1. Sell doomed products to stupid clients
2. Short those products
3. Profit X 2 !
3a. If fail, have taxpayer pay for it
2. Short those products
3. Profit X 2 !
3a. If fail, have taxpayer pay for it
That's the most disturbing part of all this: profits are kept private, but losses are socialized.
It's the equivalent of "heads, I win; tails, you lose".
When banks profit, society gets its share of those profits. Taxes, spending by the organization, spending by employees, their taxes. The government bailed out Detroit, why's this any different?
How does that make sense? Coercing the rest of us to take on debt so they can continue an enterprise that doesn't make economic sense?
You're absolutely right when you say there's no difference between subsidizing banks and auto companies. Both actions were wrong.
Taxes are not paid in exchange for bailouts... at least if they are tell that to all the other companies that have failed over the years and not had the government swoop in to help.
They are getting a subsidy to mindlessly arbitrage the yield curve and profit by making riskier loans than they would normally be capable of making. Fractional Reserve lending is NOT necessary for a financial intermediary to function. Look at hedge funds or VC firms. They are investing the amount of money they have received from investors and are not allowed to invest 10X they amount they have without raising that extra amount from somewhere.
Banks are not doing anything intelligent that adds significant value, the majority of their profits come from mindlessly arbitraging the yield curve due to a federal subsidy.
If i-banks like GS want to pay large salaries and bonuses to their employees, that is fine by me, as long as they also accept the negative consequences of the risks they take.
I'm also not a fan of the automobile bailouts; to paraphrase Plato, two bailouts do not make a right.
Here are some differences: - The bank bailouts are turning out to be at least a 100 times as expensive as the Detroit bailout. Detroit is not even worth mentioning in the same breadth as the banks.
- In the detroit bailout, most people that were responsible for the failure did not benefit. CEOs were sacked, all equity holders lost their money, debt holders lost most of their money too. In the bank case most people responsible kept their jobs and many of them are now back to getting multi million dollar bonuses (supported by government loans). Some banks wiped out their equity holders, some banks had only temporary drops in stock price. But pretty much all of the bank debt was guaranteed by the government.
But if the loans did not exist, many of these people would not be getting these bonuses either because their employers would not exist either, or because their employers would not have sufficient capital to generate the profits from which the bonuses come.
So yes, they would have gotten those bonuses regardless, and no, you can't say they would have failed without it.
Also, the bailout of AIG was really a bailout of Goldman. In other words, AIG got bailed out so that they could pay Goldman their enormous losses on securities that they bought from Goldman.
Know of any good reading on the consumer bank point?
The media has made them into a scapegoat out of them in particular, and for some reason, everyone is following along.
You know what's REALLY too big to fail? Capitalism. And rewarding market failure is the surest way to take it down.
And it should have been allowed to fail in my opinion. There would have been a lot of pain and other failures, but those are the risks of playing these games.
If you protect people from all of the ultimate costs of doing things that are rewarding in the short term most of the time, but incredibly risky overall, they will keep doing them!
And we will all pay a huge price for these parasites eventually if we don't wake up and stop subsidizing them.
I'm for criminal charges for those that committed fraud, investigations, more regulation, and so forth, but this "We should have let them crash and burn, damn the consequences" idea was not likely the best course of action, though it seems to be a pretty common attitude for some reason.
When you pick a vendor, a bank or insurance company, there's a chance that entity will fail. You're the one who has to judge that. It's not the government's job to protect you from failing to do that, especially when others took the time to assess the vendor and decided to use a more stable, smarter company.
And its certainly not the job of government to take the consequences from those that misjudged their bank or insurance company and assign those consequences to others that had nothing to do with the decision.
I am not "damning the consequences". The consequences are unavoidable. Its just a question of who should pay for them. Do we leave the consequences with those making the decisions that led to them? Or do we dump them off on everybody else?
This is not a zero-sum game within the US. Some courses of action have much larger consequences overall than others, and the one you are advocating seems likely to have had a relatively high overall cost to the system of the economy compared to the one the govt. chose, at least in the short term.
The government has been trying to keep the ship sailing as smoothly as possible, as is their general responsibility, despite the unsavory nature of bailing out some of those responsible. I believe that was viewed as a necessary evil.
It's that they represented the products as awesome, when they knew they were structured specifically to be doomed.
http://blogs.reuters.com/felix-salmon/2010/04/16/goldmans-ab...
There's a very thin line between what's legal and what's illegal, and the reason banks have compliance departments is to check over things which are borderline. In a lot of cases not only can the bank be fined but the individuals involved can also face jail time. But with borderline issues typically if they're done in good faith (full honestly, going through compliance departments) the regulatory bodies don't get too involved because they don't want to scare people away from the large number of legitimate activities which are beneficial to the system but are borderline.
However in the case where someone lied outright (presumably without the knowledge of their compliance department) that's a much clearer cut-case for prosecution. It's deception for the purpose of making money, and saying "I didn't know it was illegal" doesn't wash, because it obviously is.
Oh, you lost? Too bad. Yeah, we forgot to tell you that the other guy knew your horse was poisoned. Yeah. He poisoned it himself. We saw him do it - we helped him, really. Oh well.
Security guards? Oh, they work for the other guy. He pays 'em. Tough luck for ya, though, kid, real tough luck.
You win some, you lose some, eh?"
GS structured this whole deal from the beginning because Paulson wanted to short specific RMBS portfolios; ACA was just engaged in order to have a "brand-name" signing off on it.
ACA thought that Paulson & Co. were going to buy the equity (riskiest) tranche, and that they, ACA, were only taking on the risk of the mezzanine tranches. GS knew that not only did Paulson not intend to buy in, they intended to bet against the CDO.
Magnatar aggressively bought the crappiest traunches of CDOs so that banks would be convinced to create more CDOs. The banks could then sell them, saying "even the crappiest traunches are selling like hotcakes - you can confidently buy these less-risky traunches."
But actually, even the least-risky traunches were VERY risky, and Magnatar was pushing to have riskier stuff included in the higher-level traunches, setting them up to fail. Meanwhile, Magnatar's inevitable losses on the crappy traunches were nothing compared to the bets (CDOs) they were taking against the CDO as a whole.
They might invest $10 million in the crappy traunches and effectively put an $100 million insurance policy on the CDO as a whole.
A good analogy would be if you bought houses next to a dam you thought would burst, thereby convincing developers to build more such houses, and you then took out large insurance policies on all the houses in the neighborhood. Except that you're not allowed to take out insurance on houses you don't own, which is sane, but you ARE allowed to buy credit default swaps on CDOs you don't own, which is a recipe for disaster.
So to the CDO investors in THOSE deals, at least, what the brokers told them was "these investments are rated as super-safe and everybody is buying them - the magic of bundling takes away the risk of the underlying mortgages."
When the reality was, the brokers KNEW that the CDOs were created with the help of someone who wanted them to fail, and the ratings agencies were being paid by the people who wanted the investments rated well. (Another insane situation - it would be like if the food safety inspectors were paid by McDonalds when they came out to check things. How can they be objective?)
Yes, there were investors who saw the crisis coming. But the banks did completely omit the fact that the investments were created, in part, by people who WANTED them to fail. If they had been up front about that, nobody would have bought them. So they lied, and had ratings agencies to back their lies.
Not exactly a situation where the investor has a reasonable chance to make informed decisions.
If I sold you one diamond, and you were a shrewd buyer, you'd probably take it somewhere, perhaps to two people, to get it examined and ensure its authenticity. But if I offered to sell you a big ol' bag full of thousands of assorted gemstones, and claimed that everything in the bag was either pure diamond, ruby, emerald or opal, 25% each, you probably wouldn't have the time or money to go through each one and analyze its authenticity. Even if you did, my offer may have expired by the time you do. So instead, I say that the gems were all hand-picked and inspected by the American Gem Trade Association, and that they all checked out to be 100% authentic. If you trust me and the AGTA, you might buy the bag at this point. However, when you get home & find out that they're all rhinestones, I guarantee that you will consider my false assertion that they were picked by the AGTA to be both material and criminal.
> Goldman may have even thought Paulson & Co were the fools
Wrong. The entire point of this case is that GS knew two facts: Paulson & Co. helped construct the fund, and they also held a short position. GS is smart enough to know that someone who shorts their own product is not a fool, they're a con man. Or as Goldman probably saw it, a shrewd businessman.
Goldman: “One thing that we need to make sure ACA understands is that we want their name on this transaction. This is a transaction for which they are acting as portfolio selection agent, this will be important that we can use ACA’s branding to help distribute the bonds.”
ACA: “I certainly hope I didn’t come across too antagonistic on the call with Fabrice [Tourre] last week but the structure looks difficult from a debt investor perspective. I can understand Paulson’s equity perspective but for us to put our name on something, we have to be sure it enhances our reputation.”
http://www.businesswire.com/portal/site/home/permalink/?ndmV...
http://www.capital-chronicle.com/2008/09/nyt-report-on-goldm...
So you're saying
1.) GS never needed bailed out
2.) GS was a bank before and after the crisis.
Goldman Sachs takes $12B Bailout, Hands out $14B Bonuses http://www.dailymail.co.uk/news/worldnews/article-1081624/Go...
http://www.huffingtonpost.com/janet-tavakoli/goldman-sachs-s...
Goldman was the healthiest (best capitalized relative to the systemic risk of the crisis) of US iBanks, and thus if there had been no bailout, it's strategy would have been to wait for things to get worse and then acquire various less healthy banks at a huge discount.
To prevent it from attempting this strategy, the government instead bailed out most of its competitors, but Goldman conceded to the deal as long as it was officially "forced" to participate. This was done only for PR reasons so that it could retain the perception of being the healthiest bank while not having to resort to a fire-sale buying binge fueled by an influx of capital that might very well have been from foreign governments -- do you think China wouldn't have sent over $20B in exchange for a huge stake in one of two remaining US iBanks?
The AIG risk was a big factor, but AIG too would have probably taken capital from abroad.
The US Government bailout was partially to retain stability and partially to avoid having the firms that survived become too powerful and foreign funded.