Goldman's Success: Put Down Those Pitchforks 54 comments
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This stuff really is getting pernicious. Ezra Klein writes:
The real information in that clip from Thursday's "Daily Show"? Jon Stewart -- or someone in his office -- read Matt Taibbi's blog post explaining the basis for the $3.4 billion Goldman Sachs (GS) made during the second quarter. And so should you. That basis, after all, is your money. And it's not just Goldman. J.P. Morgan (JPM) made $2.7 billion in profits. Bank of America (BAC) -- remember when it almost collapsed? -- reported $2.4 billion.
You should, of course, be celebrating. We're back to "normal." It's a recessionary normal, but a form of normal nonetheless. The only problem is that it feels like hell. No one wants a normal where Wall Street took hundreds of billions in emergency taxpayer dollars and went back to pocketing billions for themselves. And it's not just the billions we gave them but the trillions they took: The crash was in no small part their fault. But though the rest of us remain trapped in recession, they're back to triumphant quarterly reports.
Don't read Matt Taibbi's post if you're interested in being informed, though it's of course always entertaining to watch him blow his top in print. Let me just quote one little bit of the rant in question:
So what’s wrong with Goldman posting $3.44 billion in second-quarter profits, what’s wrong with the company so far earmarking $11.4 billion in compensation for its employees? What’s wrong is that this is not free-market earnings but an almost pure state subsidy.
Last year, when Hank Paulson told us all that the planet would explode if we didn’t fork over a gazillion dollars to Wall Street immediately, the entire rationale not only for TARP but for the whole galaxy of lesser-known state crutches and safety nets quietly ushered in later on was that Wall Street, once rescued, would pump money back into the economy, create jobs, and initiate a widespread recovery. This, we were told, was the reason we needed to pilfer massive amounts of middle-class tax revenue and hand it over to the same guys who had just blown up the financial world. We’d save their asses, they’d save ours. That was the deal.
Hold on, slow down. Sorry, what tax revenue has been pilfered? As of June, the Congressional Budget Office estimated that the cost of TARP assistance to financial institutions would only be around $70 billion or so. If we're focused on Goldman specifically, the direct cost is just about nothing. Mr Taibbi points to the AIG (AIG) assistance and the fact that AIG basically paid out its obligations to Goldman Sachs in full and says that barring that payout, Goldman would have folded. Not likely; Goldman was completely hedged against AIG.
What about all those other guarantees offered by the government which have encouraged people to continue doing business with Goldman Sachs and the entire financial system as a whole? Those are worth trillions of dollars, aren't they? And the banks are using them to book billions in profits.
First, a guarantee only costs if it's invoked, and it's rarely invoked because it's a credible guarantee. If we just totted up the potential cost of federal deposit insurance it would be enormous, but of course the very existence of deposit insurance eliminates the threat of bank runs, meaning that it's only needed in cases of insolvency, which are generally rare.
And yes, there are billions in profits, but that was the idea all along. As Matt Yglesias reminds us, the plan has long been to prop up banks with guarantees and limited assistance and let them earn their way to recapitalisation. Why? Because if failing banks were instead seized by the government, debtholders would have to be paid off to the tune of hundreds of billions of dollars to avoid a systemic meltdown. And Congress was simply not about to pony up hundreds of billions of dollars for yet another bank bail-out. So this is what happened instead. The government created the conditions under which banks might be highly profitable so that capital cushions could be rebuilt. Things appear to be working like a charm.
Now, here is the complication. Ideally you want to let troubled banks fail, because if you save them, you face the possibility that moral hazard-induced excessive risk taking will lead to larger problems down the road. If you cannot avoid saving the banks, then some subsequent action must be taken to prevent this.
That subsequent action is regulatory reform—limitations on leverage, new rules on compensation, perhaps a bank tax to pay for oversight and future bail-outs, and so on. There is a regulatory reform bill in the works. It is important that that bill meaningfully limit the extent to which firms can abuse the backstop implied by recent government interventions. That's the battle that needs to be fought.
But that's not what we're getting. Instead, journalists seem to be falling over themselves to out-pitchfork each other and pretending that the economy would be much, much better off if the country's large financial institutions weren't reporting profits and having success raising private capital. This makes no sense.
Obviously, the interventions undertaken during the financial crisis were an ugly business. But they seem to be having the desired effect, and it's distracting and counterproductive for financial writers to keep acting surprised by the fact that this was how the government chose to address the situation.
This article originally appeared on The Economist.com
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This article has 54 comments:
The simple fact is GS has a dramatically different business model than any other shop on the street. They prioritize relationships and servicing those relationships. No other firm truly comes close. They understand risk. Do not forge, when every other firm wanted to relax the mark to market, Lloyd Blankfein came out in defense of the mark to market. Why? He and everybody at GS want to fully understand what the market is telling them.
How Does Goldman Sachs Operate?
www.senseoncents.com/2.../
The saddest part of all of the financial turmoil is that one key measure is missing ... does the work of these financial profit producers actually do any social good ... how much is it? We are told how much profit is earned, but never how much social value is created or destroyed. When the value dimension is added in to the reporting of Goldman performance we may well find that most of their profit is derived from destroying social value. In contrast, manufacturing profits tend to produce social value adding ... even taking into account the social value cost of pollution and environmental damage. One day there will be social value accounting ... I call it community analytics ... and the markets may have a different view of the high flying companies and countries!
Peter Burgess
Please, how naive can one be?
All I have to say is this. Every reform effort has been torn asunder and the only hope of enacting some real regulatory reform is via public anger. The financial industry is buying washington to the tune of millions and millions of dollars. they have the resources and connections.
This is not about the profits, but how the profits are derived. a public company using fed window access to prop up stock prices and manipulate the stock market. this does not add to the economy, but in fact destroys wealth.
Nobody mentions the secondary effects of the overpriced S&P. this allows other markets to inflate, increases inflation on commodities, and raises the costs that the tax payer has to pay back on the borrowed money for the defect, and kills the dollar.
The fed policy of zero interest rates, a huge subsidy for the industry, kills the saving of millions of americans.
The fed tells us the economy is fragile, but that is not reflected in market prices for securites. this creates huge macro imbalances which we have to pay for in the log run.
Everyone knows the connections issues, etc. what galls me is that we are creating the seeds of another crisis by allowing these companies to manipulate the markets. Every legit pundit has pointed this out.
Goldman profits and we suffer because of it.
SAY WHAT, we gave 70B to AIG alone
The bailout of Goldman Sachs, will not bailout the homewoner, not force loan modifications, not help unemployment.
In fact CIT going bankruptcy will be the biggest problem, to the public, as it is the largest asset based lender in existence, its failure will affect the small businessman in a large measure. Obviously GS is compleyely entrenched in our Government, and conspiracy theories abound, the fact is that any stimulus was not for the consumer. The mechanisms at work are beyond the level of understanding of the main stream, the fact is GS, JP, BAC, Citicorp, profits simply "look bad", and that will be the administrations undoing, the media and the public is slowly coming to grips with the failed stimulus package , at least in their eyes.
On Jul 19 08:47 AM Peter Burgess wrote:
> Colleagues
> The saddest part of all of the financial turmoil is that one key
> measure is missing ... does the work of these financial profit producers
> actually do any social good ... how much is it? We are told how much
> profit is earned, but never how much social value is created or destroyed.
> When the value dimension is added in to the reporting of Goldman
> performance we may well find that most of their profit is derived
> from destroying social value. In contrast, manufacturing profits
> tend to produce social value adding ... even taking into account
> the social value cost of pollution and environmental damage. One
> day there will be social value accounting ... I call it community
> analytics ... and the markets may have a different view of the high
> flying companies and countries!
> Peter Burgess
Wait till the Commercial real estate fails ....... we have not seen the end of this yet. we will be looking at 12 to 15 % unemployment if not higher, We might even see it reach 20%.
God help us all!!!!!
• On April 28, 2003, every major US investment bank, including Merrill Lynch, Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse First Boston, Lehman Brothers Holdings, J.P. Morgan Chase, UBS Warburg, and U.S. Bancorp Piper Jaffray, were found to have aided and abetted efforts to defraud investors. The firms were fined a total of $1.4 billion dollars by the SEC, triggering the creation of a Global Research Analyst Settlement Fund.
• On September 4, 2003, Goldman Sachs admitted that it had violated anti-fraud laws. Specifically, the firm misused material, nonpublic information that the US Treasury would suspend issuance of the 30-year bond. The firm agreed to “pay over $9.3 million in penalties.”
• On April 28, 2003, Goldman Sachs was found to have “issued research reports that were not based on principles of fair dealing and good faith .. contained exaggerated or unwarranted claims.. and/or contained opinions for which there were no reasonable bases.” The firm was fined $110 million dollars.
• On January 25, 2005, “the Securities and Exchange Commission announced the filing in federal district court of separate settled civil injunctive actions against Morgan Stanley & Co. Incorporated (Morgan Stanley) and Goldman, Sachs & Co. (Goldman Sachs) relating to the firms' allocations of stock to institutional customers in initial public offerings (IPOs) underwritten by the firms during 1999 and 2000.”
The 14 firms named in the complaints are all “specialists,” trading firms that have a specific duty to maintain orderly markets by matching buyers and sellers and standing ready to conduct trades when buyers or sellers are scarce. They include units or subsidiaries of well-known Wall Street names, including E*Trade Capital Markets, Goldman Sachs Execution and Clearing, Knight Financial Products and TD Options."
FIRST, re hedge against AIG: Goldman's comments on their need for cash flow from AIG (or collateral) have been very narrowly constructed. "We were hedged against AIG etc". Goldman has NEVER addressed whether the counterparty they were counting on could pay. If not, they certainly did need the government to step in.
Moreover, why is it that the government stepped in the way they did? They should have kept the cash, provided a 6 month guarantee and started settlement discussions. In the monoline case, caounterparties took a haircut. Why was there no haircut in this case?
SECOND, re the billions the banks are making (some of it real and some even sustainable): The game plan always was for earnings to recover sufficiently to cover the losses. However, it matters how you were put in a position to make that money. I kept wondering how Goldman was recovering so well with so much less leverage (down from high 20's to 14). Then the crowing starts about the new pricing power on Wall Street - caused in major part by the demise of Lehman and Bears Stearns. Nothing like killing the competition, right, Hank? People just need to keep in mind that that new pricing power as it applies to institutions is coming out of somebody's hide that might otherwise employ somebody. Of course, as long as a banker is employed, why worry about the loss of jobs with respect to people who really need them
THIRD, before we think this is all sustainable, we might want to consider all the numerous transfers of tax payer money to the banks that occurred in broad daylight as freebies with no conditions that probably totaled 500 billion to $1 trillion. For exmaple, did anybody ever wonder how Wells Fargo declined to bid on Wachovia on a Saturday, lost it to Citi for $1 on Monday and then came back on Thursday with a $billions offer? Look at changes to section 382 of the tax code which rightly spread the use of tax-loss carryforwards by acquirors over 20 years. All of a sudden, they could be used immediately. Presto! Wells Fargo! The one press report I saw which quickly disappeared - we can't tank the financial system - suggested Hank illegally changed the tax code (only Congress can do that; Hank's IRS is limited to interpretations of existing law and regulations) and that Congress was furious. Several weeks later a friend of mine told me how a smaller bank had just doubled its sale price due to the section 382 change. Section 382 is just one example (section 382 SUBSEQUENTLY was changed by Congress). Now either this is all cronyism at its worst or it indicates that all the banks were insolvent and needed to be recapitalized any way they could. Personally, I call the totality of it all Grand Theft Auto in Broad Daylight, but maybe they were all insolvent.
FOURTH, going back to Bear Stearns and Lehman, Hank and the boys are very smart people - although I think he was way behind the curve on the financial crisis the whole time (even Rahm Emmanuel of all people was ahead of Hank and tried to warn him). Re Bear Stearns, I still believe that Hank took the opportunity to get even with Bear for Long-Term Capital and help Goldman. Re Lehman, he saw a happy confluence of events of making a lesson of somebody who just happened to be another major competitor of Goldman. It is all very convenient that in both the Bear case and the Lehman case new authority for Hank and the boys only arrived very soon after their demise. Just couldn't move quickly enough. Darn. Didn't Hank and the boys understand that Lehman paper was in money market accounts?
And now we are going to do it all over again. We are restructuring America without actually restructuring America and still expect to get the benefits. We are turning America into a mirror of Europe without pausing to understand that America's dynamic economy has propped up Europe for decades and they still only have lower growth. When our dynamism falters, we both go down together and China isn't going to bail us out with an economy 1/4 the size. And now watch as the regulatory reforms get watered down even more so more very little changes. We are only in the third inning of this financial crisis and we are already creating the next one
And Wall Street pay? If Goldman and others were as good as they think they are, they would get the same amount of money over time even if they introduced 3-4 year pro-rata vesting. Guess they can't risk the test of time after all. They will still take the risks and expect to get bailed out if they fail. And now the moral hazard is even greater as we have created institutions that are even bigger than before.
One last thing, we hear all the time that nobody is to blame. That this was a Black Swan, a 100 year storm. What a crock! This was man made. It was out there for all to see. Lots of important people were warning about it and were ignored. Let the good times roll. Even the people making all the money knew it was going to end and partied on.
God forbid the American people ever come to understand all the things that have gone on. That America will always recover is just an assumption. The things we have done in the last ten years (including Larry Summers getting Clinton to sign the deregulation act and now lecturing us (like Barney Frank and Chris Dodd, innocents all) about responsibility) and our current responses make you wonder whether it is going to be true this time. Chuck Schummer "the American people don't care about these porky little things" as Don Young of Alaska threatens a Florida Congressman with potical extinction if he turns down a $10 million earmark that the Alaskan wanted for Florida (being generous, you think?) or Ted` Stephens $250 million bridge to nowhere that got overturned so Congress just gave Alaska the $250 million to use for any purpose. Chuck Prince on risk" When the music is playing, you have to dance." Translation: My job is more important than Citigroup or the country. Tom Delay ..... Who needs enemies with the self-destruction we are inflicting on ourselves. We have seen the enemy and it is us!
greenhellblog.com/2009.../
It's hard to believe that Goldman could get these kinds of trading results so consistently just through legitimate trading. After all, when they win, someone else loses. Is it really possible, assuming a fair game, that they could be that much better than all the other traders in the world? No way. They've got to be front-running. They really need to be investigated and shut down.
On Jul 19 10:24 AM HERO1957 wrote:
> Goldman Sachs is the fourth branch of government.
www.youtube.com/watch?...
So normal is where banks should make outsized profits for producing nothing of value for the economy while handing us all outsized risk that is guaranteed to blow up in our faces some day. Is that what you are saying?
People like you do not know what a real economy is supposed to look like and thus you think this is normal. The 50s were a real economy and banking was a 3-5% dividend business. They were not superstars. They were stodgy and glassy eyed and careful and conservative. Now we have been sheeplized to believe that cowboy banking is normal.
This will end badly because there are too many people like you that have not one clue as to what is right and sustainable and what is wrong and guaranteed to blow up in our faces.
Still, I can not figure out how GM or Chrysler going under could not be more disruptive than these New York financial firms going under. All these absurd debt instruments have only enriched financial firms; they have not benefited the economy.
If a bank is too big to fail then it certainly should be made smaller-isn't that a good idea- that hasn't been addressed? Regulation doesn't work but apparently size counts.
Last time I looked banks report by the businesses and franchises they operate. In many cases they insist it is necessary that one business does not communicate with any other under their roof because of conflicts. So they build "Chinese walls".
How about splitting the banks up based on these various businesses such as Credit cards, brokerage, trading, investment banking, underwriting etc. Then if one is in trouble so what?
This will never happen - too much power already in the hands of these large banks.
We were warned about the military-industrial complex by Ike and he was so right. It's too big to fail also. This power has led us into numerous wars and excessive useless armaments and will never stop!
Now we have a Financial Government Complex that will continue until we lose our "free capitalistic system".
Do a quick search of the headlines concerning last weeks earnings data and check out all of the comments posted around each. It sure seems to me that the holes in the theory may be starting to show or at least enough people are tired of getting walked on.
I’m sure glad that so many writers and media people are looking out for my best interest and helping me to decide what’s best for me to think and feel. I was never very good at the whole puzzle and riddle thing and thanks to this article I feel a little stronger today and maybe, just maybe, I can be a better person tomorrow.
Whose kidding who?
Of the $699 billion in total capital, $142 billion has yet to be committed. Of the funds already allocated, Uncle Sam has incurred a total cost of $159 billion. What does that mean?
Recall the number of times that government officials told taxpayers that we would make money on investments in AIG and the like. Well, so far we’ve lost $159 billion dollars across all our TARP investments. The loss is calculated as the difference in funds committed and allocated to securities and the market value of those securities. That loss represents 36% of the funds committed and actually allocated.
Tavakoli on the other hand "wrote the book"
For your inspection;
www.cnn.com/2009/POLIT...
This is a straw man argument. Nobody is making that case. Especially the "much,much" silliness. And "reporting" profits is not the same as actually making profits.
"If we just totted up the potential cost of federal deposit insurance it would be enormous, but of course the very existence of deposit insurance eliminates the threat of bank runs, meaning that it's only needed in cases of insolvency, which are generally rare."
Seven banks were seized 4th of July weekend, bringing the year's total to 52. But, yes, insurance works very well until whatever is being insured turns into a claim. AIG had no problems until claims were filed-- their models showed that there was very little risk.
"The government created the conditions under which banks might be highly profitable so that capital cushions could be rebuilt. Things appear to be working like a charm."
Government created the conditions for banks to show profits where there are none-- they allowed banks to change their accounting rules. Working like a charm, indeed.
This is a silly article.
"There are simply too many former Goldman people now well-placed in federal positions for me to believe that there is nothing going on. Goldman's competitors being systematically killed off by former Goldman people now in upper levels of government. Some have suggested that Goldman's high frequency trading(HFT) platform, which was stolen and then recovered recently, enabled users(GS) to front-run stocks illegally. The speed of the recovery of the stolen HFT code was breath-taking. I mean, the FBI treated that thing as if it was the presidential briefcase with the nuclear launch codes that had been stolen. I doubt the government would have pursued a presidential assassin any more aggressively. The same bureaucracy that spent over 10 years ignoring slam-dunk evidence of multi-billion dollar fraud in the Madoff case, suddenly moves at light speed to return Goldman's sacred HFT code to them. Isn't it amazing how priorities tend to enhance performance? Not that I would dare suggest, as others have, that there "
Anyway, main street camps for dead beats grows the thousands each day,
Life is good
"First, a guarantee only costs if it's invoked, and it's rarely invoked because it's a credible guarantee" The guarantee allowed them to borrow at much lower rates than they could have borrowed from say Warren Buffett.
"obligations to Goldman Sachs in full and says that barring that payout, Goldman would have folded. Not likely; Goldman was completely hedged against AIG."
First, the question isn't whether GS would have folded, but how much GS would have lost in an AIG bankruptcy. It would have been in the billions if AIG goes bankrupt. Second, the idea that Goldman was completely hedged is absurd. The whole point of the TARP was systemic risk against which you cannot have a hedge. By definition if the system fails there cannot be a successful counter-bet.
The public Goldman reports nearly flawless trading quarter after quarter by front running the very manipulations that they have been designated to carry out. Do you think its a coincidence that there's a revolving door from Goldman to Government and back? Wake up people.
On Jul 19 10:24 AM HERO1957 wrote:
> Goldman Sachs is the fourth branch of government.
On Jul 19 11:19 AM User 51160 wrote:
> Can I have some of that Kool-Aid? I'm so tired of thinking we were
> getting screwed by GS and the Government that if I could just have
> a sip or two I think I could feel good about the economy again. Put
> down the pitchforks indeed! These bastards deserve flame throwers!
On Jul 19 01:24 PM aztrader wrote:
> The video tells the story. Paulson and the rest of his well placed
> crooks are looting the treasury without regard.
>
>
> www.youtube.com/watch?...
"This author seems to have the most flagrant, off-the-wall articles..."
He needs to be responded to especially since he has that Inside-the-Beltway mentality.
The profits of the surviving banks are a direct result of the liquidity written by the US Treasury and Fed. That liquidity had to be injected because of the bad bets on the US housing market. If regulators had required banks to take haircuts in proportion to the systemic risk they were taking, then there would not have been any profits on shorting the bubble.
Its our fault. If we don't charge for systemic risk, then surviving banks will look successful and pay themselves big bonuses.
It looks like capitalism, but it's not. It depends on the socialization of credit.
Commentary by Jonathan Weil
July 9 (Bloomberg) -- Never let it be said that the Justice Department can’t move quickly when it gets a hot tip about an alleged crime at a Wall Street bank. It does help, though, if the party doing the complaining is the bank itself, and not merely an aggrieved customer.
Another plus is if the bank tells the feds the security of the U.S. financial markets is at stake. This brings us to the strange tale of Goldman Sachs Group Inc. and Sergey Aleynikov.
Aleynikov, 39, is the former Goldman computer programmer who was arrested on theft charges July 3 as he stepped off a flight at Liberty International Airport in Newark, New Jersey. That was two days after Goldman told the government he had stolen its secret, rapid-fire, stock- and commodities-trading software in early June during his last week as a Goldman employee. Prosecutors say Aleynikov uploaded the program code to an unidentified Web site server in Germany.
It wasn’t just Goldman that faced imminent harm if Aleynikov were to be released, Assistant U.S. Attorney Joseph Facciponti told a federal magistrate judge at his July 4 bail hearing in New York. The 34-year-old prosecutor also dropped this bombshell: “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”
How could somebody do this? The precise answer isn’t obvious -- we’re talking about a black-box trading system here. And Facciponti didn’t elaborate. You don’t need a Goldman Sachs doomsday machine to manipulate markets, of course. A false rumor expertly planted using an ordinary telephone often will do just fine. In any event, the judge rejected Facciponti’s argument that Aleynikov posed a danger to the community, and ruled he could go free on $750,000 bail. He was released July 6.
Market Manipulation
All this leaves us to wonder: Did Goldman really tell the government its high-speed, high-volume, algorithmic-trading program can be used to manipulate markets in unfair ways, as Facciponti said? And shouldn’t Goldman’s bosses be worried this revelation may cause lots of people to start hypothesizing aloud about whether Goldman itself might misuse this program?
Here’s some of what we do know. Aleynikov, a citizen of the U.S. and Russia, left his $400,000-a-year salary at Goldman for a chance to triple his pay at a start-up firm in Chicago co- founded by Misha Malyshev, a former Citadel Investment Group LLC trader. Malyshev, who oversaw high-frequency trading at Citadel, said his firm, Teza Technologies LLC, first learned about the alleged theft July 5 and suspended Aleynikov without pay.
‘Preposterous’ Charges
Aleynikov’s attorney, Sabrina Shroff, told the judge at the bail hearing that Aleynikov never intended to use the downloaded material “in any proprietary way” and that the government’s charges were “preposterous.”
Goldman isn’t commenting publicly about any of this, though it seems the bank’s bosses want us to believe there’s no need to worry. On July 6, Dow Jones Newswires quoted a “person familiar with the matter” saying this: “The theft has had no impact on our clients and no impact on our business.” Note that this person was so familiar with Goldman that he or she spoke of Goldman’s clients as “our clients” and Goldman’s business as “our business.”
By comparison, last Saturday, while most Americans were enjoying the Fourth of July holiday, Facciponti was in court warning of looming threats to Goldman and the financial markets.
“The copy in Germany is still out there,” the prosecutor said, according to an audio recording of the hearing. “And we at this time do not know who else has access to it and what’s going to happen to that software.”
Secret Software
“We believe that if the defendant is at liberty, there is a substantial danger that he will obtain access to that software and send it on to whoever may need it,” Facciponti said. “And keep in mind, this is worth millions of dollars.”
By “millions,” it’s unclear if that would be enough to match Goldman Chief Executive Lloyd Blankfein’s $70.3 million compensation package for 2007. Or perhaps millions means thousands of millions, otherwise known as billions.
Facciponti said the bank told the government that “they do not believe that any steps they can take would mitigate the danger of this program being released.” He added: “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.” All Aleynikov would need to get the code from the German server is maybe 10 minutes with a cell phone and an Internet connection, Facciponti said.
Judge’s Ruling
The hole in Facciponti’s argument was that the government offered no evidence that Aleynikov had tried to disseminate the software during the month prior to his arrest, after he downloaded it and had left his job at Goldman. That’s the main reason the judge, Kevin N. Fox, cited in ruling Aleynikov could be released on bail.
“We don’t deal with speculation when we come to court,” Fox said. “We deal with facts.”
Meantime, it would be nice to see someone at Goldman go on the record to explain what’s stopping the world’s most powerful investment bank from using its trading program in unfair ways, too. Oh yes, and could the bank be a bit more careful about safeguarding its trading programs from now on? Hopefully the government is asking the same questions already.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
By Stephen Foley
Tuesday, 22 July 2008
If there's something weird in the financial world, who you gonna call? Goldman Sachs.
The US government, involved in a firefight against the conflagration in the credit markets, is calling in another crisis-buster from the illustrious investment bank, this time Goldman's most senior banker to finance industry clients, Ken Wilson.
And so with this appointment, the Goldman Sachs diaspora grows a little bit more influential. It is an old-boy network that has created a revolving door between the firm and public office, greased by the mountains of money the company is generating even today, as its peers buckle and fall.
Almost whatever the country, you can find Goldman Sachs veterans in positions of pivotal power.
The 61-year-old Mr Wilson has already proved influential in deals to recapitalise and reorganise some of America's listing banks. At the Treasury he will advise on what the federal government must to do help the process, but he will face scrutiny from those concerned about the tentacles wrapping lightly around government from Wall Street's mightiest bank. For the time being, bailing out Wall Street looks to be the same as bailing out the economy, but if those diverge there could be more questions asked about the influence of Goldman Sachs alumni on public policy.
George Bush picked up the phone this month, partly at the instigation of another Goldman Sachs alumnus, his Treasury secretary, Hank Paulson. Together with Mr Bush's chief of staff, Joshua Bolten, there will be three Goldman Sachs old boys in major positions of influence in the White House – but the US government is hardly alone in finding the bank's executives to be attractive hirees.
They are well-credentialed, partly by design. From its beginning when the German immigrant Marcus Goldman began discounting IOUs among the diamond merchants of New York in the 1870s, Goldman Sachs has always known about the power of the network of influence. Goldman hires former politicians and civil servants, as readily as it supplies them.
And then there is simply the intellectual quality of the employees, many hired as much youngster men via a gruelling interview process, and then forged in the fire of 17-hour work days.
With Goldman Sachs at the heart of Wall Street, and Wall Street at the heart of the US economy, few expects its power to wane. Indeed, The New York Times columnist David Brooks noted that Goldman Sachs employees have given more money to Barack Obama's campaign for president than workers of any other employer in the US. "Over the past few years, people from Goldman Sachs have assumed control over large parts of the federal government," Brooks noted grimly. "Over the next few they might just take over the whole darn thing."
John Thornton
From his post as professor and director of global leadership at Tsinghua University in Beijing, the former Goldman Sachs co-chief operating officer John Thornton has become a highly-influential figure in the developing business and poltical inter-relations between the US and China. He was Goldman's boss in Asia in the mid-Nineties and remains well connected in the East and the West.
Duncan Niederauer
Wall Streeters joked about a Goldman Sachs "takeover" of the New York Stock Exchange. Hank Paulson, the Goldman boss on the NYSE board, moved to oust the chairman, Dick Grasso, and recommended the then chief operating officer of Goldman, John Thain, as Mr Grasso's replacement. Mr Thain modernised the exchange as demanded by Goldman, and Mr Thain's old Goldman deputy, Duncan Niederauer, is in charge.
Jon Corzine
The former co-chief executive of Goldman went into full-time politics in 1999, having lost the internal power struggle that preceded the company's stock-market flotation in 1999. He has been governor of New Jersey since 2006, having spent the previous six years in the US Senate. His 2000 Senate election campaign was then the most expensive ever in the US, and Corzine spent $62m of his own money.
Joshua Bolten
For five years until 1999, Mr Bolten served as director of legal affairs for Goldman based in London, effectively making him the bank's chief lobbyist to the EU. The Republican lawyer aided George Bush's 2000 election campaign, helped co-ordinate policy in the White House and has been the President's chief of staff since 2006.
Paul Deighton
The man heading London's planning for the 2012 Olympic Games, Paul Deighton amassed a fortune estimated at over £100m during his two decades at Goldman Sachs, where he had been one of its most powerful investment bankers.
Robert Rubin
A US Treasury secretary under Bill Clinton, Mr Rubin could once again emerge as a powerful figure in Washington if Barack Obama wins the presidency, since he has maintained his influence on Democrat politics. Mr Rubin reached the second-highest rung at Goldman, becoming co-chief operating officer before joining the US government in 1993.
Gavyn Davies
The ex-chairman of the BBC still has the ear of Gordon Brown, to whom he has been a good friend and informal adviser. He is married to the Prime Minister's aide Sue Nye. Mr Davies spent 15 years as an economist at Goldman. He was commissioned to report on the future funding of the BBC by Mr Brown in 1999. Two years later, he was poached to chair it.
Jim Cramer
This former Goldman trader is, without question, the most influential stock pundit in the US. Hectoring and shouting his investment advice nightly on his CNBC show, Mad Money, he routinely moves share prices. His primal scream against the Federal Reserve ("They know nothing") was a YouTube sensation last year, as the central bank refused to lower interest rates to ease the pain of the credit crisis on Wall Street.
Robert Zoellick
Goldman provided a lucrative home to Robert Zoellick, the neo-conservative Republican, between the time he quit as Condoleezza Rice's deputy at the State Department in 2006 (having not secured the job he coveted as Treasury Secretary, when it went to Hank Paulson) and his appointment last year as head of the World Bank. At Goldman he had acted as head of international affairs, a kind of global ambassador and networker-in-chief.
Mario Draghi
The head of the Italian central bank is another example of the revolving door between Goldman and public service. Mr Draghi had been an academic economist, an executive at the World Bank and a director-general of the Italian treasury before joining Goldman as a partner in 2002. He is becoming a significant figure in the response to the credit crisis, chairing the financial stability forum of central banks, finance ministries and regulators.
Who's designing Geithner's rescue plan? Goldman guys, of course.
Mar 5, 2009
As it was in the beginning, so shall it be in the end: Goldman Sachs will be there.
Back in the '90s and through the mid-'00s, major figures from Goldman Sachs such as Robert Rubin, Gary Gensler and Hank Paulson stood fast against derivatives regulation (Rubin and Gensler) and lobbied successfully for higher leverage ratios so they could bet more of their capital on the market boom (Paulson). When those policies came to grief and Wall Street imploded, and the Feds scrambled to rescue stricken insurance giant AIG, Goldman CEO Lloyd Blankfein was reportedly the only bank executive invited to an emergency meeting at the New York Federal Reserve (convened by then-Fed president Tim Geithner).
Now Treasury Secretary Geithner—a Rubin protégé, of course—has assigned two more ex-Goldman men to fix the vast mess their colleagues helped to create.
They are Steve Shafran, a former favorite of Paulson's, and Bill Dudley, Goldman's former chief economist and now the successor to Geithner as head of the New York Fed. Shafran and Dudley have been given the mind-bending task of resurrecting the market for securitized assets, a policy that is linked to an effort to lure the private market back in to bid on the toxic securitized assets that sit like dead weight on major banks' balance sheets. This vast project is being designed in two parts. First, revive the asset securitization market, frozen since last year's crash, through the TALF, the Term Asset-Backed Securities Loan Facility (don't try to say this at home!), started up on Tuesday. This program will bundle triple-A-rated loans into new securities and market them. Second, begin to sell off the toxic assets to private funds, in hopes that some day the TALF-revived securitization market will create demand for the lower-rated assets as well. According to a Treasury spokesman, the TALF plan and the troubled-asset buy-up program are "operating on parallel tracks."
The key now is to bring in hedge funds and other hoards of private capital by giving them government guarantees limiting their potential losses. The pitfall is that if the American public, already riled to populist fury over Wall Street's postcrash perks, finds out what a sweet deal these new investors are getting—without any limitations on executive compensation like those imposed on banks—people might get more upset.
This is not to speak ill of Shafran and Dudley or, for that matter, Geithner. The plan his Treasury team is working on is intricate, and it may well be the only way to bring the private sector back in—and get the rest of us, the taxpayers, out. A Treasury spokesman says that Shafran and Dudley are not the only ones working on the plan, which Geithner is personally overseeing. "It's been a group effort," he says, adding that there are no price guarantees. The private funds and the government will "share" first losses and profits, though details haven't been fleshed out. Nor should we ignore the fact that Goldman's "best and brightest" have sometimes dug us out of holes in the past. Former Treasury Secretary Robert Rubin, for example, is often criticized these days (by me, among others) for quashing then-Commodity Futures Trading Commission Chairwoman Brooksley Born's 1998 proposal to discuss derivatives regulation. What is rarely noted is that Rubin, at the time, was in the middle of resolving the Asian financial contagion, and he was justly concerned with sending a chilling message to Wall Street.
Still, the omnipresence of Goldman Sachs does make one wonder about the insularity of this world—what economist Jagdish Bhagwati once called the "Wall Street–Treasury complex." Or as another joke has it, Goldman is so politically savvy in Washington, it should be called "Government Sachs." Is there no one else to fix the crisis but specialists from the company that helped create it? According to a new report out by the public advocacy group the Consumer Education Foundation, over the past decade Wall Street investment firms, commercial banks, hedge funds, real-estate companies and insurance conglomerates forked over $1.725 billion in political contributions. They spent another $3.4 billion on lobbyists.
"Our government has been misappropriated by Goldman Sachs," says Christopher Whalen of Institutional Risk Analytics, a long-time critic of Geithner, whom Whalen likens to Chauncey Gardiner, the clueless hero of "Being There," who is manipulated by everyone around him. And if Wall Street elites continue to make government policy, will the new regulatory controls we hear so much about—the ones that are supposed to prevent this from happening again—ever really be adopted?
This is the critical question. Despite continued public support for President Obama and early signs that Geithner's various rescue plans—including the $75 billion mortgage bailout scheme announced this week—may be starting to reassure the markets, there is little sign as yet that the administration is engaged in the kind of fundamental rethinking of financial safety and soundness that we need. The problem is not just that Wall Street giants like Goldman, Citigroup and AIG ran wild over the past 20 years, it is that they exist in their current form at all. These institutions are too big and too systemic to be allowed to fail according to normal free-market rules, and if they remain that way we will inevitably find ourselves in a situation where taxpayers must rescue them once again.
We have been through this nightmare before, almost step by disastrous step. From 1932 to 1934 the Senate banking and currency committee held hearings on the 1929 crash and found that commercial banks had misrepresented to their depositors the quality of securities that their investment-banking sides were underwriting and promoting. According to a history posted by the Federal Deposit Insurance Corp. on its Web site, among the culprits was First National City Bank (now Citigroup), which was found to have repackaged the bank's Latin American loans and securitized them without disclosing its own confidential findings that the loans posed adverse risks. Sound familiar? The response of the government in that era was decisive: the Glass-Steagall Act, which separated commercial banking from investment banking. It is a supreme historical irony that 65 years later it was Citigroup, grown monstrous again, that pushed hardest for the destruction of the Glass-Steagall reforms. And it had a big assist from Goldman grads such as Bob Rubin, who was soon afterward hired as chairman of Citi's executive committee.
As the new Consumer Education Foundation report concludes: "Glass-Steagall was a key element of the Roosevelt administration's response to the Depression and considered essential both to restoring public confidence in a financial system that had failed and to protecting the nation against another profound economic collapse." Even if we believe that the economic and financial system may be stabilizing five weeks into Obama's presidency, it's hard to conclude that fundamental confidence has been restored.
Perhaps the Obama administration will see the light and at some point forthrightly address the "too big to fail" problem that even Federal Reserve chairman Ben Bernanke said again this week was "enormous." But it is hard to imagine that a team composed largely of Wall Street's former finest will, all by themselves, push for the breakup of the firms that nurtured and enriched them. And there is scant evidence that Geithner is now soliciting advice from others on the outside, including the new panel led by Paul Volcker—a diehard skeptic of Wall Street's agenda—that Obama set up precisely for this purpose. Who is the Treasury secretary relying on? We don't really know, but certainly one close adviser must be Mark Patterson, Geithner's new chief of staff. Patterson is the former Washington lobbyist for Goldman Sachs.
© 2009
Malcolm Turnbull
Should banks be "bailed". Of course not. Nor should insurance companies or automakers. The fact that they are so interlinked globally that jobs and money are at risk is a problem in itself and smacks "cartel". The fact that various names of jailed individuals keep popping up with inter-connected links to Enron, RBS, AIG, Morgan Stanley, Goldman Sachs, IMF, World Bank (read USA bank) paints a bleak picture, regardless of the plight of poor innocent fools who decide to work for these institutions.
Taibbi has only chipped the tip of the iceberg when it comes to the organized crime of the financial industry. Those who continue to defend these organizations without scrutiny and in fear of their own losses do the world a disservice.
2) "First, a guarantee only costs if it's invoked, and it's rarely invoked because it's a credible guarantee." Whether a guarantee is invoked or not, it has value in the same way that auto or homeowner's insurance does. I still expect to pay the insurance company a premium, even if I haven't had an accident or a fire at home over the last year.
3) "And yes, there are billions in profits, but that was the idea all along." As Taibbi's rant points out, the real idea was to get the economy back on its feet, not save Wall Street from its
(largely self-inflicted) wounds.
Anyone have a recommendation on a good farm equipment store?
Any time in the last twenty years that you asked where are the smartest guys on Wall Street? What is the hardest company to get employed by? GS would have been on anyone's list of the top two. The ludicrous paranoia spouted here is completely at odds with the expectation that GS aims to do well, and in turbulent times the opportunities for the smart people to do well are hugely increased.
The other theme here is what social good is GS to the "average" American? As though there is something inherently more worthy about making the taxpayer pay through the nose for doubtful military equipment overpriced medical care.
GS is a world class company in an industry that sent more taxes to the American people for longer than any other in history (far more than was offered in support) and can, unlike many American companies cut it against any competition in the world - you want to make money for your Charity then invest in them!
GS makes money by trading. There is someone else on the other end who thinks they are smarter. They did not force schmucks to take out mortgages they could not afford but they could detect the stink where others could not.
GS has not cost the Government money and will, through taxes, continue to support a government that helps their weaker competitors.
America is going to need a lot more world class companies and may as well get used to making a number of their employees rich.
(p.s. I am unemployed and never had a bonus of $10k plus in a 40 year career)
Yeah, the collateral was/is bad morage loans not to mention mark to market
using another blogers BS to back up your BS just makes a biger pile.
www.youtube.com/watch?...