Tuesday, July 14, 2009

Populism Rages Against 85 Broad St

Sorry for the lack of posts with much substance of late. I should be back to a more normal schedule from now on.

The Goldman Sachs earnings this morning were, as expected, a total blowout. They even blew away the blowout expectations. Short of being good news, people are angry. And for good reason. That's not to say we should be wishing all of these financial institutions ill. It is obviously in the best interests of everybody to see any company perform well. But it is the nature of how Goldman managed to achieve this feat that has people fuming mad. The issues are as follows:

1) Goldman, along with Morgan Stanley, American Express and a number of other financial players were in deep, deep trouble in September. Within days of outright collapse. Bear Stearns was already toast, Lehman was done, Merrill was forced into the hands of BoA (or the other way around, depending on how you look at it). The brokerage model was collapsing. They were all leveraged to the hilt - 40:1 in most cases. So in order to "save" the economy from collapsing, Paulson, Bernanke, Geithner, Chris Cox and Sheila Bair figured out a way to save the big kids: They would convert them to banks. As banks, they would be more eligible for backing by the FDIC and the Fed could trade paper with them through the discount window.

But instead of acting like banks, Goldman (and the others as well) essentially continued operations as usual. They continued operating an enormous hedge fund. They maintained their enormous proprietary trading desk. They even gained market share in intra-second hypertrading (known as supplemental liquidity providers). Evidently, attracting deposits and making standard loans was not in Goldman's plans. So they took the taxpayer's explicit guarantee of risk, and continued doing what got them in so much trouble in the first place.

2) Goldman received tens of billions of dollars from the taxpayer. Some of it was direct, through the TARP program. An unknown amount was guaranteed or swapped with the Fed. But a large chunk was indirect - primarily via the AIG bailout. Goldman had a ton of exposure to credit default swaps (CDS) where AIG was the counterparty. When AIG went boom, Goldman (and nearly every other financial institution in the western world) were left holding the (empty) bag. It would have been enough to cripple the firm. So the lackeys in Washington again decided to discretely pump up the balance sheet of Goldman via a $100+ Billion dollar bailout of AIG. AIG would then pay Goldman every penny that was owed to them (13 Billion, plus 6 from just days before AIG's failure). There was no haircut to be taken because of unwise bets. They were made whole.

3) The treatment being paid to Goldman and many of the other industries (the auto industry, for example) are not even close to balanced. Of course, I don't believe anyone should be bailed out. Period. But allowing individual claimants (not just bondholders, but injury claimants) of the automakers, to be run roughshod over in bankruptcy court, while claimants of financial firms (Goldman to AIG) to be paid 100 cents on the dollar is beyond hypocritical. It is an insult to anyone with a conscience.

4) And now that Goldman has paid back what it is supposed to owe from the TARP program along with a one time special dividend for the privilege, Goldman is back to business as usual, raking in enormous profits by taking enormous risks in volatile markets. And their using those profits to make their highest bonus payments ever. Not to mention an average salary of $700,000 for everyone in the firm. That includes the mail boy and the secretary.

People have a right to be mad at this. Not always is populist outrage at private business unjustified. But the populism is growing like a raging fire on this issue. After Matt Taibbi's apt description of Goldman as, "... a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," many have taken an interest in the shenanigans going on at 85 Broad St. Below is a great discussion with Barry Ritholz, author of Bailout Nation and Dylan Ratigan. It's hard not to agree.

But will the American people do anything to stop it knowing the political clout Goldman carries in Washington? I guess that is the Trillion dollar question...

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Fish10 said...

This is one of the most disgraceful episodes in Wall Street's sullied history.

Greed has no limit.

Roger J said...

Government Sachs is a more proper name for the beast.

RRB said...

It is absurd to blame this on Wall Street. It is the intertwining of a PARTICULAR firm on Wall Street (GS) and the government that is to blame. It is the govt that decides who gets what compensation during its multi-trillion $$ bailouts, not GS.

There are plenty of hard working, honest people in finance. Unfortunately, they do not end up in the elite of GS or the govt.

I am always amazed that nobody sees a conflict of interest in Paulson/Geithner's appointments and GS's almost other-worldly good fortune.

RRB said...

Also - people respond to incentives. If the govt that sets the rules - frankly, its hard to blame GS for trying to maximize their profits within the given rules.

Obviously, the rules are absurd and corrupt. And they were made by ex-GS guys. But who appointed Paulson and Geithner and Kashkari etc? Shouldn't the true blame rest on their shoulders?

Matt Stiles said...

RRB - yes. But if there is to be populist anger misdirected at wall street in general, I would rather see that than nothing.

Sleeping people are more difficult to reason with than angry people.

mannfm11 said...

Pig is too good a term to use for these people. I am a capitalist. This isn't capitalism. It is organized crime. US attorney is quoted "if this software fell into the wrong hands, it could be used to unfairly manipulate the markets". This was said upon the charging of the Russian nerd who downloaded the program to Germany from Goldman Sachs. Well, what the hell does he think GS is doing with it and why haven't they been charged? Are they waiting for the SEC? SEC gets future jobs from companies like GS. At the same time they won't let small investors day trade more than 4 positions a week.

Even Martin Hutchinson, who has a website called great conservatives, says Goldman is trading on insider information. These guys are trading and lying. Goldman runs the market in a direction tnen makes up the reason. This weeks oil inventory report is such an example, as the total amount of petroluem in storage in the US increased.

I fume literally everyday, having knowledge of what these guys do. Problem is JPM is doing the same thing and they never showed their hole card. Chase has been broke more than once and the government covered it up. Geithner worked for Kissinger, who worked for Rockefeller, who ran Chase.

They sowing the seeds for revolution in the US. We aren't talking about poor versus rich, but middle class hitting it out of the rough against rigged having it set on a tee. The idea that 30,000 people in a firm can average close to $1 million while the world is going bankrupt screams crime and fix, not brains.

As I watched Paulson on TV Thursday, I got the idea that Paulson and Geithner set Ken Lewis up for a fall. Something tells me Lewis isn't part of the NYC good old boys network of Rockefellers and the Jewish financial establishment. Notice how Wachovia was almost fed to Citi when in fact, Citi should have been closed. Robert Rubin was drawing big checks out of Citi and I am sure Sandy Weill still had plenty of stock.

I have felt for at least 7 years that the markets have been rigged. Just watch it during the day. Wednesday was a classic case, as it marched forward all day without a blink. That is a machine doing that, one that has data on where the stops are, who is short, who is long. One that forces people to give up their positions or buy or sell from or to the machine. 30 reasons come out and Goldman tells the press which reason to print for why they pushed the market the direction they did.

A guy who forecast oil going past $100 about 2 years ago has now forecast oil at as low as $20. One thing I have watched is oil for the past 35 years and rarely has the bottom come out of it without my somewhat expecting it. Goldman, I believe was cornered on the long side, their machines creating a contango over time that keep their profits in order. Oil has been a dead short over $50 all year based on fundementals, yet we had gasoline go up something like 57 straight days? The refineries haven't hit 90% capacity all year. Goldman is offering an $85 estimate in this light. They were saying $200 when it was in the $135 range last year. Abby Jo Cohen of GS was calling for SPX 1750 in January 2001, just as the bottom was beginning to rot out of the broad market. They pay too much to figure this stuff out to give it away.

I would rather sit down with a famous criminal like Al Capone and make a deal than deal with anyone from Goldman. I would rather deal with Madoff.

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