Illustration: Michael Mucci

Goldman Sachs is mourning the death of a valued client today … Muammar Muhammad Abu Minyar al-Gaddafi.

In 2008, the bank roped the dictator into investing $US1.3 billion from Libya’s sovereign wealth fund in some structured products. Somehow it managed to blow up 98 per cent of Gaddafi’s money in a year.

So keen were Goldmans boss Lloyd Blankfein and his soldiers of fortune to keep the Colonel as a client though – the Libyan Investment Authority still had $US53 billion in funds, after all – that they offered Gaddafi a stake in their firm. No, there was no seat on the board with that. No fries with that burger.

Thankfully for Goldmans, Warren Buffett bobbed along during the heat of the financial crisis and saved the day because Muammar declined the offer. It was once bitten twice shy.

Incidentally, the Sage of Omaha took his placement of Goldmans stock at $US115, which still puts him behind on last night’s closing price of $US100.86, although he has been getting a 10 per yield on his preferred stock so he may be ahead.

It’s not only the financial products which are finely structured on Wall Street, but compliance materials too. How Goldmans skirted the anti-money laundering laws designed to prevent one from taking money from terrorists is anybody’s guess.

But it’s not just the “giant vampire squid” whose tentacles seem to protrude beyond the law.

HSBC, Societe Generale and JP Morgan were also doing their level best to grab a slice of Gaddafi’s business. Goldmans simply has more flair, and better connections.

A year after torching Gaddafi, and his people’s sovereign wealth, it emerged the New Yorkers had teed up billions in off-balance sheet funding for Athens.

The government of Greece had been able to conceal the extent of its debt for years, via a currency swap deal with Goldman.

It’s down to Mario Draghi to sort it out. Draghi – ahem, formerly a managing director of Goldman Sachs – succeeds Jean-Claude Trichet as head of the European Central bank on November 1.

And it’s not just the US banks whose influence over the political process is disproportionate.

The European banks are more highly leveraged than their trans-atlantic counterparts, are loath to cop a write-down on the likes of their Greek bonds and are leaning hard on their politicians.

Plainly, they shouldn’t have lent so much money to Greece in the first place, let alone Spain, which is also starting to wobble.

And it is plain every day that the only way to solve the euro crisis is by the rich countries digging deep for a massive bail-out fund to buy sovereign debt of the less efficient nations.

The question stands, are the German people happy to support the Greeks? It would seem that an economic solution is hard without greater political union.

At some point Europe’s leaders will be forced to make a choice between their banks and their voters. Greece ought to just default. The Latin Americans did, their lenders survived and the economies of Brazil and Argentina are now in much better shape.

In the meantime, European leaders have their next tete-a-tete scheduled for tomorrow. This is a preliminary meeting at which no decisions are expected to be made while observers are hopeful something might happen at the following meeting slated for Wednesday. You get the picture.

It’s no wonder, especially in view of America’s plight, that markets have been whip-sawing on thin volume. Corporate earnings in the US have been solid. Equities still look cheap at roughly a 30 per cent discount to long-term valuations. And the recent slew of economic data out of the US suggests that its lumbering economy might just stave off recession.

So what’s the problem? The world remains in a long-term process of deleveraging. The debt binge was never going to go on forever. And so the same growth assumptions cannot be relied upon, particularly when markets suspect that governments can only be funded with higher corporate tax revenues.

And then there is moral hazard, that very hazard which regulators fleetingly agonised about before tossing gazillions to bail out the banks and the corporate sector.

The upshot is mispricing of risk, diminishing trust in financial institutions and protest movements.

They might struggle to articulate its cause but the likes of Occupy Wall Street have the vibe. They are on to something, and there are so many things, from Gaddafi to Greece.

But they are occupying the wrong street; it should be Pennsylvania Avenue, not Wall Street. The bankers and assorted finance types are just doing their jobs. Being greedy gets people out of bed in the morning.

Where is the protester who would turn down a $10 million bonus, if there were one in the offing?

You can’t begrudge bankers from making a dollar. The problem is that capitalism – in its logical and inexorable evolution – has now contaminated the political process. It is government which has failed.

Wall Street has bought off Washington. And Washington has outsourced its economic authority to a Wall Street-controlled Federal Reserve. The Fed acts in the interests of its masters.

Thankfully we have an independent Reserve Bank in Australia. It is not run by the Big Four, but you might not have guessed that lately. There was barely a whimper of dissent about the covered bond legislation which slipped through Parliament last week.

Now the taxpayer is on the hook for some $130 billion of extra risk. The mostly foreign bondholders will now rank ahead of taxpayers.