When Goldman Might Have Failed 20 comments
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I hadn't realized there was controversy over the idea that Goldman Sachs (GS) might have failed had the government not bailed out AIG (AIG). As I understand it, that's the reason AIG was bailed out—that if it hadn't been the whole financial world would have faced collapse. But Joe Hagan's piece spelling out Goldman's vulnerability seems to be raising some eyebrows all the same. A sample:
Goldman Sachs was AIG’s biggest banking client, having bought $20 billion in credit-default swaps from the insurer back in 2005…
By that weekend in September, Goldman Sachs had collected $7.5 billion from its AIG credit-default swaps but had an additional $13 billion at risk—money AIG could no longer pay. In an age in which we’ve become numb to such astronomical figures, it’s easy to forget that $13 billion was a loss that could have destroyed Goldman at that moment...
Of the $52 billion paid to AIG’s counterparties, Goldman Sachs was the biggest recipient: $13 billion, the entire balance of its claim. The amount was surprising: Banks like Merrill Lynch that had bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar in deals moderated by New York’s insurance regulator. Eric Dinallo, the former New York State insurance commissioner, who was at the AIG meetings, characterizes the decision this way: AIG’s counterparties, Goldman being the most prominent, “got to collect on an insurance policy without having the loss.”
As Felix Salmon notes, both Moe Tkacik and Matt Taibbi pick up on this fact—that AIG's paid off claims in full while other insurers were paying much less. Mr Taibbi says:
I was on a radio show a few weeks back with a hedge-fund manager, a Goldman apologist, who insisted on the air that Goldman would actually have made more money if AIG hadn’t been rescued, because the bank was properly hedged against AIG’s collapse… it wasn’t until the show was over that I realized the proper response to that argument was just, “Bullshit!” Goldman has been making that argument ever since the AIG bailout, but it has never come out and identified that magical counterparty or counterparties who’d have been able to come up with $20 billion after a system-wide financial collapse.
This is true but somewhat beside the point. Had AIG not been saved, then Goldman would not have gotten its claims paid off in full, because AIG would be gone and so would all the other institutions through which Goldman had hedged its AIG bets. But once the government saves AIG and averts system-wide financial catastrophe those other counterparties are able to pay up. At that point, it doesn't matter whether the full payout is made by AIG or someone else; the bank gets its money.
Does the fact that Goldman—along with everyone else—needed an AIG bail-out to survive mean that it has some obligation to the government? Well, yes, I think so; if you're going to get systemic risk insurance from the government, you ought to pay for it. But does this mean that Goldman didn't really "deserve" the profit figures it recently reported, because without that bail-out they'd have tanked? That seems off; a similar argument could be made about any firm or household dependent on a functioning financial system.
This article originally appeared on The Economist.com
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How does this help justify bailing them out or saving them. The amount of risk Goldman is taking is still not acceptable according to Fed standards. Thus they still pose a systemic risk by not being able to adhere to VaR or proper leverage. Rather than improving their balance sheet they did 3 things this quarter. #1) they begged the FDIC to waive their capital requirements because they don't have enough assets 2) Announced that they were paying huge record bonuses, 3) Announced that they were planning on leveraging themselves even more in the market in the future.
This obviously doesn't sit well with me and shouldn't sit well with anyone else either. What Goldman is doing violates the spirit and intent of taxpayer bailouts.
Conspiracy theories abound.
On Jul 29 07:31 AM Moon Kil Woong wrote:
> For me the issue is not the profit Goldman made from the government
> but the fact the government is trying to help financial companies
> from tanking by letting them make profit so they can bolster their
> balance sheet. Rather than do this GS and others spit in the taxpayers
> face, refuse it by paying back TARP funds saying they never needed
> it (a baldface lie) and then use all their profit not to make loans
> or improve their VaR by adding it to their balance sheet but to pay
> out billions to their executives.
>
> How does this help justify bailing them out or saving them. The amount
> of risk Goldman is taking is still not acceptable according to Fed
> standards. Thus they still pose a systemic risk by not being able
> to adhere to VaR or proper leverage. Rather than improving their
> balance sheet they did 3 things this quarter. #1) they begged the
> FDIC to waive their capital requirements because they don't have
> enough assets 2) Announced that they were paying huge record bonuses,
> 3) Announced that they were planning on leveraging themselves even
> more in the market in the future.
>
> This obviously doesn't sit well with me and shouldn't sit well with
> anyone else either. What Goldman is doing violates the spirit and
> intent of taxpayer bailouts.
> jack
However, Goldman has repeatedly made the claim that they were hedged against the full exposure, so are the making false statements to the market or were the hedges with a counterparty with enough money and lack of sense to do such a thing and would a event of default have created a massive international shit storm if GS had tried to claim. If this is the case, we are looking at a SWF...
The public is then aware of the economic fallout to themselves should a large financial institution affect them adversely.
What right does any elected administration have to just decide for the masses, this action must be performed. The fact it was done in haste and not well thought out shows that this kind of surprise is the way to get something you want when the result is unfavorable to people picking up the tab. It's a lawyer "tactic"
I'm sure it's the fastest thing that's ever went through congress.
Yes there's systemic risk allowing big banks to fail, but adding a trillion to the deficit is of equal systemic risk.
Goldman Sach's has audacity talking bonus' for their employees like they've all done something worth recognizing them for.
The bonuses are another example of the greed and the skimming of profit off the top of their money making machine.
When Obama took office he should have looked hard and long at the people pushing this bail out plan upon him. The fact Paulson got it started to make sure it would be completed and completed by a new admin displays evidence repercussions will be coming down the pipe and the Obama administration will be sharing in the blame.
It's a conflict of interest for Paulson to have been employed by Goldman before making such a decision.
Paulson ceremoniously dumps all his GS shares before performing this feat, nice way to cover his ass in the event the plan doesn't get passed.
Nothing as big as the stimulus should have ever went anywhere without much thought and consideration. A study by economic professors was warranted.
As for Goldman Sachs, Wells Fargo could have expanded and administered to the new business generated by Goldman's fallout.
This was politics, not heroism.
Goldman is the uncontested fair-haired boy in DC, and will stay that way for at least 4 more years, and surely longer than that if the present boys stay on to give us even more Obamanation.
I don't have any issues with GS as a firm. I firmly believe that if you would like to make money during good times you have to be willing to lose money during the bad times. In other words, you need to be able to put your money at risk. You shouldn't have it both ways. You shouldn't be able to get bailed out during the bad times and return to making money during the good times.
Lehman Brothers didn't have this luxury. Bear Stearns didn't have this luxury. WaMu didn't have this luxury. AIG didn't fully enjoy this luxury. Citi certainly doesn't have this luxury. Why should Goldman Sachs enjoy it?
"But does this mean that Goldman didn't really "deserve" the profit figures it recently reported, because without that bail-out they'd have tanked? That seems off; a similar argument could be made about any firm or household dependent on a functioning financial system."
The AIG bailout is just the tip of the iceberg. You fail to mention TARP and the sweetheart deal GS got to buy back it's warrants.
You fail to mention the The Temporary Liquidity Guarantee Program when Goldman last year converts from an investment bank to bank holding company status, which now makes it eligible for a new program that gives commercial banks FDIC backing for unsecured debt. This basically hands over a free AAA rating to the big banks like GS and allows them access to mountains of cheap money, with taxpayers on the hook if something goes wrong.
You also fail to mention other Fed Programs. By converting to a bank holding company, Goldman also became eligible for a whole galaxy of new bailout programs administered through the federal reserve like the Term Asset-Backed Securities Loan Facility (TALF); it also became eligible to borrow cheap money from the Fed’s discount window.
You also fail to mention the fees GS is raking in as a result of other banks wanting to repay their TARP money. Many TARP recipients had to issue new equity according to certain parameters, and guess who one of the only major equity underwriters left on Wall Street is? That’s right, Goldman, Sachs. Goldman’s equity underwriting department hauled in $736 million this quarter. Does this happen without the bailouts? No. Do the bailouts happen if banks like Goldman hadn’t taken on too much risk in the first place? No. This is another subsidy.
I could keep going on and on and on. It's your thinking that is a bit "off" on this subject. It's a shame that an economics writer such as yourself either doesn't have the competence or the balls to do his job. It's also a shame that a writer from Rolling Stone Magazine who has never written about finance before and a few financial bloggers are running circles around a professional economics writer like you. We need journalists who will start doing some real investigating and writing!
Let's add to your comments the fact that GS successfully engineered the $147 Oil Frenzy, stuffed their Index Fund Participants into it, at their peril since they were one of the first to short oil in June, ahead of the rest of the sheeple. Their own in-house accounts did just fine, mind you...
Add to this, the fact that apparently almost, if not, each year GS routinely steps over the boundaries and incurrs fines and penalities from the government, but actually just plans to run aground as they look at this as a "routine cost of doing business", a cost to the multibillion dollars they rake in when stepping out of bounds..
Yes, GS (and Big Banks), Big US Oil, Big Ins and Big Pharma have got to go...
Look, these are the 4 Biggest Lobbying Groups in the US - and here are where our ills lie....
On Jul 29 09:13 AM Ferdinand E. Banks wrote:
> These articles about GS are interesting, and for me becoming more
> interesting all the time. I have taught in about 15 universities,
> with professorships in 12, and everywhere I turn these days I run
> into mediocrities who think that their mediocrity gives them some
> special privileges in the great world of finance and economics. I'm
> sorry but it doesn't. Better the directors of GS than George W. and
> Condoleeza.
Simple suggested formula - if any firm got bailed out, took federal or state money, had federally provided guarantees (eg FDIC etc.) or changed their charter (eg became a bank from an investment bank), for the year Y2009+ time frame to extend to X years beyond that, they would be allowed 10% return on the equity THEY PROVIDED BEFORE ANY BORROWING FROM GOVT OR OTHER ENTITIES LIKE BANK (except direct deposits and firm's equity). Any profits beyond that would be taxed as WINDFALL PROFIT TAX, to be taxed at 90% - THIS WAY THEY STILL GET 20% RETURN ON THEIR MONEY - NOT BAD CONSIDERING THEY WOULD HAVE GONE UNDER AND LOST 100%!!! I am sure the smart group of people here have other ways TO BRING THE MONEY BACK TO WHERE IT RIGHTFULLY BELONGS - TO THE COMMON TAXPAYER.
Lets get your ideas going and to the lawmakers to institute this Windfall Profit Tax as a part of the comprehensive tax and financial reform currently underway in the house.
Long live America and the freedom loving people!
On Jul 30 03:01 AM johngonole wrote:
> I've got a comment. ^#*$^@ Goldman
Simple suggested formula - if any firm got bailed out, took federal or state money, had federally provided guarantees (eg FDIC etc.) or changed their charter (eg became a bank from an investment bank), for the year Y2009+ time frame to extend to X years beyond that, they would be allowed 10% return on the equity THEY PROVIDED BEFORE ANY BORROWING FROM GOVT OR OTHER ENTITIES LIKE BANK (except direct deposits and firm's equity). Any profits beyond that would be taxed as WINDFALL PROFIT TAX, to be taxed at 90%-99% - THIS WAY THEY STILL GET 20% RETURN ON THEIR MONEY - NOT BAD CONSIDERING THEY WOULD HAVE GONE UNDER AND LOST 100%!!! BRING THE MONEY BACK TO WHERE IT RIGHTFULLY BELONGS - TO THE COMMON TAXPAYER.
Lets get your ideas going and to the lawmakers to institute this Windfall Profit Tax as a part of the comprehensive tax and financial reform currently underway in the house.