The latest example of how the financial deck is stacked against the average investor is the revelation that banking behemoths like Citigroup, Credit Suisse First Boston and Goldman Sachs regularly doled out hard-to-get shares in hot IPOs to favored customers, among them corporate big shots and politicians.

Given the very cozy connection between Wall Street and Washington — “You scratch my back, and I’ll scratch my name on the front of a big, fat campaign check with your name on it” — it should come as no surprise that political insiders, some of them on congressional committees investigating these IPO practices, have been getting in on the ground floor of fast-rising IPO elevators for years.

Among the prominent politicians of both parties who were moved to the front of the line at the IPO feast: Sens. Barbara Boxer, Judd Gregg, Robert Torricelli, Jeff Bingaman and Fred Thompson; Reps. Nancy Pelosi and John LaFalce; and former senator Al D’Amato and former speaker of the House Tom Foley. This special access only reinforces the indubitable contention that corporate America and official Washington have grown far too close for the comfort of the rest of us.

The allocation of these goodies was no small perk. At the height of the tech bubble, when every morning seemed to bring another cash-gushing IPO — initial shares of Priceline.com, for instance, skyrocketed more than 300 percent in value on its first day of trading — being cut in on a hot IPO was like being handed the combination to Bill Gates’ wall safe, a stable boy’s pick in the featured race at Aqueduct, and the map to the fountain of youth. All on the same day.

Among those able to quickly cash in — or, in the parlance of the game, to “flip” — their IPO shares for big bucks was former WorldCom CEO Bernie Ebbers. He earned more than $11 million from shares in 21 separate IPOs allocated to him by brokers at Citigroup subsidiary Salomon Smith Barney, who were after WorldCom’s business.

Ebbers’ fellow WorldCom slimeball Scott Sullivan and former Qwest CEO Joe Nacchio also made it onto the VIP list at the very exclusive Club IPO. As did W’s dad, George I, whose $80,000 pre-IPO stake in now bankrupt Global Crossing ballooned to $14 million after the company went public. Democratic National Committee chairman Terry McAuliffe even did ol’ 41 one better, flipping his $100,000 pre-IPO Global shares into an $18 million windfall.

The IPO outrage is just another in a long list of examples proving that cleaning up the corporate stench that has been filling the air and the headlines for close to a year still remains to be done.

Instead of worrying about their investments, here’s what our leaders should be doing now. Not after the election. Not after a change of regime in Iraq. Let’s start by closing the loopholes that allow IPO favoritism to imbalance the financial playing field. And then let’s move on to treat stock options as the expense that they are, strengthen whistleblower protections, institute real reforms to regulate lobbyists and pension account managers, and make bridging the great wall between stock analysts and their investment banker cohorts illegal.

During the wild times of the late ’90s, IPOs were hailed as a modern manifestation of the American dream: Build a better mousetrap and the world will make you a market millionaire as soon as your company goes public. But now they have been revealed for what they really are — just one more way of trapping small investor mice for the fat cats.

If Democrats control the White House and both houses of Congress, they would likely extend the payroll tax cut and attempt more stimulative spending, because millions of people are still out of work. (They would also likely not allow defense spending to be significantly cut, because they don’t want people to accuse them of hating the troops.) If the GOP controls government, they will “fix the deficit” by passing huge tax cuts. Just massive tax cuts, on top of the permanent extension of the Bush tax cuts. (Which Democrats would probably only mostly extend.)

But with divided government, the status quo wins out, and right now the status quo involves horrific insurmountable gridlock coupled with the threat of billions of dollars in scheduled automatic (perhaps devastating) spending cuts and the expiration of various tax cuts. Goldman says that would mean that “a compromise on the expiring tax cuts will be necessary” (which would probably just mean a government shutdown followed once again by the “temporary” extension of the Bush tax cuts), but divided government is the only scenario in which the automatic cuts actually have any chance of taking effect.

This note is of interest only if you are one of those people with an obsessive interest in the size of the federal deficit as opposed to, like, “how many Americans have jobs and can afford to go to the dentist,” but give the money-grubbing world economy-destroying plundering high-finance pirates of Goldman credit for plainly stating that the deficit won’t go away without revenue, and “cut all taxes” is not a realistic means of generating revenue.

Smart “fiscal conservatives” have long understood that divided government is best for dragging all government business to a halt, which is generally the unspoken (or occasionally spoken) goal of professional “deficit hawks.” Goldman gets that you want Democrats in charge of most of the government if you want a balanced budget, because Democrats crave compromise and balanced budgets and fiscal responsibility, on account of modern Democrats being for the most part Rockefeller Republicans. (But if you let the Dems be in charge of all of it, they might try to “give everyone healthcare” again, or something equally awful.)

My question: How much do people pay for these GS research notes, exactly? Because the analysis seems “right” but it is also something you could read on a blog, for free. Like, a Slate intern could have also written this, and it would’ve been shorter, probably. Stop paying Goldman Sachs, and put some boring econ “wonk bloggers” on your Google Reader instead. Fiscal restraint begins at home!

If Mr. Smith believes such disregard of investors is unique to Goldman, he doesn’t know the rest of Wall Street. In the late 1920s, National City Bank, which eventually would become Citigroup, repackaged bad Latin American debt as new securities which it then sold to investors no less gullible than Goldman Sachs’s. After the Great Crash of 1929, National City’s top executives helped themselves to the bank’s remaining assets as interest-free loans while their investors and depositors were left with pieces of paper worth a tiny fraction of what they paid for them.

The problem isn’t excessive greed. If you took the greed out of Wall Street all you’d have left is pavement. The problem is endemic abuse of power and trust. When bubbles are forming, all but the most sophisticated investors can be easily duped into thinking they’ll get rich by putting their money into the hands of brand-named investment bankers.

Moreover, finance has become so complex that investors don’t even know when they’re being taken for a ride, and so can’t possibly hold a brand-name bank responsible for their losses – or for gains that are a fraction of what they might otherwise have been.

That’s why we have regulations. After millions of investors lost everything in 1929, the federal government stepped into the breach with the Securities Acts of 1933 and 1934 and the Banking Act of 1933, sponsored by Senator Carter Glass and Congressman Henry Steagall.

But starting in the 1970s and 1980s, Wall Street made sure these and the regulations issued under them were steadily watered down – which contributed to the junk-bond and insider trading scandals of the 1980s, the dot-com scams of the late 1990s and early 2000s, the Wall-Street enablers of Enron and other corporate looters, and the wild excesses that led to the crash of 2008.

Wall Street’s shenanigans have convinced a large portion of America that the economic game is rigged. Yet capitalism depends on trust. Without trust, people avoid even sensible economic risks. And when they think the game is rigged, they’re easy prey for political demagogues with fast tongues and dumb ideas.

The Street has only itself to blame. It should have welcomed new financial regulation as a means of restoring public trust. Instead, it lobbied intensely against the new Dodd-Frank Act and refused to resurrect Glass-Steagall.

The cost of such cynicism has leached deep into America, finding expression in Tea Partiers and Occupiers and millions of others who think the Street has sold us out.

Despite that very good spin, Goldman Sachs lost $2 billion worth of market value as its shares fell 3.4 in trading over the course of the day (“oh man, some guy says Goldman Sachs is evil? I HAD NO IDEA” — the market). Thankfully, one hero stands ready to defend Goldman Sachs from public scorn: New York City Mayor Michael Bloomberg.

Bloomberg actually visited Goldman Sachs headquarters today to personally cheer up very sad bankers. Bloomberg met with Goldman head Blankfein and various other members of the 1 percent, in order to reassure them that they are good people who do good work, even though that is a ridiculous delusion that only fellow members of that class still believe.

“The mayor stopped by to make clear that the company is a vital part of the city’s economy, and the kind of unfair attacks that we’re seeing can eventually hurt all New Yorkers,” Bloomberg’s spokesman said. Bloomberg is a billionaire mogul who owns a financial information company, so Goldman Sachs and other major financial institutions are a vital part of his economy.

After his visit, Bloomberg continued his “stop piling on Goldman Sachs” tour on the radio:

“I don’t know whoever said what,” Bloomberg said on WOR Radio’s John Gambling Show.

“But even if it was said, it’s a few people and, you know, Goldman Sachs is a firm that’s been around for well over a hundred years and it’s a great firm.”

“It’s my job to stand up and support companies that are here in the city that bring us a tax base that employ our people and I’m going to do that.”

He called news coverage of the letter “ridiculous” and “not something we should do.”

We mustn’t cover bad things about Goldman Sachs, because if we do they might get mad and leave us, and then we will have no more Goldman Sachs! They are so important to our tax base that New York City gave them hundreds of millions of dollars worth of tax concessions and grants and benefits after they unconvincingly threatened to move to the suburbs.

“Bloomberg View,” the opinion arm of Mr. Bloomberg’s media company that operates out of the offices of his charity, also defended Goldman in an unsigned editorial mocking Smith for failing to realize that Goldman exists to make money by any means necessary, which is obviously a self-evident Good Thing for The Economy and The Country. “If you want to dedicate your life to serving humanity, do not go to work for Goldman Sachs,” the Editors write. Then: “Goldman and other investment banks do perform an important role in our economy, and Goldman bankers — most of them, at least — can hold their heads up high.” I am sure they are relieved to hear they have Bloomberg View’s vote of confidence. (Meanwhile, Bloomberg-owned Businessweek magazine offered this article documenting some recent “heads I win, tails you lose”-style Goldman malfeasance. When will these unfair attacks end?)

That’s the essentially contradictory message currently being offered by defenders of Wall Street: Only a naive fool thinks Goldman doesn’t rip off suckers, and also Goldman performs an important service. And as always the richest and most powerful people in finance turn out to be extraordinarily concerned about their public reputations, but basically unable to actually stop doing things that make people hate them.

Exiting: Greg Smith, executive director of Goldman Sachs’ U.S. equity derivatives business in Europe, the Middle East and Africa, who has resigned in protest of the company’s culture of toxic greed and published his reasons in a New York Times op-ed.

This tale of coming and going, and the public reaction, speaks volumes of the power of Goldman Sachs and the public rage over its ethical lapses.

Which will speak louder? The answer will serve as a barometer to how far America has come in challenging a destructive financial system.

The Devil’s Work

Back in 2009, Rolling Stone’s Matt Taibbi launched the key media indictment of the mega bank’s excesses, famously dubbing the firm a “blood-sucking vampire squid.” Taibbi unsparingly detailed the vast economic and political power of Goldman and its history of destructive market manipulation that helped devastate the world economy in the 2008 financial crisis.

Taibbi’s story involved some of the most influential men in recent U.S. history, including Hank Paulson, Robert Rubin, and other members of a privileged fraternity of Goldman-affiliated players whom he called out as political puppeteers working on behalf of a corrupt financial industry. It was a tale of greed triumphing over democracy. Goldman Sachs was the predator, and we the people, our money sucked away in a “giant pump-and-dump scam,” were the broke and bewildered prey.

Taibbi was vilified by many members of the press for his audacity, and it wasn’t just the conservative press that pounced. Tim Fernholtz accused Taibbi of lying and called the piece a “conspiracy theorist’s dream” in the liberal American Prospect.

A few voices came to Taibbi’s defense, including economist Rob Johnson, who published his reaction on a blog I edited at that time. Johnson pointed out that Taibbi’s article would “surely be discounted by some as hysterical or exaggerated, particularly by those whose senses are deadened by the business press or CNBC-style babble.” But Johnson felt that Taibbi’s outrage was more than justified:

“He is screaming in a way that a healthy press would do in a hysterical time. Goldman Sachs’ uncontested success blurring the boundaries between market and state is symbolic of a tremendous malfunction in finance, politics and civil society.”

The Goldman apologists might dismiss Taibbi as hysterical. But it was a little harder to wave away the condemnation that appeared in the New York Times this week from a man who had worked at the firm for 12 years before quitting because he could no longer tolerate what he described as a culture as “toxic and destructive as I have ever seen it.”

Rip-off, Inc.

Greg Smith came to Goldman as a college intern and over the years has helped recruit students to join the firm. But after 12 years, he found himself working for a company that had become so blinded with greed that its clients were no longer there to be served, but to be duped, profited from, and disparaged. Smith wrote:

“It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes in internal e-mails.”

Regardless of the legality of Goldman’s activities, Smith found the absence of integrity and the single-minded focus on pushing potentially harmful investments on clients to be destructive and repellent: “I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.”

This announcement came on the heels of a report from none other than Matt Taibbi that Goldman Sachs had just hired a man as global head of mortgage trading whose background is as shady as it is outrageous. Jeffrey Verschleiser, a former Bear Stearns executive, was already making the news back in January, when he bought out a popular Aspen hotel and shelled out $500k to $1 million for his daughter’s bat mitzvah party. The community was disgusted, particularly as this same man had been named in a lawsuit against Bear Stearns that claims the company took millions of dollars from clients in the name of profits and bonuses. Teri Buhl, who broke the story for the Atlantic, named Verschleiser as a key figure in a scheme among Bear traders to sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. “The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds.” In other words, Verschleiser and his pals were getting paid twice on the same deal, what’s known as “double-dipping.” The Bear traders cynically referred to these crappy bond mortgages as “sack-of-shit” bonds.

Verschleiser was hired by Goldman Sachs. Two days later, Smith released his op-ed in the Times, which pointed to a “toxic leadership culture” as one of the key problems at the bank.

Release the Kraken!

The vampire squid froze for a moment in horror. And then a tsunami of attacks on Smith and defenses of Goldman covered the media. Within 24 hours, the following stories appeared:

Greg Smith Isn’t A Whistleblower, He’s Just A Goldman Sachs Executive Having A Midlife Crisis (Nathan Vardi, Forbes)

“Smith is not the first person who wants to tell his former bosses to shove it. He is also not a whistleblower. He remained happily employed at Goldman after it took a massive taxpayer bailout.”

Read: Traitor!

Greg Smith Doesn’t Like Goldman Sachs, But MBAs Still Do (Kurt Badenhausen, Forbes)

“Smith might think that Goldman is undergoing a ‘decline in the firm’s moral fiber,’ but MBA students are still clamoring to get in the door of the investment bank.”

Read: Who cares about morality when you can make $$?

Yes, Mr. Smith, Goldman Sachs Is All About Making Money (The Editors, Bloomberg)

“If you want to dedicate your life to serving humanity, do not go to work for Goldman Sachs. That’s not its function, and it never will be. Go to work for Goldman Sachs if you wish to work hard and get paid more than you deserve even so.”

Read: Goldman Sachs doesn’t have to serve society. How cool is that?

The ballad of Greg Smith (Felix Salmon, Reuters)

“It’s much easier to see the disgruntled ex-employee here, quitting in a huff, than it is to see someone genuinely trying to do his part to reconstitute the Goldman Sachs of Gus Levy and John Whitehead … The most remunerative skill, at Goldman, is the ability to flatter someone into believing that they’re incredibly important and clever and sophisticated, even as you’re getting that person to do exactly what’s in your own best interest.”

Read: Fiduciary duty is for suckers. Not for blood-sucking vampire squids.

Goldman on Trial

One of the most memorable spectacles of the Occupy movement was a mock trial held in Zuccotti Park in which philosopher Cornel West and journalist Chris Hedges teamed up with people directly impacted by Goldman Sachs’ destructive policies to publicly accuse the firm of crimes against society. “The People v. Goldman Sachs” concluded with a verdict that found the bank guilty of felony fraud and a demand, among other things, of the return of billions looted from the U.S. Treasury.

Now, perhaps, is the moment for a broader public trial.

Paul Volcker has praised the Smith op-ed and denounced the conflicts of interest rampant in the industry. The blogosphere is ablaze with commentary testifying to widespread anger at the firm and all it represents, including Mike Lux’s piece in the Huffington Post, which includes a petition demanding that Mitt Romney lead the charge for Lloyd Blankfein’s resignation. Web satirists are having a field day — a parody popped up on the Daily Mash website in which Darth Vader resigns from the Empire, unable to swallow its unethical behavior.

Most upsetting for Blankfein, I’ll wager, is that money talks. The company’s shares have already taken a steep dive, evaporating $2.15 billion of its market value.

Hard to say where this will all end. The vampire squid has lost a tentacle, but it knows how to grow three more in its place. Unless, of course, it finds that unmitigated greed and corruption don’t pay quite as well as they used to. At water coolers, dinner tables, classrooms and newsrooms across the country, the people will be asking, how have we allowed this predator to exist in our midst? And some very wealthy clients will be asking, why the hell are we giving this thing our money?

The working group’s detailed policy position gives lie to the common claim that the Occupy Wall Street movement is “well intentioned but misinformed.” It shows there’s room in the movement both for policy wonks and those chanting “anti-capitalista.”

The group was aimed to bolster one of the key reforms to emerge since the 2008 crash. The Volcker Rule (named after former Federal Reserve Board Chairman Paul Volcker)  is a subsection of the Dodd-Frank act, passed in 2010. Its purpose is to curb risky speculative trading by Wall Street investment firms. The regulations are set to be  finalized in mid-July. Until then well-paid lobbyists will do everything they can to create new loopholes that will enable the banks to engage in high-risk, high-reward speculation. Occupy the SEC seeks to block them.

“The main takeaway is the bank lobby is not the only player when it comes to influencing the regulators. There’s another side, and we’re trying to take that side,” said Akshat Tewary, an attorney, who helped draft the letter.

The SEC  is now bound to some combination of its initial draft and the comments it receives, explained Alexis Goldstein, who quit her Wall Street job last year. “They can’t add new stuff out of thin air; it has to come from comments. We’ve basically said the opposite of what the banks have said, from what I can tell so far.”

The action marks an unusual development for both the Occupy Wall Street movement and  the SEC. Unlike the Environmental Protection Agency, which gets comments from both industry and environmentalists, the SEC usually only hears from industry. The movement is bolstering the regulators, not bad-mouthing them. While the Occupy movement is often characterized by its disruptive street protests, it also includes a faction willing to dedicate untold hours of detailed policy analysis urging the SEC to do its job. That’s a more full understanding of what the movement calls “diversity of tactics.”

It’s hard to argue with Occupy the SEC’s recommendations. The Volcker Rule currently has an exemption for “repos,” which, Akshat tells me, is “basically a way to get funding at a very high leverage and very quickly.” Alexis describes repos like a pawn shop transaction. You sell your watch to the pawn shop for cash, but you plan on buying it back.

“So it’s technically a sale, but it’s treated as a way to finance things. Banks do this all the time, to finance things. And that would be fine if they were using Treasuries [i.e., U.S. Treasury bonds,  the definition of a safe bet], but they’re using these crappy assets. So they sell them, then they buy them back, and it’s all really short-term trading that happens with them. When people start to think the assets are bad they demand more collateral, and then other people hear that they’re in trouble so they start to demand more collateral and it becomes this death spiral.”

Repos are one of the reasons Lehman Brothers fell as swiftly as it did in 2008, and Occupy the SEC thinks that exempting them from the Volcker rule is a “terrible” idea.

They also want illiquid, over-the-counter financial products – like mortgage-backed securities – to be forbidden. As Alexis Goldstein puts it, “There’s a clause that says any high-risk asset shouldn’t be allowed by the rule, and we think over-the-counter illiquid assets are high risk.” The millions of Americans still suffering the effects of the Great Recession that began with the 2008 Wall Street crash  are likely to agree.

In addition to its attempt to directly influence the SEC, the group hopes to wage a broad educational campaign to teach the public about the financial industry. Occupy Wall Street has already successfully jammed early-stage class consciousness into the American zeitgeist. Occupy the SEC is hoping to build on that.

As one SEC occupier told me before the march, “One of the most exciting, surreal things about Occupy Wall Street so far is I have this sign that says, ‘Bring Back the Glass-Steagall Act,’ and if I just hold that on the subway, or on Broadway, you see people walking up to me every day, every single day I do it, someone walks up to me and says, ‘Yeah man, the Glass-Steagall Act.’ That would have been unthinkable four or five months ago.”