Goldman Owes Taxpayers More than Just TARP

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 |  Includes: AIG, GS, KBE, MS, XLF
by: Wall Street Weather

“Missing time” refers to a person who has a memory gap covering a certain period of time. In recent years the term has been used to describe a gap in time that the person cannot account for that under hypnosis might be attributed to an extraterrestrial encounter.

While it’s unlikely that chief executive Lloyd Blankfein or any other members of the management team at Goldman Sachs (NYSE:GS) have experienced a close encounter of the third kind, perhaps a hypnotherapy session would help Goldman to have better recall of the events of the last six months so it can be grateful rather than disdainful that the government rescued it from its near death experience.

Just as the short sellers were closing in on Goldman and Morgan Stanley (NYSE:MS) after Lehman Brothers collapsed last September, the Federal Reserve called an emergency meeting Sunday evening September 21 to allow the two investment banks to become bank holding companies. The next day the Justice Department waived the five day antitrust waiting period. Even though Goldman and Morgan do not function like a commercial bank and have no intention of doing so, their newfound status gave them access to the same government programs as the commercial banks.

When Goldman reported first quarter earnings on April 14, it marked the six month anniversary of receiving a $10 billion equity injection from the TARP. Goldman chose to mark the occasion by raising $5 billion in a secondary offering in order to fulfill what CFO David Viniar describes as their “patriotic duty” to return the $10 billion TARP money to the Treasury.

Now that Goldman is convinced the government would never allow it to fail, Blankfein and Viniar have developed their own version of missing time. Goldman has received billions of dollars in benefits courtesy of US taxpayers beyond the $10 billion TARP. Since Bear Stearns collapsed in March 2008, Goldman has had access to the Fed’s discount window. Instead of negotiating with Goldman over CDS contracts with AIG (NYSE:AIG) as the New York Insurance Department did with Merrill Lynch and XL Capital, the Fed’s Maiden Lane III paid Goldman at par if collateral already received from AIG is factored in.

Is it an equitable tradeoff for Goldman to be released from TARP restrictions simply by paying back the TARP itself while retaining access to FDIC-backed financing and all the other perks of a bank holding company? I believe this is a disingenuous argument on Goldman’s behalf. Estimates have ranged from $21 billion to as high as $40 billion in media reports of Goldman availing itself to cheap government guaranteed financing via the FDIC and other programs.

It’s hard to really know how secure Goldman is as a bank. We know you can’t enter one of their “branches” and make a deposit, let alone receive a free gift for opening an account. And then there’s the missing month of December that even the financial publications can’t decipher. All we know is during hypnotic regression, the patient could not create a framework around December’s $2 billion+ loss.

When you add it all up, it’s difficult to believe Goldman can be trusted as a bank and should be set free from strict government oversight. The proud and mighty Goldman may yet face another near death experience later this year and come crying back to the government again. If Goldman is arrogant enough to want to be set free now then the next time around they should be allowed to fail.

With an almost $1 trillion balance sheet supported by only $42 billion in common equity, Goldman is more casino than commercial bank. Perhaps Goldman should have asked Bernanke for a gaming license instead and relocated its headquarters to Las Vegas.

Disclosure: none