The Fine Line Between Profits and Theft

Let's dispense with this sort of bilge from The Washington Post right here:

Money can't buy love? For proof, look no further than Goldman Sachs. Last week, the firm reported a spectacular quarterly profit -- close to $3.5 billion for the bank and about $385,000 in compensation for each employee for the first half of the year -- and right on cue, the braying began for the heads of the Goldmanites. Earlier this month, Rolling Stone's Matt Taibbi, in a comprehensive exercise in conspiracy mongering, primed the pump of outrage with his article "The Great American Bubble Machine." Now a chorus of supporters has chimed in, shocked that in a recession the evil Goldman could turn such profit.

I know nobody that objects to making a profit.

I know a lot of people who object to theft.

What began as an effort to keep the financial industry from repeating its mistakes has turned into, as at other points in history, an attack on the idea of trading profit. It is no longer enough that the banks should be reformed; the opportunity to make this kind of profit should be eliminated.

That's an outrageously false statement.

Many in the community, myself included, object strenuously to a poker player who has an extra set of aces up his or her sleeve. We also object to a casino capitalist model where the winnings are kept but the losses are forced onto someone else.

And that, dear reader, is what Goldman (GS) and the rest of the big banks have been doing for the last two years.

Over the last several years Goldman Sachs entered into a metric ton worth of credit default swaps with AIG, even though AIG was incapable of paying off on those swaps. They did so as the "brightest people in the room", that is, either knowing that AIG was incapable of covering the bet or simply not caring that AIG could not cover the bet.

These transactions allowed Goldman (and the other banks who engaged in them) to hold "assets" on their books at intentionally-inflated values - that is, at demonstrably more than those "assets" were actually worth in the market, under the rubric that should their value fall Goldman would be able to "recover" under their insurance policies (the CDS.)

But in point of fact these transactions were never any good, because AIG didn't have the money to pay.

When this became evident Goldman (and others) managed to connive the government into "saving" AIG by throwing more than $100 billion dollars of taxpayer money into the firm. About $13 billion of that went directly to Goldman Sachs to "pay off" those contracts. Billions more went to other institutions, including banks in Europe.

In doing this, Goldman and these other banks forced the taxpayer to eat their bad bet - that is, their loss. That $13 billion was in fact unearned - they had no right to it, as AIG was in fact insolvent and they would have collected zero had the firm gone into bankruptcy. Goldman and these other banks were either unable or unwilling to rescue the firm themselves, so through the use of political influence peddling they got the taxpayer to do it for them, thereby collecting on a transaction that they either knew or should have known had no chance of being paid off at the time they entered into it.

Having done this, they placed yet more bets. This time they won those bets, and made a "profit." But they would have never had the capital to place the bets but for the taxpayer bailing them out in the first place, as they would have likely gone under last fall.

The real objection of Taibbi and others is that Goldman, except for one bad quarter at the nadir of the financial crisis, has turned a profit. Big profit.

No, the real objection of Taibbi and others (myself included) is that Goldman managed to steal $13 billion dollars of American Taxpayer money, without which they would not exist today. Having stolen that money through claims of imminent financial collapse made by their former head, Henry Paulson, at their urging, they now have speculated with that taxpayer money and kept the proceeds.

Nobody would object were Goldman to return not only their "TARP" money but also the entirety of the "passthrough" benefits they have received, specifically but not exclusively the $13 billion dollars that was funneled through AIG to them.

But if Goldman had done that, they would have posted a huge loss, and in addition would not have had the money to repay TARP.

Nobody I am aware of cares if a firm is able to turn a legitimate profit through their actions in the market. We object not to profit, but to blatant chiseling of the taxpayer after a company or individual makes a bad bet due to their own incompetence or willful blindness, then demands that the taxpayer cover it, yet when their bets turn out well, they keep the money and hand it to their "associates."

That's robbery, and I and others will continue to point it out until the shills who advocate for same and try to excuse it, along with Goldman themselves, are held to account.

Comments

[Network Effect:]

Amen brother. Amen.

Jul 20 03:05 PM

[theblindtib...:]

The Goldman self-dealing story is one we've seen so many times. The incompetent board of directors looks away, while the rapacious CEO loots the company coffers. Except this time the board was composed of our elected officals and their appointed stewards. The fact that Geithner and crew were complicit in all of this is a serious indictment of this administration.

Jul 20 03:40 PM

[mplaut:]

There is no fine line between not doing your homework and being informed.

GS deserve to have their wings clipped IMO, but they are not guilty as charged here. They did not just load up AIG and wait for the government to bail them out. You write: "they had no right to it, as AIG was in fact insolvent and they would have collected zero had the firm gone into bankruptcy."

In fact, GS knew that AIG was not a reliable counterparty and they had hedged and collateralized all of their exposure to AIG. They would have gotten their money whether AIG was bailed out or not.

See:
economicsofcontempt.bl...

I repeat that I still think that the government should claw back some of GS's recent profits, but they did trade very smart and did not rely on AIG or a government bailout of AIG as charged here.

Jul 20 04:17 PM

[BerkeleyBob:]

The central point is the disparity in treatment of say, GM bondholders and GS receiving 100 % payout on its non-insurance with AIG via the taxpayer. AIG bankruptcy may have been more catastrophic than what emerged but whatever AIG was doing, it was not insurance as the term is commonly defined. It was an off shore and unregulated casino.

Jul 20 05:28 PM

[antiquary:]

This line looks about as fine as a two-by-four. It's more like "The Intentionally, Profitably Blurred Line Between Profits and Theft."

Jul 20 06:15 PM

[Kanomi:]

Given how blatantly the author, an Establishment lickspittle named Mark Gimein, misrepresents the complaints of Matt Taibbi and others against Gangster Sachs, and how utterly corrupt the Washington Post is, you have to wonder about payola in this instance. How else could something so malicious and evil in intent see the light of day?

Jul 21 03:07 AM

[djj420:]

And the previous administration is blameless? You have to be kidding. It's funny to see all this fiscal conservatism blossoming after the Bush administration drove the economy and the banking system over a cliff. The time to bite the bullet was years ago.


On Jul 20 03:40 PM theblindtibetan wrote:

> The Goldman self-dealing story is one we've seen so many times.
> The incompetent board of directors looks away, while the rapacious
> CEO loots the company coffers. Except this time the board was composed
> of our elected officals and their appointed stewards. The fact that
> Geithner and crew were complicit in all of this is a serious indictment
> of this administration.

Jul 21 12:13 PM

[Fnord123:]

On Jul 21 12:13 PM djj420 wrote:
> And the previous administration is blameless? You have to be kidding.

Mr.Denninger has been critical of both the present and previous administrations. Your complaint is not only incorrect, it is a distraction from the fundamental issue, which is that GS and friends are looting the treasury with the assistance of the government (that includes not only Bernanke, Geithner, etc., but also Paulson).

Jul 21 07:33 PM

[holmesnmanny:]

The only way they would have gotten any money would have been via a "loan" from the government, a loan they would have to pay back at some point. Given that it was AIG that they gave their risk to, it was "solely" AIG that would be able to pay them back for the credit defaults.

The author is 100 percent correct. If AIG would have went bankrupt, it would have severely hurt GS and others.

You should really do your own homework.

And don't contradict yourself. Either your for GS or against 'em. Quit changing course fifty times within the same post.


On Jul 20 04:17 PM mplaut wrote:

> There is no fine line between not doing your homework and being informed.
>
>
> GS deserve to have their wings clipped IMO, but they are not guilty
> as charged here. They did not just load up AIG and wait for the government
> to bail them out. You write: "they had no right to it, as AIG was
> in fact insolvent and they would have collected zero had the firm
> gone into bankruptcy."
>
> In fact, GS knew that AIG was not a reliable counterparty and they
> had hedged and collateralized all of their exposure to AIG. They
> would have gotten their money whether AIG was bailed out or not.
>
>
> See:
> economicsofcontempt.bl...
>
>
> I repeat that I still think that the government should claw back
> some of GS's recent profits, but they did trade very smart and did
> not rely on AIG or a government bailout of AIG as charged here.

Jul 22 09:26 AM

[djj420:]

I was replying to theblindtibetan's comment in this thread, not to the author's article. In his comment, theblindtibetan was only condemning "this administration", as if the GS/lobbyist/government wonk revolving door was a new development that Obama brought about.


On Jul 21 07:33 PM Fnord123 wrote:

> On Jul 21 12:13 PM djj420 wrote:

> And the previous administration is blameless? You have to be kidding.

Mr.Denninger has been critical of both the present and previous administrations. Your complaint is not only incorrect, it is a distraction from the fundamental issue, which is that GS and friends are looting the treasury with the assistance of the government (that includes not only Bernanke, Geithner, etc., but also Paulson).

Jul 22 10:28 AM