For Goldman, Government Gift from 2008 Crisis Keeps Giving
dealbook.nytimes.com
dealbook.nytimes.com
As usual, take any propaganda with a grain of salt, but IMHO, from the info I have gathered thus far, Goldman Sachs and our government are almost the same entity, separated only by who reaps the benefits. Private gains, public losses.
I've seen bits and pieces of that, but they always strike me as kind of superficial and conspiranoid-tinged, leaving me still skeptical. I accept the central thesis -- there is obviously a nobility here in the classical "feudal" sense -- but I'm not convinced people like Matt Taibbi have more than a tabloid-ish understanding of it. People like him are also clearly selling something, and that makes them play favorites in their own ways.
Such an understanding would be helpful if we are to have any hope of charting an exit path from this condition. It could inform the authoring of meaningful reforms instead of vapid and ultimately impotent populist trash.
But it's more complex than, say the french nobility in the 18th century since there is no central authority and access to the peerage is explicitly obscured ( there is no nobility in America ) and although it is certainly possible for individuals to lose favor and fall out of the elite ( Bill Cosby this week ). It's worth remembering that the prime threat to Aristocrats has always been other Aristocrats aside from the occasional epic convulsion like the french revolution or the english reformation.
Given the current state of affairs, America looks most closely parallel to pre-renaissance Italy. Although if Jeff Koontz is our Michelangelo; perhaps we don't deserve our empire.
The purpose of the government is to be a place you can go, when you need to obtain someone else's money to spend on someone other than yourself (and if you're doing it right, keep a bit for yourself).
The purpose of finance, is to be a place you can go, when you've been given someone else's money, and need to find something to spend it on (and if you're doing it right, keep a bit for yourself).
The interests are so perfectly aligned no external coordination or policing is needed -- the system just works.
Naturally everyone involved is buddies with each other, and taking care of your buddies so that they can stay in a position to take care of you is just human nature. Even less sleazily, if you actually want to get something done inside the system, the only source of actual competence is the insiders -- it's not like there's some priesthood of uninvolved experts that have the slightest clue how to manage things. Financial regulatory capture isn't so much a tragedy as the only way anything could possibly get done.
The essence of your post is "the only source of actual competence is insiders." It's a difficulty that emerges around any attempt to create an alternative anything. But it has been done. I do wonder if we are seeing the very earliest embryonic steps toward a new kind of financial system with stuff like bitcoin. It's not even close to baked, but there is there there.
It could more accurately be described as a parasitic takeover of the host.
Whether you consider that tragic I guess depends upon whether you are part of the parasite (the financial system) or the host (society).
If you cannot be bothered to examine today's situation in its particulars, you won't come up with workable solutions.
For my own position: definancialization of the broader economy would go a long way to breaking banks from the state.
I'm not sure I agree that it's really nobility or call it feudal, but I would love to see some serious research.
One interesting pattern: Many of the wealthy, such as the Koch brothers, push hard against government power and expenditure. That leaves society more dependent on those same wealthy people, giving them more influence both absolutely and also relative to government.
As a simple example I read an article advising people seeking grants for scientific research to network with the wealthy because government research spending has been cut. The same applies to the arts, education, social welfare, etc.
https://twitter.com/alexia/status/522517041983393793
> I've seen bits and pieces of that, but they always strike me as kind of superficial and conspiranoid-tinged
The main left-wing, non-superficial analysis of the 2008 financial crisis that I know of is this -
http://monthlyreview.org/2008/12/01/financial-implosion-and-...
It has plenty of data, as well as an analysis of the data from their viewpoint.
Eleven years after Marx died, Engels published the third volume of Capital from Marx's draft and notes. In it he lays out the tendency of the rate of profit to fall in capitalism ( http://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit_... ), and other such things.
The Monthly Review article links to the US government's Bureau of Economic Analysis of US GDP growth. In the 1960s it was 4.4% a year, in the "stagnant" 1970s it was 3.3% a year, in the 1980s it was 3.1% a year, in the 1990s it was also 3.1% a year, and from 2000-2007 it was 2.6% a year (if it has been extended to 2008 and 2009 it would have been lower).
The real successor to capitalism is a socioeconomic system that has yet to be invented.
If there hadn't been a bailout, the result probably would have been more like the 1980s S&L crisis, with the FDIC and FSLIC taking over failed institutions, winding them down, and selling off the real estate. Non-bank institutions like Goldman (which wasn't a bank at the time) would have just gone bust, leaving their investors with zero.
Most experts, especially those within the establishment, say that allowing all those institutions to collapse would have been catastrophic and that the government should have rescued them. I think it's reasonable to expect that if one of those establishment experts was the alternative to Paulson, a likely scenario, then they would have acted similarly.
If someone acts to prevent catastrophe and succeeds, critics always can (and do) say that the catastrophe wouldn't have happened anyway.
In contrast, concerns about nepotism didn't apply to the relationship between the Treasury and other banks, although the Treasury seemed sensitive to Goldman (JP Morgan and Jamie Dimon got better treatment). Personally, I think the Treasury and the Fed did a good job in response to the crisis, and that Congress abdicated almost all responsibility for dealing with the crisis, leaving the financial response dominated by monetary policy (which by definition favors the financial sector by promoting unequal access to terms of credit) instead of a more egalitarian process.
Somethings worked out for them, BUT they did give up quite a lot along the way.
Regardless the article is not well balanced and presented in a way that breeds misinformation. Quote from the end of the article - about a quote from the fed:
In its analysis, the Fed added that **Goldman had asked** the Fed to determine if the grandfather clause permitted the activities to continue. But the analysis said that the Fed’s lawyers were still considering that request.
If past behavior in compliance is any indicator to future compliance I would like to bring attention to the following:
- One of the things that was clear early was that proprietary trading[1] was a big NO under the next bank status and TARP conditions and had to be wound down by 2014.
- Goldman Sachs shut that business down in under 4 months. It's worth noting that they were probably the best trading desks with consistent great results.
- Most other banks kept their trading desks around till quite recently
[0] http://www.businessinsider.com/uncovered-tarp-docs-reveal-ho...
[1] http://en.wikipedia.org/wiki/Proprietary_trading
edit: typo and grammar
> They mention:
- Goldman Sachs became a regulated bank
- Which in turn allowed them to partake in activities that were allowed by the Gramm-Leach-Bliley Act
- Also that they were not a 100% on the validity and asked the Fed's to confirm if they could continue their business
> What the article fails to mention or is unclear about is:
- Goldman and Morgan Stanley were forced to accept the TARP
- A condition of TARP was that they had to immediately become a regulated bank (again not by choice)
- They complied with everything that was clear under TARP immediately and months/years before their counterparts
- They closed off their highest money making departments
- The so called windfall gain/Gift of the crisis/unfair advantage is something that is permitted under another law, which Goldman asked for clarification on
So yeah, read the article, if you did not notice that this was about TARP, it wasn't your fault, this article is constructed very very poorly and leaves a lot out and glosses over the anything else that may cast a doubt on their headline.
I wouldn't say it's poorly written, it's just that isn't not the article you want it to be.
In what sense were Goldman & MS "forced to accept the TARP"? They were both free to choose bankruptcy, were they not?
They gambled and they lost, then they had their government cronies bail them out. An analogy would be an idiot gambling away his entire live savings on the slot machine, and then going to the house and complaining: "I deserve all my money back because I didn't win."
Actually, revelations from the ongoing AIG trial are proving otherwise.
http://www.nakedcapitalism.com/2014/11/aig-bailout-trial-rev...
If one takes into consideration that 4 days after that email was written Goldman announced a $5 billion investment into GS from Warren Buffet. A $5 billion deal does not get conjured overnight, takes days if not weeks of work prior to public announcements.
Regardless, that was over a full month prior to them receiving the TARP funds.
Also if one absolutely must, they could take into consideration that 4 days prior to that email GS, mid-crisis had beat prior earning and profit estimates by a tad over 10%.
Also, GS had not had a single losing quarter since 1999. They did however report a loss mid-December 2008, mostly stemming from being required to mark the value of various assets at currently distressed prices, mostly because their status was recently changed to a regulated bank.
"FYI, Morgan Stanley called Tim Geithner late last nite and indicated they can not open Monday. Morgan Stanley advised Goldman Sachs of that and Goldman Sachs is now panicked because feel that if Morgan Stanley does not open, then Goldman Sachs is toast. So appears we will definitely need to resolve both entities in one way or another this weekend. Options under active discussion range from sovereign wealth injection to merger with / acquisition by a bank to becoming Bank Holding Companies themselves to government assistance (unlikely). Tim Geithner and PDM team just finished getting first hand report of liquidity situation from Morgan Stanley. Have not heard assessment of that call yet. Baxter only EVP present. Checki expected shortly. Dudley, Rutledge and Krieger on standby at home for likely conf calls."
No, no distress here at all.
Sarcasm noted. I am not saying that there is no distress. But, all I have tried to do is give light to missing information. There is always some bias and opinions that bleed through.
But everything I have said is verifiable. If I mentioned something that is incorrect I would be happy to accept it and not repeat in the future.
Back to that email. It says "Goldman Sachs is now panicked because feel that if Morgan Stanley does not open", how does that statement in anyway prove that they had an internal reason to worry?
Again not saying that they were not distressed, the inevitable sell-off that would result from MS not opening was huge, and could possibly create a bank run and possibly lead to bankruptcy as all bank runs do.
But it does not indicate that there was a choice for GS/MS to be bank holding company. If anything the email itself notes that the option for them to be a bank holding company was unlikely.
In 2008 however I was very much involved in the financial markets, as an independent options and quant trader(avoiding calling myself a day trader, but that would be accurate too).
Never worked for GS or any of its real competitors. Have worked on a proprietary trading floor(wouldn't call GS a competitor still unless making a pun on how insignificant we were compared to GS) and have worked in retail finance in the past.
Made some decent returns on put options positions on GS between August and November 2008. Hence intimately familiar with the stuff happening around them in that period.
I'm deeply interested in financial services, tech and law. and I will chime in time to time, mostly when there is some misinformation or blatant disregard for the regulatory infrastructure flying around.
Not giving any more information as of now, not because I cannot, not because I am famous (I'm not), not because I have any conflict (I have none), I generally like talking under a small guise of anonymity that HN affords, I'd like to keep that for now.
edit: removed unnecessary information not required in a disclosure.
...and replace them with politically-connected cronies? That's what usually happens for nationalizations.
They became a bank holding company on Sep 21st, 2008. It was a Sunday; CEOs of all financial companies worth noting were being held in Paulson's office to accept the conditions of TARP.
The TARP funds followed over a month later circa Oct 28th, 2008.
Can't speak for MS, but GS was not going bankrupt, they were the only one's who were making money (a substantial amount) and had already secured funding to buy up distressed assets.
That's a bit misleading. GS had a huge exposure via AIG. Many people in the industry think that GS was essentially bailed out via AIG.
Until then I'd always harbored at least some sense that the USA was different in some fundamental way from Putin's Russia, China, or other totalitarian oligarchies.
The arbitrary favoritism and obvious behind-the-scenes exercise of absolute power displayed in the reaction to the 2008 financial crash showed me otherwise. While America may have more of a functioning democratic republic on the surface, the clear message of actions such as these -- as I saw it -- was that at the top America is a nation of men and not of laws.
When people who know the right people get in trouble, laws no longer matter. Any and every measure will be deployed to bail them out, even at the expense of the long term health of the nation and of the civilian economy. We live in a nation run for the benefit of those who run it, not its people.
This has deep implications going forward.
It's a clear signal to the American people that if something really bad does happen, like a serious financial crash or worse, we must assume that the authority figures are not on our side. We can and will be sacrificed for the benefit of the connected.
Secondly, it means that we must expect the situation to worsen. As time goes on we must expect more and more of the legacy gloss of a functioning republic to flake away, revealing the machinery of arbitrary lawless power that is operating beneath. Unless something fundamentally changes we will become a classic corrupt and barbaric empire, and then rubble. We're probably still early in the process, but that's the trajectory.
I don't think this is overreaction. To me there's something different about the 2008 reaction vs. Watargate, or the overreach of J. Edgar Hoover's FBI, or anything else for that matter. For all those things it was possible to make a reasonable argument that they were exceptions driven by rogue or out of control actors within a system of democratic republicanism that was still basically intact. Nixon and Hoover were "cowboys." But this is just so "business as usual," so utterly without clear authorship, that it betrays this kind of favoritism as standard procedure rather than an exception.
It's the banality of it. There was no Hoover, no Nixon, not even a 9/11 or other traumatic event to inspire emotional over-reaction. It was just an economic crunch, a particularly bad one, and there were many options that did not involve obvious cronyism. Yet these were not taken, not even entertained. The message was: "Of course you'll be sacrificed to rescue Goldman Sachs. They're members of the nobility and you're not."
I'd describe it as a total loss of confidence in my country. I no longer believe America is in any way special or remarkable. It is morally equivalent to other totalitarian oligarchies. It can only be said to be superior in pragmatic ways.
P.S. The Iraq War is a close runner-up, but as I allude to above that is somewhat "excusable" or at least explainable as emotionally driven overreach due to a traumatizing event. It can also be attributed to a list of identifiable actors -- there is someone to blame. There's still a sense that it wasn't business as usual. I do not expect that America will arbitrarily embark on another pointless invasion anytime soon, but I do fully expect that if another financial crash happens my and every other American who isn't a member of the connected nobility will have their futures sacrificed without a second thought. We now clearly have a noble class that are "more equal" than anyone else.
I also still hold out some hope that this trend can be reversed, but only if the level of political discourse in America can be elevated above naive ideological pandering and tabloidism.
This sentence confuses me. I did not know that becoming a bank holding company required prior federal permission. I thought it was a regulated state that any financial institution could elect into. I thought Goldman and other investment banks had avoided it previously because the regs cramped their style.
I also don't see how that places them within a taxpayer safety net. The two biggest bank "safety nets" I can think of are the Federal Reserve discount window and the FDIC. Neither spend taxpayer money; they are both self-funding.
GS and MS were able to sidestep all the rules, and with the Fed's help, become banks overnight.
All the players also regulate each other, in the form of their different credit ratings and cost of credit.
So, as far as I can tell, what you'd like to see is indistinguishable from the current situation?
Personally I don't think you're going to have regulations that scale to keep up with the banks so what does scale other than the markets regulating them? As far as I know most efficient market theory rests on transparency.
[1] http://www.theatlantic.com/magazine/archive/2013/01/whats-in... [2] http://www.forbes.com/sites/nathanvardi/2013/09/18/jamie-dim...
The issue isn't that they don't report their assets and liabilities, or their positions (which they mainly do), but they don't report their risk. That's mainly because nobody can agree on how to measure that, though. There isn't some standard, meaningful number that they have but don't report - they all have their own proprietary, easily gamed methodologies for that.
Economies rise and fall, there are steep jumps and falls but none of this warrants government intervention. During the 2008 recession, american citizens failed to keep the government out of it instead demanded that government should do something. This is only a logical consequence.
Arab spring was in large part caused by sharp rises in food prices, prices that were inflated by trading. I had wondered at the time why the government was allowing banks to trade in once regulated areas. it seemed like the wild west was let loose, until Arab spring occurred and a lot of people the US didnt like ended up out of power.
We (the US) has benefited quite beautify from the financial crisis's in so many ways. US tentacles reach deep into foreign banks now (even Swiss banks are like open source to the US government). is anyone surprised that the price of oil has fallen off a cliff right when the US needs pressure on Russia (a heavy oil rich exporter).
you can surely claim coincidence on a few incidents, but if you look back on how price fluctuations has been working hugely well for us foreign diplomacy.
The US has weaponized its corperations.