Goldman Sachs: Don't Blame Us
businessweek.com
businessweek.com
The real problem is that our government seems to be at the beck and call of Goldman Sachs and entities like it.
Congress has even surrendered its responsibility for our money to the Federal Reserve, a scheme hatched by bankers that created the bubble leading up to first great depression.
The "first" great depression had the Dust Bowl, mass migration, people starving to death right in public, shantytowns popping up everywhere, and 25% unemployment. The "first" great depression had a 30% decline in GDP.
When was the second great depression?
The fact that "petty" means both small (which this one is, as far as depressions go) and mean-spirited (price-gouging on housing with young families at the barrel-end) means it fits surprisingly well.
The government borrowing massively to keep the government sector expanding and is paying people to consume in an effort to convince everybody that things are recovering.
This is not sustainable and only worsens our situation. One day, we must face up to our debts. We'll be very lucky if interest rates aren't jacked up on us.
And, as in Japan, it seems they want to keep the zombie banks alive and avoid acknowledging the extent of the problems.
But a relatively similar percentage reduction? Quite likely. I would say that this depression looks quite similar to the beginning of the great depression when you consider unemployment percentages and debt as a percent of GDP.
The claim was that if the Fed was created, we would never have such bubbles/panics again.
Since the Fed was created in 1913, and we have had the Great Depression and lots of other monetary issues, including the current one, it is safe to say that the original argument in favor of the Fed is proven false.
yep, its all been smooth sailing. only because they've figured out how to borrow and inflate their way out of every correction.
in the mean time total system risk grows to never imagined heights.
I can buy the argument that Goldman didn't see the subprime coming since they were initially exposed (or so the story goes http://www.vanityfair.com/business/features/2010/04/wall-str...) Because of this, they were the first big bank to see the coming pop, and acted.
However, while their CFO may be the most "frustrated" he's ever been during his 30 years as a Goldmanite, I'm the most frustrated I've ever been in my 23 years as an American. To see this bank make millions every day because a luiqidity-at-all-costs monetary policy issues taxpayer debt to TBTFs as near-zero % interest loans which they use to jack the DOW to all time highs is ridiculous. Yes, the US government is totally unable to tackle the country's financial problems which creates opportunities for I-banks like GS, but I can hardly believe the right path requires a bonanza for these guys. Non-CNBC headlines consistently point to a blatant conflict of interest between fiscal policy and wall street profits (today: http://www.zerohedge.com/article/guest-post-tim-geithner-sni...) They want to play the dangerous game of squeezing the heart of our nation during a time of impending crisis.. look to Blackwater for PR advice.
Obligatory: http://creattica.com/photoshop/ut104/18473
http://www.zerohedge.com/article/guest-post-tim-geithner-sni...
Maybe you missed the part in the article where they said they could have survived without the money.
Also the TARP money was pretty much forced on them http://goo.gl/N7SP (businessinsider.com)
1. Goldman blew up AIG by making AIG post collateral based on market prices (for bond insurance AIG had written). Because this is only fair.
2. Goldman got the feds to pay off the insurance at 100% value, not market value. Without an insurable event happening, and without executing the insurance by delivering the bonds.
3. Goldman used the pay off to buy the bonds. At unspecified prices, presumably market prices if we read between the lines.
4. "Qualified investors" knew what they were getting into massive risks buying certain instruments. They were well informed and knew how to investigate and rate risk properly. But when Goldman bought bond insurance from AIG, they were shocked, shocked to find AIG could not pay.
How evil.
4. The "qualified investors" knew that the contract might obligate them to pay out large sums of money. If you bet money on a horse race, you better plan for losing.
On the other hand, Goldman (and everyone else) did not expect gigantic AAA counterparties to go bankrupt. If you bet money on a horse race, you might not plan for winning but then having the track going bankrupt.
"Nobody could have predicted" is the worst kind of excuse.
Also, when entities go bankrupt, usually all of their debtors get a % of the money they're owed, because if they could get paid everything, then there wouldn't be a bankruptcy. The feds should have told Goldman and everyone else "Here you go, 50 cents on the dollar, take it or leave it". They would have taken it and everything would have been fine.
By 100% backing any bank that failed, the FEDs allowed the flow of money to continue through the economy and it said a very clear message that everyones money is safe.
Imagine if everyone thought their money was not safe in their bank accounts. That everyone started taking out all their money. The system would have collapsed.
For good reason: many large financial institutions were based on fraud. People were worried that there was nothing backing up their deposits because there really was nothing backing up their deposits.
"By 100% backing any bank that failed, the FEDs allowed the flow of money to continue through the economy ..."
No, to prevent a panic you back up depositors. "Worried that your checking account might evaporate, that you might not be able to make payroll because they stole your money? Don't worry, our printing press has you covered. And the crooks? They be goin' to jail." The inflationary costs would have been eye popping, but they would be over rapidly, and a foundation of trust would have been laid for future growth.
Instead they bailed out the con artists with taxpayer money. This will either have to be covered by punitive taxes for decades (destroying business recovery through low profits), or by massive inflation at some unknown time in the near future (choking off business recovery through fear). Meanwhile the institutionalization of fraud creates direct fear that prevents reasonable speculation.
Where's the fraud in these investment banks? Maybe your referring to the brokers (in the high street) who actually sold the subprimes to people buying houses? Maybe.. but that's certainly not investment banks.
The article says: "and instead dealt only with hedge funds, insurance companies, and large financial institutions, so-called qualified buyers that, under SEC rules, are expected to understand the risks."
They sold it to people who can understand these financial instruments.
"because there really was nothing backing up their deposits."
FDIC was backing up their deposits, well to 100K at least.
"This will either have to be covered by punitive taxes for decades"
The Treasury just didn't give them free money, they sold them warrants (AFAIK). The money is starting to come back in. The US Treasury just made $8B in profits from Citibank: http://goo.gl/rM9E
What is evil is that if it was you instead of Goldman Sachs, AIG would have paid you pennies on the dollar instead of the full value on paper.
4. See #1. Counterparty risk is part of every deal.
Example:
If you took a bet from Joe Sixpack that would probably pay $1000, but possibly $10 million (more than his life time earnings), the US government would not, and should not, be using taxpayer money to pay you $10 million in the worst case scenario. Unless you happen to be Goldman Sachs.
For the record, I'm not defending the bailout, I've always opposed the bailout, and one of my highest rated comment on HN ever is a snarky post criticizing the bailout.
It is nowhere near the financial norm to expect companies to have the government pick up the tab for failed counterparties.
Why can't people criticize Goldman for doing that? Can I not criticize multi-billion dollar companies for putting former members into high ranking officers to influence the politics? Can I not criticize connected donors that break laws and then are able to get a pardon from the President?
Just because they can, doesn't mean they should.
Who would you want to run the FED? An elected politician? :)
And just so you know, the chairman of the Fed is Ben Bernanke, who has never been part of Goldman Sachs. The fact that Goldman is so successful is because Goldman members like Henry Paulson are unelected politicians, the worst type.
Right.. my bad. Ben's great and seems to be great for the job.
To reduce this risk, trades are collaterized, (http://www.investopedia.com/terms/c/collateral.asp) and that's what GS called on AIG, and AIG couldn't pay any more and asked the government for help.
e.g If you took a bet with Joe Sixpack for $10M and after the first day, the market moved in your favor say $1M, then based on the contract, Joe would have to give you $1M as collateral. If the following day it moved $2M in Joes favour you would have to give Joe $3M (his original $1M + $2M)
All banks do this. This is nothing special that GS did. The monies involved are FAR greater than $10M so that really everything has to be collaterized.
Being collateralized doesn't change the facts. Goldman had the choice to exercise the option right away. It wasn't because they were forced to do so because the contract said so.
They knew AIG was going to be insolvent soon, so they wanted to get the money out of there as fast as they can.
If it was insurance it would be regulated. Maybe CDS are used so much like insurance and they do need to be regulated, but that's another discussion.
Collaterized contract isn't an option. It's a daily swap of the market-to-market exposure. All banks do this to limit losses.
"It wasn't because they were forced to do so because the contract said so." Sure, they didn't have to, but everyone does it daily. (Well the good/clever banks do). Your just upping your exposure if you don't and really, that's the whole point of getting daily collateral, so you don't.
"They knew AIG was going to be insolvent soon, so they wanted to get the money out of there as fast as they can."
Errh.. what's wrong with that? You think they should take a hit on their bottom line becz AIG didn't know what they were doing.
update
You are wrong. Goldman did not demand collateral from AIG because they had a AAA rating.
http://www.nytimes.com/2010/04/04/opinion/04burry.html?ref=o...
What’s more, I demanded daily collateral settlement — if positions moved in our favor, I wanted cash posted to our account the next day. This was something I knew that Goldman Sachs and other derivatives dealers did not demand of AAA-rated A.I.G.
I think after $13B (I presume its around that figure as they got that money back from the government) of exposure GS decided to call them on it.
Maybe AIG should have not sold $13B of CDS that they couldn't collateralize. I don't see how that's GS problem.
I just proved this was wrong. If GS withdraws all the money in one go, this was not a day to day transaction.
And the whole point of my original comment was to point out that it IS Goldman's problem. It should NOT be the US taxpayer's problem. But it is thanks to Goldman Sach's influence on the government.
"Goldman checked the market prices daily and made numerous collateral calls on AIG beginning in mid-2007. By September 2008, Goldman had $7.5 billion of AIG's money and claimed it was owed an additional $2.5 billion"
This suggests that it wasn't all in one go, but over a year. This is from Goldman. Not sure what the source of the NYTimes article is.
"It should NOT be the US taxpayer's problem" The government decided that AIG was too big too fail and it would back AIG obligations 100% to prevent a meltdown in the economy.
Why should GS then write-off money owed to it by AIG (based on a contract)?
The source is from Burry, the first person to start buying CDS's in 2005. He even bought some from GS. You can't really expect GS to be honest here when their reputation is on the line.
And yes, GS should have written it down as a loss. Because if it was you in their shoes, you would have been forced to eat the losses since you don't have their government connections. Why does GS get a free pass?
Yes the government could have forced them to eat their losses, but the point of the bailout was to stabilize the market. The government didn't want anyone (not just GS) to lose money, as that would have caused a cascade effect. (In their mind)
I think your suggesting (as far as I can tell) is that GS forced the government to give out money (through their political connections).
I really don't think that's true. I think the government was super concerned (and super scared) that the flow of money would stop and the whole US economy would fall. Not just investment banks but everything.
This is very much the case. To open an account at Goldman Sachs, you must invest at least $10 million. Averages Joes are not investing with Goldman Sachs.
If they wanted to stabilize the market, the government could have chosen to invest it in banks that did not overextend themselves, or to directly purchase toxic assets instead of doing it through a middleman: letting GS skim a profit.
Instead, they predictably saved the assets of the super rich instead of mainstreet America.
Sure, AIG owed Goldman money. But when AIG went belly up, why did the U.S. taxpayer step in to pay Goldman in AIG's place?
The former claim implies Goldman is evil (nearly as evil as Bush/Pelosi). The latter claim does not.
Greenspan says that evaluating counter-party risk was SOP at the private institutions where he worked before joining the fed. He claims that he knew more about the state of his competitors when he was in private biz than he did about the state of the same institutions when he was in the fed.
> If you bet money on a horse race, you might not plan for winning but then having the track going bankrupt.
You may not plan for it, but it happens.
More to the point, it doesn't matter whether Goldman planned for it - they were willing to take the profit, so they should take the loss as well.
How evil."
Yes. Goldman knew the contract was fraudulent. They signed it to create a bogus asset that they could list on their balance sheet, allowing them to speculate using what should have been reserves. If AIG could not pay, they would simply write it off and lose a pittance (the few percent they paid AIG), small compared to the returns they could get on the speculations. If by some miracle AIG did pay, Goldman would throw a party where it rained money and cocaine.
"On the other hand, Goldman (and everyone else) did not expect gigantic AAA counterparties to go bankrupt."
First, a proper financial investigation ("due diligence") looks into the risk that the counterparty will spend all the money on fast cars and hookers. Second, if Goldman did not expect bankruptcies, then why did they buy insurance for bonds they did not own? Buying a derivative by itself is not a hedge, it is speculation.
Do you have any evidence for this?
Also, expecting an AAA rated multinational corporation to pay their debts is hardly a "miracle".
Second, if Goldman did not expect bankruptcies, then why did they buy insurance for bonds they did not own?
Home "owners" defaulting on mortgages is not the same thing as AIG going bankrupt. Goldman expected the former, not the latter (at least according to the article).
They knew anybody with a few $100k could buy a AAA rating -- they were buying them themselves.
You are accusing Goldman of speculation, not fraud.
Incidentally, insurance is a derivatives contract. Any insurance company is a derivatives trader, AIG Financial Products in particular.
I'm sure the good people of Iceland would agree.
It's like me saying "I don't know if obesity is related to use of baseball caps but i've lost my trust in the government". Yeah.. it's ridiculous.
Don't blame, The sweet and tender hooligan, hooligan, 'Cause he said that he'd never, never, never, never do it again.
He was a sweet and tender hooligan, hooligan, Because he'd never, never, never, never do it again.
-The Smiths, Sweet and Tender Hooligan