M. Burke

Goldman's Success: Put Down Those Pitchforks

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!