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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