How Goldman Sachs made all their recent loot

http://www.pbs.org/newshour/bb/business/jan-june10/goldmansachs_02-11.html
http://www.pbs.org/newshour/bb/business/jan-june10/goldmansachs_02-12.html

NOMI PRINS, former managing director, Goldman Sachs: First, of course, they received $10 billion in TARP money. Even though, a year later, they can say, "Well, we didn't really need it," They really needed it.

And look what they did with it!

Goldman's CEO recently testified on the Hill about his company's record profits and big bonuses from 2009, when many Americans were suffering terribly. He basically said that they did it without government help, and that they are just a kickass operation that "allocates capital" and grows wealth for millions of people out there. They are "important" to the economy. While that is probably true, it also glosses over some inconvenient details of how they got there.

Goldman is basically a hedge fund that applied for bank status in order to get TARP funds, and the government went along. Only 10% of their revenue comes from i-banking, and 75% came from trading (mostly commodities and currencies). So we can't really buy the "we're nice guys who lend money so you can make money" story. And they did so well in trading partially due to "front running" of clients. Say Goldman thinks oil is undervalued, so they buy up a crap load of it (where they get the funds to do this will surprise you too - I'll explain soon). Then they consult their clients to do the same, of course AFTER they have gotten in at a lower price. So by their sheer size and the reach of their advising, they can move global markets in their favor. Technically this is illegal, but it's hard to prove and enforce. And in their case, it's amazingly profitable.

In addition, they were selling risky mortgage-backed securities to pension funds while they were taking out huge insurance policies with AIG and others to protect against losses from those securities. Pension fund managers were much less savvy, and just wanted to get in on this seemingly booming market. Goldman gave them the green light, and they trusted them. Of course their greed blinded them from questioning why brainy Goldman would want to sell something solid and profitable to another party. But instead, they sold a suicidal guy a gun, and then took out a life insurance policy on him. Most people now agree that Goldman's political connections and heavy pressuring of Washington helped them decide to bail out AIG. This allowed AIG to pay Goldman the $13B it owed on the policies, which Goldman then used in 2009 to make huge bucks off a troubled market.

Goldman was traditionally a trading house, but applied to become a bank-holding company in order to gain access to TARP funds. They claim that they didn't need to for survival, but were pressured to do so by the government (to help disguise to the public which banks were the most distressed, all the banks too some money). They quickly paid back their $10B TARP loans in order to unfetter themselves from government regulations (especially bonus limits). But as a "bank", they had access to basically limitless Federal Reserve credit at near zero interest rate (0.1-0.3% at most). And their debt was insured by the FDIC. What a deal. And here's the best part - Goldman used taxpayer money to buy Treasury bonds that paid out 3.5-4%. So with zero risk, Goldman transferred huge sums of money from the Fed to Treasury, and the government paid them a commission for it.

Of course there were many more lucrative investments out there in 2009 than T-bonds, so Goldman also used Fed cash to make money in other markets. With the security of government backing, Goldman raised a ton of private capital ($28B in 2009) versus other Wall Street players, and they did it at an interest rate only 1-1.5% higher than what the US government borrows at. So basically that means people think Goldman is as meager of a borrowing risk as the USA. And really, is there a difference at this point?

I know some Goldman supporters will say they deserve it, because it was all more-or-less legal. They were smart and they exploited loopholes and panic. They are in the cutthroat business of wealth maximizing, and make no apologies for doing their job. This is their MO; they beat competitors by finding new and "clever" ways of making money. Blame the system and the government (comprised of many ex-Goldman folks and others with an interest in Goldman's success). Well I do also. Drug dealers and weapons traffickers are also innovative businessmen who make big money. Maybe making money isn't a sin by itself, but what depths do you sink to do so?

Like Enron, they're the smartest assholes in the room. But I'm sure that one day they will get Enron-ed too. Pride cometh before the fall.

Goldman & Chrysler get aid but not CIT?

http://www.chicagotribune.com/business/chi-fri_cit_0717jul17,0,1042812.story?track=rss
http://www.nytimes.com/2009/07/17/business/17factor.html?_r=1&ref=business
http://marketplace.publicradio.org/display/web/2009/07/16/pm_cit/
http://money.cnn.com/2009/07/17/news/companies/goldman_sachs_tarp_ingratitude.fortune/index.htm?section=money_latest

Politicians often laud the entrepreneurial spirit of Americans and claim to be supporters of "small businesses" at the core of this economy. Small businesses need a lot of credit (payroll, raw materials, etc. until sales revenues come in), and many of them fail. So interest rates on them can be fairly high if they patronize traditional banks. That's where CIT (Commercial Investment Trust) comes in. For over 100 years, that company has collected private investment money and in turn loaned it out to small businesses at more reasonable rates. They have over 1M clients and $40B worth of loans, from Dunkin' Donuts franchises to Eddie Bauer to Dillard's to Wal-mart subcontractors. They are on the Fortune 500 and service 80% of the Fortune 1,000, so it's not like they're a podunk community S&L.

Last year, Bush made his case for Wall Street and big bank rescue based on the fact that credit is the lubricant that keeps the gears of our economy rolling. CIT has already received $2.3B of TARP funds, but may need another $3-6B to stay afloat (they asked for $2B yesterday but were rejected by the Obama administration). Credit raters and analysts have already written CIT off as a dead man walking, and the company has lost $3B over the last 2 years. Maybe the company is doomed, and most of us on this email list are against "panic bailouts" to rescue "necessary" players in our economy. CIT is not too big to fail, but its credit services are crucial to retail commerce, and retail needs to rebound if we are to have a real economic recovery. So what do you do? Well, what has Uncle Sam done in the recent past?

Goldman Sachs, an investment bank (before it became a bank holding company to qualify for TARP), received a $10B bailout and government backing of its debt. Whether they desperately needed the money like AIG or BofA is doubtful, but their industry was in free-fall at the time. Did I mention that Goldman was the #2 corporate contributor to the Obama campaign, and gave plenty to Bush, Clinton, and other elite politicians too. Months later it returned its TARP portion of course (on its own accord, not due to government requests), in order to break free of executive compensations limits and other factors. Goldman also posted a huge $3.4B profit in Q2 2009, and analysts expect the company to doll out huge compensation bonuses to those responsible (mostly their fixed income division dealing with currency/commodities trading). Can't you just hear "The Boys are Back in Town" song playing? But now Goldman finds itself in a very different millieu. It's rivals Merrill, Bear, and Lehman, that invested much more heavily in toxic mortgage-backed securities to their own peril, are no more. In fact Goldman poached a lot of talent from those firms in the last half year, and now finds itself the dominant investment house on Wall Street, and they are going to be kicking ass despite this recession and however long it lasts. Less competition and mostly steady demand for their services means they can increase costs (and profits, obviously). So why can't the government give part of Goldman's returned cash to guarantee some of CIT's loans to worthy clients? Obviously they are in great shape and won't need another bailout.

Chrysler is not critical to the national economy, no matter how you slice it. Chrysler reported 58,000 employees in 2008, which is 1/6 the size of Target Corp. They were literally in the grave by the time they filed for Chapter 11 and Fiat took one for the team. As part of the bankruptcy settlement, Chrysler is guaranteed up to $8B US and 4B Canadian dollars (from the gov't of Ontario) in loans, on top of the $4.5B given in 2008 by the Bush crew. That is way more than what CIT is asking for, and those dollars won't go as far. But many Chrysler factories and their unions are very important to various Midwest Congressmen, as well as it's "sentimental value" in the American manufacturing landscape, so I guess they are worthy of rescue.

But not CIT, even though losing them would significantly impact already struggling retail and small business credit sectors. There wasn't enough credit to go around for small business needs before CIT took a nose dive, so if they fail it will get much worse. Desperate small businesses will need to turn to the Big Banks and Wall Street sharks for credit, and will pay dearly for it. Since many small business owners are emotionally and personally invested in their professions, they may go to irrational lengths to keep their life's dream going despite all their red ink. Droves of such desperate borrowers are a banker's wet dream. That tells you how bad the credit market still is when underwriters are still hesitant to loan to such small businesses, even at highway-robbery 20% monthly interest rates. Big banks even have loan vehicles where a small business owner can put his/her retirement account down as collateral. They really smell blood. So much for government reforms to protect borrowers.

It's not like CIT deserves its fate due to incompetence and greed. It was not heavily into the subprime mess. It had a tiny home mortgage arm that it is currently selling, but the core of its business was small-to-medium business loans. The problem is Wall Street investment in CIT is just drying up because investors are clutching their purses tightly in this recession, and as I said, small businesses often go under (especially now). Yet maybe CIT is "too big to fail" anyway; they are 60% of their market. They loan to 2,000 manufacturers that supply 300,000 retailers (60% of apparel makers). It's not like goods just magically appear on store shelves. Even large retailers usually don't own factories and make the goods they sell. It's not efficient. Suppliers/distributors need to be paid, and CIT facilitates that. We often hear of the "ripple effect" that losing a big auto company would have on our country (parts, mechanics, dealerships). Well losing CIT is a Maverick's wave compared to auto's ripple. I don't want to sound alarmist; it's not like CIT will disappear overnight. Parts of the company may be chopped up and sold. But for its core lending function, why can't the government guarantee those loans or even assume CIT's role (temporarily)? It's already sitting on GM's board for Pete's sake. The Federal Reserve has already broken tradition and become a direct lender to commercial banks. I think the government is doing something similar for college loans. Why can't they step in and use some of the TARP billions to support the small businesses that they constantly invoke on the campaign trail?

Well, I guess CIT execs didn't donate enough to the right campaigns. I say this with all seriousness, since they obviously qualify for aid based on the other economic considerations and rationale give to us by Washington leaders. Plus the only reason why a company like Chrysler would qualify for aid is political connections.

Goldman Sachs TARP payback

http://www.npr.org/templates/story/story.php?storyId=103122382
http://en.wikipedia.org/wiki/Goldman_Sachs
http://www.marketwatch.com/news/story/story.aspx?guid=%7B18220CBF%2D2FAB%2D4943%2D9693%2D0336B2D16A01%7D&siteid=rss

"Clearly we have created banks that are too big to fail; should we be asking if they are also too big to exist?" - Simon Johnson

There was an interesting interview on Fresh Air yesterday with Simon Johnson, the chief economist at the International Monetary Fund during 2007 and 2008. He is a professor at MIT's Sloan School of Management. He raised some interesting points about the bank bailout and the concerns over the Goldman TARP payback news. He also wrote a piece in The Atlantic describing the ways that the financial sector asserts its dominance over Washington, often at our expense.

http://www.theatlantic.com/doc/200905/imf-advice

Goldman (stock was near 200 before the crash, hit a low of 45 in Dec., and now is back to 120) claims that it took $10B in TARP money last year because the gov't twisted its arm - Treasury wanted to give aid to healthy banks as well, so that it wasn't obvious to the public which banks were the most troubled, in order to head off bank runs. Goldman claims it didn't really need a rescue, and now like Wells Fargo they are doing fine, so they want to repay their TARP loan. They want to do this to unfetter themselves from all the TARP-associated restrictions, namely compensation limits. With their competitors struggling, Goldman thinks it will be able to attract the top talent during this recession, so that they will be better poised to clean house once the economy rebounds. Basically they want to stack the deck, even if it puts the overall bank recovery and TARP program at risk. With the entire system still near the precipice, old habits die hard for greedsters like Goldman.

But TARP rules state that it is the GOVERNMENT, not the banks, that makes the final call about how and when institutions pay back their TARP loans. So this may become a showdown between the "bank oligarchy" and the Federal Government about who calls the shots during this precarious process. But in Goldman's case, it's more complex. Some think that the Feds would love to get Goldman's $10B returned, because it validates their bailout efforts and demonstrates that the financial industry may be on the mend. Also Geithner will have a fresh $10B to dole out to others. Seems good, right? Well, $10B is a drop in the bucket compared to the trillion dollars Bush/Obama have already injected into economic recovery efforts. More critically, if Goldman returns its loan to show that it is doing well, what does that say about other banks that don't? Will the public assume the worst about them? Even relatively healthy banks may not plan to repay TARP loans in the next 12 months, but now they may feel pressured to accelerate their plans, which may not be beneficial to their institution, clients, and shareholders. But to be fair, Goldman is not the first to try to repay its federal loans; 6 others banks have already done so, and others are considering it, though they're small regional banks and not household names with global influence like Goldman.

This pre-emptive strike is a big middle finger from Goldman to its competition... and to the gov't/taxpayers too. Many critics think that the Feds have already bent over backwards to help Wall Street. You'd think the least the banks could do is hold up their end of the bargain and play straight with us. Nope. Obama had to practically beg them to even accept conditional bailouts (with pay limits), and throw in huge incentives/guarantees for them to offer up their "troubled assets" to investors through the Geithner plan (many banks are still mulling it over). Trying to cover their own asses, the banks have fought us every step of the way, which has only worsened the financial crisis and delayed recovery. And now they have the hubris to think that beggars can be choosers. If the Feds let Goldman have its way now, it will show the public (and other banks) who's boss, as well as cast doubt on the gov'ts ability to better reform and regulate the financial sector in the future.

But we really shouldn't be surprised. Goldman is an investment bank, but during last fall's crash, it applied to become a bank holding company (like Citi and BofA), just so they could be eligible for Federal Reserve assistance. Morgan Stanley did the same, so now actually none of Wall Street's historic i-banks exist anymore. But Goldman is not a bank, it's a risk-taking brokerage house. Just because it bought a few struggling boondocks community banks, doesn't mean it should enjoy savings and loan status. Also, it's hard to argue that Goldman was healthy all along and just took TARP to be a team player. $13B of the initial $80B that went to help AIG meet its debt underwriting obligations went to Goldman.

We have discussed the "revolving door" between Congress and lobbyists, but what about the r-door between Wall Street executives and financial regulators? Clinton's Treasury Sec. Robert Rubin, W's Treasury Sec. Hank Paulson, Geithner's chief of staff, the current head of the CFTC, and others in government are ex-Goldman employees. There is no way they aren't getting preferential treatment from Washington. Oh, and did I forget to mention that Goldman was Obama's #2 campaign donor?

The American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

-Simon Johnson