tide, which has left the firms clients feeling victimized because of undisclosed conflicts of interest. GS has been a pioneer in managing conflicts of interest while it led the way in exploiting moral grey areas, (Economist 2010) of the investment banking business. It is difficult to distinguish cosmetic changes, as when the firm convened an ethics committee (Goldman Sachs 2011) and issued a revised code of ethics (Goldman Sachs undated), from profound changes in the GS business model, because the firm depends on the information it gleans from its clients and the market, which gives rise to the conflict of interest concerning how it positions itself with regard to the positions of its clients. In the past few years, GS has skirted allegations of misconduct without admitting wrongdoing, and it has shuffled and re-branded entities, vehicles, and staff in order to comply with regulatory changes. Although some of this reform is made public by GS or by inquisitive financial journalists and market gossip, much of the discussion within the bank regarding strategy or structure only emerges in the aftermath. GS is, after all, a black box, and it is largely unknown how the firm makes its money (Weisenthal 2009), although much potentially accurate speculation abounds (Bloomberg News 2008). The positions taken by GS hedge funds and other proprietary entities is surrounded with secrecy,
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although many industry insiders and commentators have questioned whether GS divisions are indeed separated by Chinese walls, because of reports of cozy relationships and firm-wide databases that show all client and proprietary positions taken by the firm. According to the SEC complaint, the firm promoted research huddles, as part of the Asymmetric Service Initiative, during which analysts would share information from select clients and ideas on potential trades, based on this information (SEC Press 2012). This form of insider trading has been a not infrequent accusation, as seen when a report surfaced regarding the close proximity of the desks of wealth management and commodities trading, which was quickly corrected (Comstock April 2011). This situation can arise naturally in the investment banking industry, but that does little to reduce the responsibility of GS and other banks to guard against such obvious conflicts of interest, of which they are usually well aware. In the case of the firm-wide databases, the first report was of a system called secDB by Antonio Garcia-Martinez, who asserted: You could see basically every position and holding across the company, whether you were supposed to or not, (Comstock August 2010). This database would violate various laws regarding information-sharing and has been vigorously denied and challenged by GS. It stands to reason that such a database would greatly streamline the implementation of GS strategy, although it compromises clients relations by merging that knowledge with the firms trading, or client optimization, desks and entities. Other reports of technology firms hired by GS for the firms internal communications infrastructure and the admissions of Nishant Roy, a former analyst at GSAM, now an advisor to USAID, who states on his Linkedin profile that he developed a firm-wide Wiki-site (Roy Linkedin profile), which sounds remarkably similar to the rumored secDB so vehemently denied by GS. According to this former employee, there are three firm-wide databases , the Product Master, which keeps track of
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securities bought and sold by GS, the Account Master, which keeps track of GS customers investment histories, and the Entity Master, which combines the information of the former two in order to cross-check for hidden risks (ZDnet 2009, 2). The SEC issued a warning in September of 2011 regarding alleged money-laundering, insider-trading, market-manipulation, accountintrusions, unregistered broker-dealer activities, and excessive leverage associated with mastersub account structures (SEC 2011), which a writer at Forbes interpreted to mean that the SEC would soon announce high profile cases against entities and individuals (Singer 2011), although so far none have emerged. In this way, SEC cases against misconduct are an additional window into recent or past activity by the firm, indicating what the strategy of GS may be. GS has been notable for the singularly aggressive way in which the firm enters into positions on different sides of trades, as a market maker, but also the way it layers entities and vehicles in a structure of relative contingency, which allows for maximum flexibility and the constant replication of strategy across markets and asset-classes. The culture of the firm extends throughout its vast network of organizations, and though it has been the most imitated by its competitors and the last to adopt questionable industry practices as they became standard, GS today is in search of alpha in the growth markets, as an all-purpose actor, engaged as principal, lender, broker, underwriter, market-maker, dealer, and trader, in other words, being Goldman in more places, (Blackden 2011).

II. ONeill: Foundations and Defense of the BRICs Market surveillance is one of the methods by which GS approaches investment opportunities. The firm has innovated by creating its own benchmarks and indexes which form
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the basis of internal analysis, market-making, and the firms own investment strategy. When elaborating the BRICs concept, Jim ONeill sought a benchmark that would take into account and reflect certain advantages that he believed set the BRICs apart from other emerging countries. He admitted that some of his colleagues voiced worries that by advocating this change in benchmarks Goldman will be vulnerable to reputational risk if the BRICs dream does not materialize (ONeill 2011, 204). Despite this, ONeill believes that a GDP weighted benchmark is more appropriate for fixed income and equities than is the market cap benchmark. Although it is contentious, there is truth to his argument regarding benchmarks when in consideration of emerging economies like the BRICs, because their economic structure has changed so much that past economic indicators may not provide a basis from which to accurately gauge future growth. For this reason, ONeill argues that the BRICs and later his Growth Markets (the N -11, etc.), merit special attention as long-term investment destinations, (ONeill 2011, 4). This is fundamental to ONeills seductive argument for the BRIC concept, because it is geared to convince investors that future returns may expand beyond expectations based on historical economic performance alone. It is unclear who, if anybody, was the first to recognize the potential of the marketing magic (Rodriguez 2012) at GSAM, but it stands to reason that by the time the BRICs Fund was being marketed, GS decision makers would have already devised the long-term and short-term trading strategy for the firms own capital. This assumption seems dubious at first, but considering that Altegris, an investment firm focused on alternative investing in emerging markets (EM) made the case that, Frontier markets lack the size and liquidity to pursue a multi-strategy approach that the developed EM space now allows. Our focus, therefore, is on the most developed EM countries which allow for a multi-strategy, hedged investment approach across multiple asset classes, (Altegris 2010, 2). According to Altegris, the
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ideal hedged strategy for the developed EM would include not only long positions in equity, but long and short positions across equities, currencies, credit, and interest rates, with a focus on generating market alpha, or excess returns from the strategic benchmark, subtracted from the beta which stands for market risk or volatility, which in the case of a portfolio that includes multiple assets would have multiple alpha and beta drivers (Altegris 2010). In the case of Goldman and the BRICs, the report by Wilson and Purushothaman indicated such planning was underway, Developing strategies to position for growth may take several years and require significant forward planning, (2003, 4). The various iterations of the BRICs defense by ONeill elaborate favorable demographics, growth trends, and governance improvements as reasons why each of them were unique and unlike other emerging countries in their generation of alpha profits. Celebrity wealth managers like ONeill, with their own and the firms reputations on the line, are then put in the position to maintain the brand, but in the case of the BRICs, the political leaders and other elites welcomed the opportunity to collaborate in region-building activities, sometimes snubbing although never undermining the managers of transnational capital. Hedge funds are posed as regulators in the improvement of governance and accountability, and they often prove disruptive politically and economically in the long run. Nevertheless, all of the BRICs have enjoyed generous FDI flows, although China has been far and away the largest recipient. After elaborating and launching the BRICs concept, Jim ONeill made every effort to quell the anxiety of investors over short-term volatility, political gridlock, corruption, weak rule of law, and corporate governance issues, by reiterating his initial insights and the interpretation of Goldmans economists, using Goldmans own patented set of indicators. As such, the creator of the BRICs dream has an incentive to disclose yet understate aspects that are unattractive to
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investors, which presents a conflict of interest. Nevertheless, ONeill proved unflagging in his optimism for the BRICs: There is still a great debate in the industry as to whether BRICs funds are anything more than a marketing theme. Some believe investors should stay well away from theme-based approaches. In my new life as chairman of GSAM, I am learning that this is one of the great conceptual issues facing the asset management industry. Clients want good service, reliability, and of course good return. A theme-based investment fund may be a good way of raising assets, but it might not necessarily give clients the experience they want, and it depends heavily on the success of the investment manager. The BRICs, I believe, are different, strong enough as a theme to make a sensible investment strategy (ONeill 2011, 202). This passage displays ONeills fears and hopes as well as acknowledging that a theme-based approach is likely to inflate asset prices.

III. Investment Time Horizons: Long Term Investors & Short Term Strategies The focus on the long-term profitability of the BRICs because of their particular factor endowments and future growth potential has been integral to keep restless capital committed to achieve the BRICs dream. That effort seems to have largely failed, as indicated by BRICs Fund withdrawals en masse and the resignation of Jim ONeill from GSAM, although it is not explicitly clear that the two are related. ONeill did not hesitate to make his case for the BRIC s as a matter of ethics, in The Growth Map, [The BRICs dream] is a theme for tens of millions to embrace, (2011, 198) and on Charlie Rose, where he argued that Westerners should not view the populations now entering the working class with fear, that these populations deserve the benefits of greater integration in the global economy, which his BRICs concept facilitates (2012). ONeill also attempted to link economic growth to increasing return on equity (ROE) (Monthly Insights From the Chairman 2011), which is a myth, according to Virtus Investment Partners, because GDP growth and stock market returns are negatively correlated over the long25

term and because equity returns are frequently earned outside of the country where they are listed (2009). When we examine ONeills argument, his statements are telling as to the mentality of GSAM. He says, in his viewpoints from the Chairman series: Our analysis reveals that the link between GDP growth and equity returns is, in fact, very strong. The key point is that investors are, by nature, forward looking. We do not find evidence that GDP growth and equity returns co-move, probably because investors are influenced by unanticipated developments. Instead, we find that equity markets are a lead indicator of GDP growth and react strongly to expectations about the future. Changes in consensus GDP expectations are likely to influence equity prices. While there is considerable diversity across countries, in general the sensitivity of equity returns to future growth forecast revisions appears to be much higher in the Growth Markets than in the advanced world (ONeill 2011) This argument lacks clarity. ONeill does not reveal the results of GS analysis, but instead starts profiling investors psychology and the effect of expectations on the economy. We shall see that investors psychology is just as important as BRICs fundamentals, or even more important, for GSAMs purposes. Ruchir Sharma (2012), head of Emerging Market Equities and Global Macro at Morgan Stanley, argues that forecasting economic growth in the super-long view, i.e. 2030, 2050, is illusory as a foundation for investment. He writes: Today we are at a very revealing moment. For the last half century, the early years of each decade saw a major turning point in the world economy and markets. Each began with a global mania for some big idea, some new change agent that reshaped the world economy and generated huge profits... Most gurus and forecasters are willing to give people what they want: exotic reasons to believe that they are in with the smart crowd. The mania appears to make sense, for a time, until the exotic reasoning crumbles. Sharma dismisses many of the fundamentals of ONeills argument for the BRICs, down to the demographics, which offer some spin on the basic idea that population growth drives economic growth, (56), and alternative economic indicators, which loses predictive value [when they become too popular], (11). Yet, although Sharma disparages the fundamental tenets of
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ONeills BRIC concept, he has his own alternative investment fund with 25 billion US$ to promote with his critical political economic analysis of which will be the breakout nations that other fund managers fail to appreciate. Nevertheless, the author unravels the political economic circumstances of each emerging country, drawing attention to the competing political interests between the BRICS (253) and cautioning against any approach that treats emerging markets as a homogenous class rather than a group of individual stories (255). The jostling of fund managers, against each other and against policy makers, has given hedge funds a reputation as activist investors and important political constituents, especially in emerging markets where the corruption perceptions index is high. Fund managers often put their finger on specific governance issues in the national and international media as well as at the firm level. Hugh Sandeman provides an example published in Business India, where he advises, Forget about where India will be in 2030. Forget about China. The 8-9 per cent growth path, the $1 trillion in infrastructure investment that was deduced as being a condition of such growth, the governments projection of 100 million manufacturing jobs- these numbers are now on the statistical scrap heap, (2012, 34). Fund managers also unravel the fallacies of reasoning in the investment strategies of their competitors. An example of the latter comes from Gregg Wolper writing in Morning Star: Whether a concept is as new as clean technology or as old-fashioned as gold, has a catchy acronym, an attention-getting theme, or simply tracks an index, it doesn't qualify as a compelling investment unless it has several important traits in place. Without experienced management boasting a solid track record, a logical strategy, and a reasonable price, a fund will have a hard time making its case. That's true no matter how much its concept may, in the abstract, rest on solid evidence and fit with your principles or interests and align with your long-range investing goals (Wolper 2011). Wolper criticized BRICs funds, of which there are dozens, because of their high fees 1.8 - 2.0% of the annual profits and the fact that their returns, dont turn any heads, barely beating the
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average for the diversified emerging markets category in the case of GS BRICs Fund or missing it, in the case of the BRICs Fund at Templeton. The merit of these criticisms may have sunk into markets, if declining growth figures were not enough. Whether or not it was push or pull factors were the dominant cause, capital outflows from BRICs funds during 2011 totaled $15 billion, according to EPFR Global, which tracks them (Patterson and Chen 2011). We will return to this discussion below.

IV. Volatility: High Frequency Trading and Dark Pools During this time, GS activity in food, energy, precious metals, and other commodity markets known for their volatility is widely documented, especially in the context of high frequency trading (HFT). HFT allows unique exploitation of price differentials, which amplifies the profit potential of positive feedback investment strategies. HFT technology relies on volatility, so a market exhibiting moderate volatility will attract HFT. Louis Liu, founder of Matrix Trading Technologies LLC, a New York-based HFT technology firm, commented on this phenomenon: Whenever there are spikes in markets, high-frequency traders gather data on it, (Sheppard and Spicer 2011). William McNeill, managing director of trading at HTG Capital Partners, a similar proprietary firm, based in Chicago, agreed: If there's moderate volatility... there's probably ample opportunity to take risk, (Sheppard and Spicer 2011). He was referring to the oil and gas industry, and considering that 23% of the BRICs Fund is invested in this sector, it is a safe bet that HFT is employed to maximize profits for the firm and its clients (Market Watch 2013). The subsidiary of GSAM, GSAM Internationals (GSAMI) own description of its transaction processes and execution policies indicates that MTF are the most utilized platform,

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although not exclusively, for fixed income and the usual choice for money markets (GSAMI 2009, 6). Consider the following statistic, quoted in Zero Hedge: High frequency trading firms, which represent approximately 2% of the 20,000 or so trading firms operating in the US markets today, account for 73% of all US equity trading volume. (Zero Hedge 2009). Add that in with the fact that, according to Zero Hedge, Goldman controls roughly 50-60% of principal program trading on the NYSE, which in turn accounts for 30% of all global program trading, and it suggests that HFT is a crucial factor for GS global activity, so important that GS decided to create a multilateral trading facility (MTF) (The Trade News 2011), referred to in the industry as a dark pool (Alternative Trading System in the U.S.). The purpose of this move was at least threefold, to give GS clients access to exposure, to provide liquidity to the markets, and to give GS access to market information, including information on GS clients, according to the Australian Securities and Investment Commission (Lionidis 2013). Dark pools offer several advantages to trading firms like GS, but regulators and exchanges regard them with suspicion, both because they allow the execution of trades without displaying bids and offers in advance, and because dark pools draw trading volume away from NYSE and other exchanges (Mehta 2012). In this arena, an investment bank like GS can employ pinging market participants with algorithms that draw information about their willingness to buy or sell, which is one strategy among many associated with high frequency trading recently scrutinized by regulators. GS maintains that dark pools merely replicate the price discovery process that was done manually before, that they are well regulated, and that dark pools only account for less than 10% of US stock market transactions (GS website quotes Rosenblatt Securities, 2009). GS maintains that the
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benefit goes to institutional investors who can have less of a footprint in stocks because of dark pools, but the unacknowledged advantage investment banks and hedge funds derive comes at their expense. Originally, HFT was an invention meant for the Hollywood film industry, but the patent fell into the hands of an investment firm. Although invented by Max Keiser for the purpose of leveling the playing field in Hollywood, it has done the opposite in the context of Wall Street, because it enables what has been called computerized front-running, in the form of flash trades (Brown 2010). In this process, according to Brown, An incoming order is revealed (or flashed) to a trader for a fraction of a second before being sent to the national market system. If the trader can match the best bid or offer in the system, he can then pick up that order before the rest of the market sees it, (2010). In that fraction of a second, the HFT program can calculate the maximum price at which the seller will make the trade, which is information heretofore limited to the market-maker, enabling the high frequency trader to manipulate the market (Brown 2011). An operator at the NYSE wrote, Too much fragmentation and darkness can undermine investors perception of a fair and orderly market, (Mehta 2012). It can be argued that NYSE is obliged to press for the dissolution or restriction of MTFs, as they have for the last three years, because they considerably reduce the trading volumes of NYSE and others. Bloomberg data show that a full of US equities were traded outside of formal exchanges in 2012 (Mehta 2012). Meanwhile, the growth of opaque trading facilities and exponentially larger trading volumes with HFT coincides with the mass exit of small investors from BRICs equity markets (Patterson, Leite, and Shaaw 2013). One Indian investor remarked, The confidence of small investors is rock bottom. They have no faith in the markets, (2013), offering substantiation to the fear
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voiced by the NYSE operator that the activity of HFT firms and dark pool facilities undermine investors perception of fair and orderly markets. Although HFT happens outside of dark pool facilities, the both contribute to increased and even anti-competitive advantages to the strongest and largest investors. Noise investors have an effect disproportionate to their number in the market, however, and can cause even sophisticated investors to chase noise, thus amplifying sentiment shocks and moving price away from fundamental values (Mendel and Shleifer 2011, 13). The high probability of volatility is increased by HFT, which enables false price signals and the appearance of increased trading volumes, thus amplifying the destabilizing phenomenon of noise chasing and flash crashes, which undermine the trust of smaller participants in the market. It is quite clear from a number of disclosures and news items that GS is engaged in HFT on commodity futures while simultaneously issuing statements in the media on its expectations in one market while buying and selling stores of those commodities in other regions. One example is Cliffs Natural Resources, an international mining company that has survived for 165 years, which was downgraded by GS from hold to sell, because GS predicted that Cliffs profits would continue to fall as new global supplies of iron ore come online (Shoenberger 2011, Grant 2012). In this case, GS was able to leverage its surveillance of the BRICs to hedge against a North American company. GS research pointed to, ... a long period of significant oversupply, but in our view this is still two years away. We expect iron ore producers will see one last year of exceptional prices and profit margins [as the] restocking phase continues, supply starts to tighten and market sentiment becomes more bullish, (Sedgman 2013). GS later predicted that pricing power would shift from international mining companies to China, although suppliers in Brazil and Australia were dominating supply on the spot market, with much less coming from India,
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which, GS analysts acknowledged without elaborating, was another reason for the speculative nature of recent price gains (Tan 2013). Upward price co-movement has been the rule across commodity classes, because since the bursting of the tech bubble in 2000, there has been a 50fold increase in dollars invested in commodity index funds, (Kaufman 2011). GS was an early innovator in the shift from HFT in equities to commodities, according to Foreign Policy, which has brought volatility to the formerly sleepy market of $13 billion (Kaufman 2011), including frequent flash crashes when HFT algorithms malfunction (Sheppard and Spicer 2011). The discussion of the efficiently of HFT has centered on whether they provide for more efficient markets or if they cause investors to chase artificial prices, thereby undermining markets efficiency (Arnuk and Saluzzi 2008). While advocates of these trading platforms claim they are adding liquidity to the market [in the form of higher trading volumes], or making [the] financial markets more efficient, critics believe this practice is unethical and destroying [Americas] capital market structure. (Moyer and Lambert 2009 and quoted in McGowan 2010, 2). There may be legitimacy to the claim that exchanges such as the NYSE are monopolies that should be disciplined by competition from alternative exchanges and brokers who offer liquidity outside of exchanges (Selway quoted by Mehta 2012). However, the charges are mounting against HFT by regulators, such as the Commodities Futures Trading Commission, that so-called wash trades allow, high frequency traders to act as both buyer and seller in the same transactions, (Patterson, Strasburg, and Trindle 2013), which distorts prices, creates the impression of higher volume in the market, (2013), and can confuse even sophisticated investors into chasing artificial prices (Arnuk and Saluzzi 2008, 1). Despite the risks of the lack of information on HFT strategies, the potential for manipulation of the market, and the increase

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in volatility that could lead to crises (McGowan 2010, 20), all signs point to increased volumes of this form of trading across asset classes.

V. The Role of Sovereign Wealth Funds and Other State Capitalists One notable category of actors in GSAM funds is the sovereign wealth fund (SWF), which come into existence as a result of national foreign exchange reserves or because of natural resource windfalls. GS may have found a convenient vehicle for just that in the BRICs, which enables foreign government-controlled investors (FGCIs) from the Gulf States, Singapore, and several members of the N-11 to invest in BRICs assets conveniently below the radar. GS, as an entity composed of transnational capital, has no obligation to protect sectors or companies. Several emerging countries have inordinately large currency reserves, as Larry Summers pointed out in 2006 at an event hosted by the Reserve Bank of India, before pleading that these countries recycle the reserves into the global economy (Summers 2006). It is interesting to note that China, with foreign exchange reserves three times larger than Japan, the next largest in the world, is beginning to recycle its reserves into the global economy and has opened up its markets to Central Banks, SWFs, and other qualified foreign institutional investors (QFIIs) (Dingmin 2012). This process has been politically contentious because SWFs, Central Banks, and other FGCIs and funds are not transparent and could lay their hands on strategically important assets. Western policy-makers have been ambivalent about other states owning national assets, in part or in full, when political rather than economic concerns may be the motivating factor. However, GS economists, like Jim ONeill, have been vocal about allowing EM SWFs and other state capitalists into the fold of investors most favored by those on the demand side of global capital markets, not only because it is democratic, but also because,
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Without them, the shortage of world savings would entail a prolonged global recession, (ONeill 2007). He was absolutely correct in 2007, as is obvious considering the fact that emerging countries dispose of 75% of global sovereign wealth and that most of it will be invested in developed countries (Vanham 2012). Today, more SWFs are allocating their investment portfolios across multiple assets, rather than primarily in currencies and bonds. Hua, writing for Pensions and Investments, said this trend is increasing because of, low nominal yields and sovereign credit concerns combined with higher overall volatility in global markets, (Hua 2012). GSAM manages $61 billion from SWFs (Hua 2012), and GS has extensive linkages with monetary officials in EM, such as the former Goldman banker Uche Orji, who is now President of Nigerias SWF (Kay 2012), or the gathering of institutional investors, hedge fund and SWF managers at AIM conference. Owi Ruivivar, a portfolio manager for GSAM in Singapore, says, The response of SWFs is not, should we invest [in emerging markets], but how much? (I&T News 2011). ONeill believes that the reluctance of developed nations to accept investment from SWFs is linked to a greater misalignment of priorities in the multilateral sphere, by which the old hegemony of the West is preserved intact in the voting rights of the Bretton Woods institutions and the G7 and G8 (ONeill 2007). Despite the resistance of Western policy-makers, there is considerable excitement among Western corporate and banking elites regarding the deepening activities of SWF in the equity markets of developed countries, an ironic reversal of roles, according to the Financial Times (Vanham 2012), reminiscent of reverse dependency briefly defined by Pieterse, as the dependency of de-industrializing regions in the North (Wales, Scotland, Brittany) on investors from Asia (South Korea, Taiwan), (Pieterse 2000, 131). However, the concept of reverse
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dependency, although illustrative, is as reductionist as dependency theory, because it relies on a binary relationship, while SWFs from EM countries and the BRICs represent the interaction of diverse nodes of a multipolar global economy, that of polycentric governance organs, and the blending forces of globalization and intra-regionalism. In this context, SWF officials from EM countries have a dual mandate from their governments, One is to manage the wealth of their countries, and the other is to create national champions, (Ibid.). As such, a substantial amount of SWF portfolios will be invested in domestic EM companies. In the process, GSAM says, SWFs cant get enough EM debt, because EM countries have more secure balance sheets at the sovereign, corporate, and household level, (Investment Magazine 2011). This situation, in a world of globalized financial markets, has important implications for hegemony and the international division of labor, as well as for the concept of state sovereignty. Fabio Hassan puts forth an ambitious legal framework for the governance of SWFs in The Law of Sovereign Wealth Funds (2011), wherein he posits that only fracture is possible when the Westphalian model of sovereignty collides with the emerging system of distinct governance organs grounded in principles of free movement of capital, where SWFs are financial superpowers without a commensurate regulatory structure (Backer 2012). Economic sovereignty at the state level is imperiled when state capitalist actors not subject to juridical and regulatory structures outside of their own sovereign territory become active shareholders in a foreign market. As such, when a hedge fund manager from America essentially tells a market or a country to get to work, those who have ears will hear sovereign/private power and sovereign/private capital acting in a managerial capacity on the global level. As more official institutions, such as central banks, SWFs, and other FGCIs, consider multi-asset strategies with money managers (Hua 2012), the dividing line between public and
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private will be further blurred in global financial markets. George Hoguet, a senior portfolio advisor at State Street Global Advisors, a hedge fund, acknowledged the development of mutual dependency between SWFs and the international financial community since the subprime crisis, called for cooperation and communication, especially regarding corporate governance and shareholder responsibility, and offered a list of best practices regarding disclosure, auditing, legal framework, coordination with local policy-makers, and fund governance (Nugee 2009). The important distinction is not between public and private, in the context of SWFs, but between the political or economic purpose of the investment and private or public law which governs the investment, in terms of the national regulator or international law. As an example, take the recent purchase of 2.3 billion share of Industrial and Commercial Bank of China, by Temasek Holding, the Singaporean SWF, from GS, which cleverly bought 4.9% of the bank in 2006 (SWF Institute 2012). Apart from being a perfect example of GS EM strategy by generating $3 billion for the firm (Koh and Hu 2012), it illustrates the dynamic nature of SWF transactions, because an entity controlled by a sovereign has purchased a substantial stake in a foreign state-owned enterprise (SOE), as Temasek Holdings claimed it now owns 1.3% of the shares of ICBCs stock, through its units and associates (Reuters 2012). Although Temasek Holdings has been transparent about how much it and its associates own of ICBCs stock, other SWFs may not disclose holdings by other organs of the state, which presents a potential conflict of interest for foreign enterprises in need of capital and foreign regulators attempting to moderate the influence certain external actors in strategic sectors of the domestic economy. Although none of the articles on the Temasek Holdings - ICBC purchase detailed the firms consulted by Tamesek for due diligence, legal advice, or public relations, these gate-

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keepers are one group through which SWFs begin to exercise influence, according to Larry Cata Backer (2011): But the complication is not merely the fairly obvious one of knowledge transfer (or rental) for penetration into foreign markets. It also affects the conversation of about these activities within the host state itself. Law firms, accounting firms, public relations firms and the like, hired to represent SWF interests within domestic conversations about investment can have a substantial effect on the quality of conversation and its flow. It can provide the appearance of an indigenous conversation when it might be better characterized as something else. The rise of SWFs and other FGCIs is a hot topic because of the legal and regulatory implications, which is a micro-conflict against the background of the implications for national economic sovereignty. Governments can never be sure when the buyer of stocks and bonds is acting in the service or directly for a foreign government. The anonymity which cloaks the activities of investment funds in OFCs exacerbates the uncertainty and gives primacy to the sovereignty of international capital over that of individual state governments. The ambit of FDI is that of cyberspace and offshore finance, because capital chooses the path of least resistance, which is provided by OFC political leaders who recognize that the state must become an apparatus that facilitates capital mobility. For such leaders, sovereignty, in the traditional liberal sense, is moot. Perhaps the real sovereign in this vision is outside the state, above and beyond it, transcendent... (Maurer 1998, 512). These leaders believe that sovereignty, in the liberal sense, [has] the ability to destroy the financial services business, (511). This fractious conflict between states and sovereignty in the contemporary global economy was vividly portrayed by Backer, reviewing Bassans book: SWFs incarnate and replicate the collisions between two tectonic forces that are grinding their way to a new normative framework of governance and power, (2012, 103). With $61 billion AUM for SWFs at GSAM, Jim ONeill is at the helm of that tectonic shift, advocating for a reallocation of multilateral decision-making power in favor of the
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BRICs. In reality, he is advocating for much much more, because he represents speculative capital from offshore.

VI. Effects on and Implications for the BRICs A. Voting Rights and Capital Flows ONeills original thesis in 2001 was ginger in comparison to the claims that were being made in 2003, but the groundwork was laid in Building Better Economic BRICs for the regional political collaboration. ONeill appealed to the most ardent desire of the BRICs political leaders in the multilateral sphere, which is the reallocation of voting rights and political sway in global policy-making forums, specifically the G7 and the IMF. This would seem an astute strategy; offer the political class and the elites an incentive to run with the concept as a manner to attain more influence in the multilateral arena. Capital flows are implied in the launch of the BRICs concept by an investment bank, but the defense relies on an essentially moral argument regarding the BRICs middle income populations inclusion, although it does not follow that offering BRICs nations more decision-making power in multilateral fora is the same as offering more inclusive growth to their burgeoning middle class populations. Furthermore, it does not follow that foreign capital inflows offer inclusion or rising living standards to these populations; in fact, it may very well lead to the contrary. Robert OBrien argues that regional ization activities are similar to globalization, rather than contradictory, and that both globalization and regionalization, ... generate similar unequal institutional arrangements governing the rights of capital and labor, (Cooper et al. ed. 2008,153). This was sharply in contrast to the idea of Cooper et al. (2008) that regionalization allows greater bargaining power on the part of emerging

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countries and policies that would mitigate sweeping globalization, (3). In the case of the BRICs, the results, which we will return to below, are mixed. The reallocation of voting rights in the multilateral fora would offer the BRICs the chance to set the agenda to reflect their share of global economic production, rather than, for example, focusing on the debt crisis in Europe. Although the governing cartel at the IMF has been wary of acknowledging the need for a change, the dedication of several billion by Brazil for the European Union underlines Brazils increasing importance to the IMF and other multilateral institutions (Gomez 2012). However, as we debate the necessity of these reforms, we might have occasion to wonder whether ONeill and GS have pulled one over on us, by offering marketing for an investment fund cloaked in a contradictory moral argument about globalization and emerging markets. Ironically, it may be that the particular strategies of GS serve to undermine the strength of the BRICs economies in the long-term, rather than challenging the allocation of voting rights in the multilateral arena. In the debate over the causes of international crisis, Marcel Fratzcher, an economist at the European Central Bank (ECB) opined that governance indicators play a role in financial movements, such that, countries are far from innocent bystanders that are powerless in being exposed to volatile global markets, and that indeed they have tools to insulate to some extent their economies from adverse global shocks, (Fratzcher 2011, 6). Considering the speculative strength of hedge funds, even against developed countries paper, currency, and assets, this argument could be described as blaming the victim, according to Ghosh (1999), who argued, Throughout the Asian crisis the western policy establishment had been playing down the role of the hedge funds. They put the blame on the countries themselves, (2). Researchers at the Bank of International Settlements (BIS) find that changes in macroeconomic fundamentals do not
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explain the movement of contagion. They point instead to changes in the asset-holdings of international investors, especially in the case of funds, in transactions such as the carry trade (2011). Specifically in Brazil, the carry trade has been singled out as one cause of increased inflation. Salmon, writing for Reuters had the following to say: The influx does no good for Brazil whatsoever (exporters hate overvalued currencies) while feeding huge dividends to hedge funds and others with little long-term stake in Brazils future, (Salmon 2009). Investor mania raises equity prices above fundamentals, and then, as Kyle and Xiong (2001) argue, ... when investors suffer a large loss in investment in the crisis country, they may have to liquidate their positions in other countries and thus cause equity prices to depreciate in these other countries, (quoted in Boyer, Kumagai, Yuan 2006, 958). Judging by the extensive holding of the various BRICs funds, it is reasonable to assume that the initial onset of slower growth, political gridlock, or inflation in any of the BRICs and the subsequent public announcements by GS, among other market actors and commentators, of the end of the BRICs decade and the bursting of the BRICs bubble may have had a substantial correlation. It is as if GSAM, as other fund managers were doing, was chastening the BRICs by exacerbating the selloff of their assets. It seems odd for governance advice to come from a fund manager, but since those entities have a significant stake in the countries, their sentiments have weight behind them. In this context, ONeill berating Russia because of the deplorable condition of the Moscow airport is not to be taken lightly, although BRICs leaders often seem to disregard fund managers, or pretend to. B. Offshore Financial Centers: Conduits of the Shadow Banking System One benefit of the special treatment GS, its subsidiaries, and its competitors regarding FDI is that it provides small and large businesses increased capacity to evade taxes and practice
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transfer pricing. The massive discrepancy between inflows of foreign exchange from Chinas trade surplus and net foreign direct investment and the inflows into Chinas currency reserves is at least partially caused by mis-invoicing, according to the Economist (2012). Chinese exporters understate their exports and over-report their imports, thereby obfuscating a portion of their earnings from the government. The Hurun Report reckoned that wealthy Chinese (with over 10 million yuan) hold 19% of their assets abroad, because of financial oppression by the Chinese banking system (Economist 2012). Add to this fact that the BRIC countries all receive the largest share of their FDI flows from tax havens, Brazil has Holland, Russia has Cyprus, India has Mauritius, and China has the British Virgin Islands and Hong Kong (IMF Coordinated Direct Investment Survey), and the shadow banking systems principal role in the BRICs boom becomes more salient. Just as the state and private sector blend in the global financial flows to and from OFCs, so do the licit and illicit proceeds of business transactions between enterprises of all scales operating across asset classes. In the case of China, the Western banks are obligated to do business with Chinese high net worth individuals offshore (Gu 2013), but in the case of Brazil, GS chose to relocate its office offshore (Napolitana 2012), an indication of the pull of offshore advantages for capital, such as layered secrecy, seasoned private bankers hard to come across in EM, and regulatory environment favorable to a wide range of investment vehicles (Gu 2013). OFCs can be categorized as semi-peripheral states for global finance, because they have become pivotal nodal points in the expansion of global circuits of capital... operating from leading financial centers in London and New York and the myriad of production sites throughout the semi-periphery, (Vlcek, from Worth and Moore Eds. 2009, 177). Specializing in financial services gave many of these nations the opportunity to diversify away from agriculture and
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tourism. In the process of this regulatory specialization, the big four accounting firms are the longest-standing and best represented providers of corporate services in offshore locations, according to the Economist Special Report (2013, 12), which illustrates the role of these gatekeepers alongside the shadow banking system in the integral processes of global financial governance. In addition to the reputational risk of subverting the law by crafting (enabling) tax avoidance strategies, OFCs carry the stigma of shady characters and murky vehicles that threaten the rule of law and the stability of the economic system (Ibid. 7). The practice of round-tripping by which domestic individuals obtain tax breaks by routing their revenues through OFCs back into assets as FDI may account for a sizeable portion of investment in India and China (Economist Special Report 2013, 7), defenders of OFCs counter that they provide legal frameworks specialized for business that make markets more efficient, lower barriers to entry in global finance, provide regulatory arbitrage opportunities, and incentivize companies to expand their activities in poor countries nearby (Ibid. 6). This specialization of the semiperiphery facilitates both globalization and regionalization activities by providing financial conduits, the proverbial plumbing of transplanetary capital flows, which makes them indispensable for the fund-raising, securitization, and investment activities by GS focused on the BRICs. C. Price Volatility, Market Instability, and the Role Fund Managers The BRICs made a joint statement about volatility in commodity markets and inflation caused by capital flows (Bodeen 2011), but $15 billion flowed out of BRICs funds by the end of the year, at which point GS issued a statement that BRICs growth had peaked (Bloomberg 2011). Market commentators began to remark on the bursting of the BRICs bubble by the end of 2012 (Money News 2012). From the beginning of the BRICs boom, the smart money in the market
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was in the position to take advantage of uninformed noise investors, who would naturally be attracted by positive news about the BRICs by positive feedback trading, that is, buying securities when prices rise and selling when prices fall (De Long et al. 1990, 1). Finance theorists have long observed the inclination of noise traders, and the smart money anticipates them at every turn. In the context of the BRICs, the informed rational speculators, GSAM, would buy BRICs equities, driving up the price more than the fundamentals dictate, in anticipation of the uninformed investors reactions to this news. This market logic cannot be discounted when considering the effect of the pronouncements of a hedge fund manager that growth has peaked in a country or a region or the BRICs. In this act, the fund manager reveals himself or herself as a supranational shareholder exhorting the population to be productive and for the leaders to govern with an eye on absolute returns for the fund managers principals. The willingness to undermine market stability is implicit in GS strategy and in the admissions of the firms elites before congress. In the context of the BRICs, we might consider whether the research of GSGE and the BRICs dream is primarily market-making or client services. There does appear to be a synergy between the two, which John Carney, a financial journalist with CNBC, associates with the new emphasis on Wall Street of making money by reacting to customers reactions to market events, (2013), which makes the claim in September 2010 by Katie Koch, client portfolio manager for fundamental equities at GSAM, seem highly dubious: We believe that investors should closely examine the BRIC countries as arguably the fundamentals of the BRICs have never appeared stronger: balance sheets look robust, valuations can be viewed as attractive, and productivity improving. Looking ahead, we also believe that a number of demographic trends should favor the BRICs including the youth of the population, the ongoing urbanization, and the emergence of a middle class with spending power. We believe this could therefore present a good opportunity for investors to increase their exposure to the some of the worlds fastest growing economies (GSAM 2010).
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The month in which this statement came from GSAM was the last month that the MSCI BRIC index beat Standard and Poors (Patterson and Chen 2011), after which capital outflows from BRICs funds commenced and productivity slowed significantly. A year later, one market analyst commented, The time to warn about BRICs and emerging markets was a year ago, which I did, (Shedlock 2011). The author merely warned about China generally and the risks for trade surplus nations and commodity producers, which are issues that GS acknowledged, especially in the case of iron ore, although GS was downgrading it in one market (North America) while remaining bullish on it in another (China). GSAM would have been well-aware of the destabilizing rational speculation weighing down productivity which had been growing after the boom years from 2003-2007, but GSAM persisted in touting the essential arguments they made in the early iterations of the BRICs concept, although it was plainly visible that the BRICs decade was over and that the dream was not to be realized, which GS delayed yet another year in admitting (Wilson et al. 2011). Jim ONeill has remained bullish on the BRICs even after massive capital withdrawals from the BRICs Fund and poorer performance of equity stocks in the BRICs. However, it may be reasonably asked if there is a correlation between the Chairmans resignation and these declines in BRIC performance: Trading by Brazilian individuals has dropped to the lowest level since 1999, exchange data show. Russian mutual funds posted 16 straight months of outflows, the most since at least 1996, and withdrawals in India are the biggest in more than two years. Chinese investors emptied more than 2 million stock accounts in the past 12 months (Patterson, Leite, Shaaw 2013). Finance theory suggests that noise investors will buy low and sell high, and that the informed rational investor will buy in anticipation of positive feedback investing. Once the mania of has pushed price up beyond fundamentals, the destabilizing rational speculation of informed
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investors then aggravates the downward trend when equity prices begin their steady decline after the bubble bursts. In the case of the BRICs, Goldman would be in an ideal position to profit from asset fire-sales and sell-offs, which bring prices below fundamentals (Long et al 1990, Shleifer and Vishny 2011). When investment banks are the most influential voices in the discussion of the global economy, investment managers like Jim ONeill are the informants of the market. Investment managers can mold investors beliefs just as they can (or purport to) mold the behavior of emerging market elites. Has Goldman stepped into a role where the firm is the arbiter of information for the investing public? Clearly GS is attempting to do so and has had some success judging by the fact that BRIC is found on US government websites, particularly the Department of Justice Antitrust Division (Brandenburger 2012) and the Department of Commerce, which has a themes and risk report from GS on its website, emphasizing the BRICs contribution to global aggregate growth during the crisis (GS Research 2011). In addition, while at the Brazilian Ministry of Foreign Affairs, President Obama remarked that the US has integrated to the [BRICs group], which he called, the most dynamic economies, (Office of the White House Press Secretary 2011). While one finds only a few dozen mentions of BRIC on US government websites, it elicits ten million results in Google, of which 1,520,000 are correlated with GSAM, while 1,170,000 are generated with the name Jim ONeill, and 960,000 of which mention Goldman Sachs, (Google Search website 2013). The term BRIC has over one million Google results in Chinese, almost two million in Russian, and just under 300,000 thousand in Portuguese, among which a large portion are official government websites. Interestingly, there are over thirty million hits for BRICs Summit , and the proportions for BRIC official languages (with the exception of India), were approximately repeated (Ibid).
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Although these are imprecise numbers, they give an idea of the currency or footprint of the term on the internet and suggest that, although the BRICs summits have been criticized in the press for generating concrete results, these summits are creating more than their weight in emanations of fanfare from cyberspace. The effect of the GS management of investors beliefs through the BRICs was powerfully demonstrated recently at an alternative investing conference, where attendees, including institutional investors, fund managers, and high net worth individuals were polled on their expectations for the global economy for 2013, as they entered the auditorium. They were asked: Will the dominant factor in markets be policy-makers strength, US economic strength, or BRICs economic strength? 60% of the attendees believed the policy-makers would be determinant for markets, 33% said US economic strength, 7% voted for the BRICs (Keenan 2013). However, at the end of the day, 40% of these same informed investors chose the option indicating that emerging market risk assets will be the best performing market, compared to US (37%) and European (23%) markets. Judging by the fact that the alternative investing community convenes at conferences organized by GS and the Emerging Markets Private Equity Association, the propensity for groupthink among sophisticated investors is highly likely, despite renegade voices like Jim Chanos and Ruchir Sharma. However, groupthink among hedge funds would result in crowded trades, which Reca, Sias, and Turtle (2012) argue is not the case. Reca et al. maintain that hedge funds are less likely to engage in herding behavior, although non hedge fund institutions are more likely to herd during periods of market stress and to momentum trade (35). My reading of finance theory suggests that hedge funds managers, as sophisticated investors who have risen to prominence in the last 15 years, bank on precisely the sort of behavior of uninformed noise traders as Reca et al describe, herding and momentum trading,
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from which they often derive their profit-making strategy. Still, a recent study by Ben-David, Franzoni, and Moussawi (2012) provide empirical evidence of hedge fund herding in the third quarter of 2007 when hedge funds jointly exited US equities market, and found evidence of the same during Lehman Brothers bankruptcy. The WSJ stated the problem aptly: Hedge funds are crowding into more of the same trades these days, amplifying market swings during crises and unnerving investors. Such trading has stoked market jitters in recent months and helped to diminish the impact of corporate fundamentals on stockmarket movements. Droves of small investors have reacted by pulling money from the market, questioning its stability and whether fast-moving traders are distorting prices. (Strasburg and Pulliam 2011 quoted in Reca et al, 3) All these circumstances are besetting the BRICs, in the commodity, currency, and equity markets. Holly A. Bell (2011) put her finger on the GS effect in the BRICs: It is worth considering whether BRIC performance influenced the Goldman Sachs report, or if the Goldman Sachs report has influenced performance, at least in the short-run, of the BRIC countries, (24). Bell refers to correlations in economic indicators to the factors in the GS report, which experienced a crossvergence around the time of the report. It could be that the report was prescient, but Bell points out, now GS has warned that expectations are higher and the valuation gap is much smaller, the same degree of outperformance seems much less likely, even if the BRICs deliver solid returns, (Wilson, Kelston, and Ahmed 2010 quoted in Bell 2011, 24), which suggests GS was moderating economic expectations for the BRICs, perhaps in preparation for the transition of the firms publicity towards MIST or other particularly attractive members of the N-11. The same can be said of the 2009 report by ONeill and Stupnystka attempted to drive a turn-around for the BRICs Fund to rally from the trough at the beginning of 2009 (Brenner 2013). Acknowledging that the BRICs dream was in question, the authors countered, As a result (of the crisis), our long-term projections for the BRICs look more, rather than less, likely to be realized, (1).
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It is not hedge funds that herd; it is the hedge funds that lead the herd. Consider that one single hedge fund had taken exposure to 20% of the Thailands official reserves before the crash of 98 (Ghosh 1999, 95). As in the case of John Paulsons consultation with GSs Fabrice Tourre (SEC 2010) in order to short the subprime real estate market, so was Jim ONeill preparing to short the BRICs by building up a price bubble using GSGE, one of the research divisions of the firm, later from his office as Chairman of GSAM, as well as in the media and his book on the growth markets (2011). Hedge funds occasionally praised for their actions as activist shareholders at the level of the individual firm and more recently as activist investors in the paper of various EM countries, although even those supportive of hedge fund activity acknowledge the problem of excessive focus on short-term pay-off at the expense of long-term profitability as well as stress fractures from undisclosed concerted actions by which hedge funds buy a commanding stake in a company jointly with associates, without filing SEC forms, as the corporate raiders of the 80s did (Kahan and Rock 2007, 1067, 1077-78), which, although not usually a problem in the US thanks to the poison pill provisional of many American company charters, may one factor behind the increasing collaboration between regulators in the US are with BRICs. Although hedge fund managers pose the governance dilemma in a clever way by offering themselves as governance regulators, their activity may, according to OBriens argument, undermine rather than improve the rights of labor relative to the rights of managers. Global governance is accomplished in this way, with the global governors posing as capable regulators of national governments' economic policies and as a whistleblower on corrupt practices, while in reality offering a subterfuge which enables the national elite more power and wealth in the global arena by making national assets more accessible to the international investment community.
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Allowing the actors to export capital to BRICs markets and partially or fully own national assets has significant governance implications with cross-cutting and dynamic outcomes for the political elite and the working class. From the perspective of the political leaders of the BRICs, the various actors that compose that investment community, including hedge funds, pension funds, private equity, SWFs, University endowments, wealthy families, and corporations, each represent risk and opportunity, but we must ask, a risk to whom? An opportunity for whom? D. Global Governance through the BRICs: Transnational Hegemonic Regionalization or Emancipatory Multipolarity? Despite the overt nature of Goldman Sachs BRIC global governance project, the response of the BRIC governments has been to use the BRIC grouping as a platform for regionalisation activities that serves to rebalance global decision-making power away from the West. However, although the BRICs leaders lace their cooperation with developmental messages, the BRICs club is vigorously denounced in Africa as sub-imperialists (Bond 2013). Tomaso Ferrando excoriates Brazil, China, India, and South Africa for their land grabs across the African continent: The dominant narrative about the BRICS approach to development is based upon G77 principles that affirm South-South cooperation, equality, solidarity, mutual development and complementarity. Yet in reality, the proliferation of South-South bilateral investment treaties together with an extraordinary level of capital mobility provides investors with the possibility to generate a regulatory competition between peripheral countries, who in turn utilize their sovereignty (in particular, their sovereignty over natural resources, ability to set taxes, etc.) to become more attractive than their neighbors. The consequence is that formally public or common goods such as land, water, labor and fiscal resources have been progressively privatized and accumulated under cover of private investment agreements (2013) For many critics in Africa as well as within and around each of the BRICs, GS coining of the concept has coincided with and added momentum to the regional hegemonic projects initiated by the BRIC countries, which have greatly angered their neighbors. In Latin America, Brazil has
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expanded commerce and migration with each of the neighboring countries, and Brazilian development projects have inspired notable political backlashes in Bolivia, Guyana, and Ecuador. Ral Prada Alcoreza, a former senior official in Bolivias government, complained, Just as China consolidates regional hegemony in Asia, Brazil wants to do the same in Latin America, (Quoted in Romero 2011). For Pieterse, the resistance proves: The ideology of domination is under attack everywhere... Today not only global hegemons are under challenge; regional hegemons are under even greater challenge. In South Asia, for example, not only Pakistan but even smaller countries like Nepal, Bangladesh would not accept any form of domination by India, (Mohanty 2009 quoted in Pieterse 2011). The rise of the BRICs indicated a global rebalancing of power and wealth away from the core and towards the semi-periphery. This would have happened without the concept of the BRICs, but the fact that GS, a hedge fund pretending to be a bank-holding company, got there first and acted as intermediary in the securitization process is indicative of the trajectory global rebalancing will likely take, that is towards cyberspatial sovereignty, towards the hegemony of transnational capital, towards disciplinary neoliberalism, towards sub-regional hegemony and towards asymmetric exclusion and cleavages in the global middle income classes. However, the harmonization of global regulatory and juridical regimes in favor of governed capitalist economy (Wade 2012) or global plutocracy (Pieterse 2011), or disciplinary neoliberalism is not assured, as the shifting tides of the world order and individual state power cycles guarantee. If the imbalance between the productivity of the semi-periphery and the lack of demand in the core is not rebalanced towards productivity in the West and demand for imports in the East, the tide may turn towards global reorganization, rather than simple rebalancing, which implies institutional and decision-making changes in global governance (Wade 2012). Pieterse termed
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the resistance against Western hegemony as emancipatory multipolarity, and claimed, like the theorists of new regionalism, that developments are layered and that elements of both scripts are combining, (1), which, in view of the BRICs sub-imperialist expansion into Africa, may be an accurate characterization of BRICs employment of similar hegemonic tactics to the ones used by Western hedge funds. In this context, the activities funded by the Brazilian or BRIC development bank could be compared to the financing of GSAM of similar projects in the BRICs in order to ascertain the extent to which hegemonic interests dominate and whether or not socially equitable economic growth results from these and other projects. Helge Hveem distinguishes between hegemonic, non-hegemonic, and transnational regionalization projects by categorizing what actors and what groups associate with what kind of intention, (Soderbaum and Shaw, Eds. 2003, 85). Hveem also describes the leadership structure and the decision-making processes in order to characterize the projects, which have been hegemonic throughout history (85). According to Hveems definition, the BRICs is an example of a corporate regionalization project that seeks to bring a particular thematic regionalism idea that originated within GS into existence by investing in the intended members economies, but the theme lacks the clear idea of a region, because of the diverse identities and political systems involved in the contested membership and leadership of the project. An example of the contested nature of the membership is seen in the attempt of the BRICs to add South Africa in order to aid their hegemonic regionalization project into Africa, which ONeill rejected, as well as dispute over whether Russia should be a member. In addition, the leadership is not clear, as the real originators and beneficiaries of the initiative within and through GS are relatively obscured, which is an obfuscation the BRICs leaders try to maximize in order to

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counter Western hegemony and substitute their own in its place, both in their individual regions and in Africa. The BRICs regionalization initiative found support among the Western elites because many of them knew that the time was ripe for a boom in several semi-peripheral countries and because of the preference of capitalist accumulation for a multi-centric instate system. ChaseDunn and Boswell explained that this is, because it provides greater maneuverability of capital than would exist in a world state, (Worth and Moore, Eds, 2009, 214). In addition, transnational hegemonic regionalization may find support among realists and liberal institutionalists, although for different reasons. Realists tend to support hegemonic stability theory (Keohane 1987, 86), whereas liberal institutionalists welcome the renewed engagement in multilateral fora, which will be required in order to bring balance to the decision-making process. Although the intelligence community in the United States is now worried that US hegemony may disintegrate by 2030 (not only) because of the rise of these countries, GS concept found favor among elites because it gives a non-state actor, GS, which is dominated by Western interests, a foothold in the potentially counter-hegemonic movement of several nations from the semi-periphery to the core. This wedge gives a variety of actors outside the BRICs leverage in BRICs economic future and could ultimately result in arresting the movement of these nations to the core, by increasing market volatility, internationalizing (privatizing) national assets, and increasing social antagonisms. The latter is virtually guaranteed if, as Cooper et al maintained (Brigaldino Reviews Cooper et al 2007, 584), regionalization and democratization are not mutually reinforcing, and democratization moves in retrograde because of the hegemonic aspirations of the group of actors leading the BRICs project. This model of globalization was criticized by Andre Gunder Frank because it depended on authoritarianism to enforce domination by
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productive forces over labor and on borrowing, which often leads to BOP crisis (88) and stress fractures when hedge funds engage in undisclosed concerted actions against EM (Kahan and Rock 2007, 1077). Regionalism as an organizing principle of globalization of growing importance, according to Cooper et al. and O'Brien maintains that the regional agreements have allowed a continuing shift of power away from labor towards capital, which puts the capacity of regionalization activities to spur economic growth and development outcomes in doubt. If this is accurate, social pressures from 'unruliness of the labor movement may intensify because transformation of institutions necessary for movement to the core is unlikely and the discontinuities of globalization will lead to fractures in the social order (Martin, Ed. 1990, 114). Comparing developmental outcomes in Latin America and Asia, Korzeniewicz critiques bureaucratic authoritarian regimes and the dependent-development approach towards manufacturing in the semi-periphery, quoting Arrighi and Drangel, The industrialization of the semi-periphery and periphery has ultimately been a channel, not of subversion, but of reproduction of the hierarchy of the world-economy, (1986, 56 quoted in Martin 1990, 114). With the rising instability in the BRICs, the time is ripe for contestation of the social order (Worth and Moore 2009, 23) and the method of accumulation of capital through dispossession (Ibid. 43). In contestation, as in accumulation, labor is the principal actor by which the international division of labor is challenged. The structure of this division was cleverly described in Worth Moore using the motto of Brazil, "Order and Progress," wherein order is for subalterns and progress is for elites (66). Multi-centric governance is favorable for the domination of capital by the likes of GS (214), which relies on inter-regionalism and leveraging South-South cooperation, which in turn
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relies on the mentalities and identities of global populism in order to convince unlikely protagonists within the BRICs to support the global governance agenda of GS. This process molds and reorganizes identities and loyalties (Soderbaum and Shaw 2003, 205-210), creating a winning coalition for GS. Using a small cluster of countries may not make economic sense, but they encourage South-South collaboration under the aegis of the core, which attempts to subjugate the potential of counter-hegemony by managing regionalization in order to counteract the power cycle (Worth and Moore 2009, 214) of which the US may be nearing the end by harnessing productivity resulting from structural change in the BRICs (Heim 2009). GS, and specifically GSAM, created a multi-faceted vehicle, the BRICs theme, which was broad enough for diverse actors to carve out pieces for themselves and innocuous so as to serve as a foil against critics of the BRICs dream. The dream of the large populations of the BRIC countries to enter middle and upper middle income brackets is indeed an alluring one, but it will not happen as a result of the activities of GSAM, because those activities will likely undermine the stability of the market and drive social tensions to a breaking point, which very few semi-peripheral countries have been able to manage, especially when social unrest and economic collapse come simultaneously. Jim ONeill held the helm of the BRICs dream for several years, during which he nonchalantly yet relentlessly downplayed the risks endemic to the BRICs, although the short-term horizons of the GSAM mission in the BRICs would preclude any path to 2050 written about in GSGE. ONeill and his colleagues were piling into BRICs assets of all classes, carefully gauging as the markets became more and more volatile, which would merely fill GS coffers as the enlightened positioning around client flow, already years in the making, was coming to fruition.

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The BRICs leaders were all well aware of the risks and opportunities of transnational regionalization as it was devised by GS. It is remarkable how little was made by them of the involvement of GS. ONeill joked openly on Charlie Rose that his invitation to the BRICs Summit must have gotten lost in the mail, (2012). Perhaps this is the merely discreet political posturing, because GS represents the absorption of politics into economics, because sovereign wealth is intertwined with the private sector and various levels of the banking system simultaneously in its hedge-fund-like activities. GS entities have been vying for ownership of assets in BRICs, and the same strategies can be expected, Hedge Funds and private equity emanations from the firm for the large enterprises, Special Situations Group and municipal finance vehicles for mid-sized enterprises and Public Sector and Infrastructure (PSI) (Goldman Sachs website 2013), as well as socially conscious bonds for prisoner rehabilitation, support for the arts, education, etc., in other words, just your neighborhood bank. GS is anything but a bank, but the BRICs leave well enough alone in order to avoid potential political fallouts, when they have no choice but to tacitly affirm the hegemonic intentions of GS. The conflict of interest in inviting an entity like GSAM to commodify national social space and open the door to speculation on national assets is likely a strong inspiration to use the platform of the BRICs to promote regional hegemonic summits on the internet three times more than Goldman. As they say, Money talks, but wealth whispers. Judging by the difficulty the BRICs have faced in raising capital for the BRICs development bank, there is no doubt that transnational capital will always outmaneuver nation states, because when it is free of political and transactional friction, free to play national states off against one another and[it] can escape movements that try to regulate investment and abandon national states in which such movements attain political power, (Owen and Moore
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Eds. 214). For the BRICs, the middle way of the double movement is still working within hegemony.

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Acronyms AIMS ATS AUM Alternative Investment Manager Selection Alternative Trading Assets Under Management
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BIS CIGI EM ECB FASIT FCIC FGCI FICC FDI GS GSG GSAM GSAMI GSGE HFT IMF MNC MTF MIST MSCI MSI N-11 NYSE

Bank of International Settlements Center for International Governance Innovation Emerging Markets European Central Bank Financial Asset Securitization Investment Trust Financial Crisis Inquiry Commission Foreign Government Controlled Investor Fixed Income Currencies & Commodities Foreign Direct Investment Goldman Sachs Goldman Sachs Group Goldman Sachs Asset Management Goldman Sachs Asset Management International Goldman Sachs Global Economics High Frequency Trading International Monetary Fund Multinational Company Multilateral Trading Facility Mexico Indonesia South Korea Turkey Emerging Markets Index Multi Strategy Investment The Next 11 (Growth Markets) New York Stock Exchange
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OECD Development OFC QFII REIT REMIC SEC SOE SPE SPV SSG WST WSJ

Organization of Economic Cooperation &

Offshore Financial Center Qualified Foreign Institutional Investors Real Estate Investment Trush Real Estate Mortgage Investment Conduit Securities & Exchange Commission State Owned Enterprise Special Purpose Entity Special Purpose Vehicle Special Situations Group World Systems Theory Wall Street Journal

78