Goldman's Record Taxpayer-Subsidized Profits

Matt Taibbi's excellent reported piece on Goldman Sachs is now online, and he's created a kind of sequel with this piece about Goldman's big profits, mostly the result of handout after handout from the Feds:

Last year, when Hank Paulson told us all that the planet would explode if we didn’t fork over a gazillion dollars to Wall Street immediately, the entire rationale not only for TARP but for the whole galaxy of lesser-known state crutches and safety nets quietly ushered in later on was that Wall Street, once rescued, would pump money back into the economy, create jobs, and initiate a widespread recovery. This, we were told, was the reason we needed to pilfer massive amounts of middle-class tax revenue and hand it over to the same guys who had just blown up the financial world. We’d save their asses, they’d save ours. That was the deal.

It turned out not to happen that way. We constructed this massive bailout infrastructure, and instead of pumping that free money back into the economy, the banks instead simply hoarded it and ate it on the spot, converting it into bonuses. So what does this Goldman profit number mean? This is the final evidence that the bailouts were a political decision to use the power of the state to redirect society’s resources upward, on a grand scale. It was a selective rescue of a small group of chortling jerks who must be laughing all the way to the Hamptons every weekend about how they fleeced all of us at the very moment the game should have been up for all of them.

Goldman's profits only count as "profit" if you consider a pass-through federal subsidy to AIG, quick and easy loans and multiple bailout programs made available to them by the FDIC and the Fed after converting themselves into a bank holding company, the forced collapse of much of its competition and fees from stock issuance from other banks having to repay TARP to be something based on hard work and ingenuity and not political connections and corporate welfare.

But what's most amazing about all of this is how Goldman Sachs is taking all this federal largesse and plowing it back into the market at HIGHER rates of leverage than even during the crisis which amount burnt down the entire financial system:

As Felix Salmon notes, Goldman last year, after it converted to bank holding company status, announced that it was “taking steps to reduce leverage.” But what’s happened since then is that Goldman has actually been emboldened by all its state backing to borrow more and gamble more than ever. This is the equivalent of a regular casino gambler who hears that the house has doubled down on his credit line and decides to stay up at the tables all night, instead of going home and sobering up. Just look at Goldman’s VaR, or Value at Risk, which measures the amount of money the bank puts at risk on any given day: it’s soared since last year.



Taken altogether, what all of this means is that Goldman’s profit announcement is a giant “fuck you” to the rest of the country. It is a statement of supreme privilege, an announcement that it feels no shame in taking subsidies and funneling them directly into their pockets, and moreover feels no fear of any public response. It knows that it’s untouchable and it’s not going to change its behavior for anyone. And it doesn’t matter who knows it.

And meanwhile, out in the country, unemployment will top 10 percent soon, and lots of people will be wondering why those Wall Street profits haven't trickled down.

Ian Welsh has a lot more.

"Too Big To Fail" To Fail?

Over the weekend, the White House either released a new part of their regulatory plan or got the AP to bite at its larger intent - that they seek the end of "too big to fail" institutions that threaten to take down the entire economy.

They are the biggest of the big — the Citigroups, the Goldman Sachses, the AIGs and other financial behemoths. The Obama administration doesn't want so many around anymore.

Financial regulations proposed by the president would result in leaner and simpler institutions that don't carry the weight of the system on their marble columns [...]

So far, however, congressional debate has centered on the administration's plan to put the Federal Reserve in charge of these "systemically significant" companies. Less attention has focused on the potential effect on the institutions and the financial system's hierarchy.

Under the administration's proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn.

They also would have to anticipate their own demise, drafting detailed descriptions of how they could be dismantled quickly without causing damaging repercussions. Think of it as planning their own funerals — and burials.

Obama's plan, in short, aims to make it far less appealing to be so big. That was the middle ground the administration sought, a step short of an outright ban on systemically risky companies.

This sounds like a return to the behavioral economics mode that Obama wanted to push going into the White House - in effect, he wants to nudge big institutions from getting so large and interconnected that they must be kept on life support. The rules described here aren't entirely specific, but it sounds like the biggest companies will need to lower their leverage and increase their capital requirements as they grow.

Some believe that eliminating "too big to fail" is impractical. And those beliefs should be taken seriously. But even those critics believe that the way to do it is through capital requirements and leverage. So this is pretty much on the right track.

Now, if the White House takes this advice from the President of the New York Fed, we'd have something.

The Federal Reserve should break with past policy and try to identify and deflate asset bubbles before they can damage the U.S. economy, New York Federal Reserve President William C. Dudley said.

While interest-rate policy may not be the appropriate tool for popping bubbles, Fed officials have "other instruments in their toolbox," Dudley notes in the text of a speech scheduled for July 26 at the Bank for International Settlements in Basel, Switzerland. The New York Fed released his remarks yesterday.

The Fed's view has been that bubbles can be identified only in hindsight, and that all the central bank can do is prepare to clean up after they burst. The current crisis shows that policy is mistaken, Dudley said.

"Asset bubbles may not be that hard to identify," he said. "This crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high."

Dudley did not specify what tools the Fed should use. Analysts have suggested that central bankers might raise reserve requirements or amp up restrictions on margin lending.

Simon Johnson links approvingly but wonders if the Fed can actually meet this task.

Of course, if the Fed can’t get better at spotting bubbles, the implication is that no one can. Which means that “macroprudential regulator” is just a slogan – a nice piece of what Lenin liked to call “agitprop”.

And if macroprudentially regulating is an illusion, what does that imply? There will be bubbles and there will be busts. Next time, however, will there be financial institutions (banks, insurance companies, asset managers, you name it) who are – or are perceived to be – “too big to fail”?

You cannot stop the tide and you cannot prevent financial crises. But you can limit the cost of those crises if your biggest players are small enough to fail.

It really all goes back to that. Hopefully the Administration is on the right track.

Wall Street Reform

Not one to tackle a manageable amount of issues at one time, the President today mad some remarks on regulatory reform. Now, I am going to be perfectly honest that a lot of this is above my pay grade. In general I think that we need to regulate banks for what they do and not what they pretend to be, and that Kevin Drum's hobby-horse of regulating leveraging is quite right. Canada is doing much better in this economic environment right now because their banks weren't as over-leveraged. In addition, the country might want to find a way to encourage banking decisions like the ones made by the Lebanese central banker who barred his country from investing in mortgage-backed securities.

Nonetheless, here are the President's 7 principles for reform:

• Enforce strict oversight of financial institutions that pose systemic risks
• Strengthen markets so they can withstand both system-wide stress and the failure of one or more large institutions
• Encourage our financial system to be open and transparent, and to speak in plain language investors can understand
• Supervise financial products based on "actual data on how actual people make financial decisions"
• Hold market players accountable, starting at the top
• Overhaul our regulations so they are comprehensive and free of gaps
• Recognize that the challenges we face are global

I read #2 as "we can no longer have any institution that is too big to fail," which is quite right. The rest seems like a lot of poll-tested and voter-approved speak. The details are important here. Actually, this paragraph is a better expression of core principles:

Let me be clear: The choice we face is not between some oppressive government-run economy or a chaotic and unforgiving capitalism. Rather, strong financial markets require clear rules of the road, not to hinder financial institutions, but to protect consumers and investors, and ultimately to keep those financial institutions strong. Not to stifle, but to advance competition, growth and prosperity. And not just to manage crises, but to prevent crises from happening in the first place, by restoring accountability, transparency and trust in our financial markets. These must be the goals of a 21st century regulatory framework that we seek to create.

With this being a global problem, it's good to see the EU stepping up more forcefully on the specifics, with sanctions for tax havens and caps on bonuses. Ultimately I think Obama could be brought around to that view, although the fear is that the New Democratic caucus will undermine whatever final legislation comes out of Congress as a payoff to their financial services industry paymasters.

The National(ize)

Looking at the continued sucking of our resources into the financial industry's toxic sinkhole, I see no way out of this mess without a total nationalization of the banks.

With two of the nation’s largest banks buckling under yet another round of huge losses, the incoming administration of Barack Obama and the Federal Reserve are suddenly dealing with banks that are “too big to fail” and yet unable to function as the sinking economy erodes their capital.

Particularly in the case of Citigroup, the losses have become so large that they make it almost mathematically impossible for the government to inject enough capital without taking a majority stake or at least squeezing out existing shareholders.

And the new ground rules laid down by Mr. Obama’s top economic advisers for the second half of the $700 billion bailout fund, as explained in a letter submitted to Congress on Thursday, call for the government to play an increasing role in the major activities of the banks, from the dividends they pay to shareholders to the amount they can pay executives.

“We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “We are going to go back to a time when the government controlled the banking system.”

Which is what we need at this point. The masters of the universe had it their way for a while and they very nearly destroyed the economy. Banks need to lend, not cover their trillions in losses. If they do not lend, they are not a bank, and the government ought to take them over and run them like a bank for the time being until they can untangle and deleverage everything. It would be a lot better than the current situation, where the government is the main shareholder in the bank but cannot tell the executives what to do.

The only reason this won't happen is if the limits of the establishment imagination are reached, and they cannot think of nationalization in anything but the most icky, ultra-librul ways. Well, the Irish government just took over Anglo Irish Bank, so the role model is out there, and in the "Celtic Tiger" which was a model for conservatives of a thriving capitalist economy, no less.

Once the banks can actually function on their own again, we can set them back out into the market, only with shiny new regulations that assure they cannot agglomerate too quickly or over-leverage themselves ever again.

Schmucks At The Helm

At the rate we're going, we'll be lucky if the White House isn't in the middle of foreclosure by January 20th. Emperor Paulson and his merry band of geniuses are making the same bad bets with taxpayer money as the investment banks did to get us here in the first place.

Stock intended to eventually earn taxpayers a profit as part of the Bush administration's massive bank bailout has lost a third of its value — about $9 billion — in barely one month, according to an Associated Press analysis. Shares in virtually every bank that received federal money have remained below the prices the government negotiated.

Stocks dropped again Friday after the government reported a larger-than-expected number of job losses in November, but a top Treasury Department official told the Mortgage Bankers Association that the tax dollars are being invested in "very high-quality institutions of all sizes."

"We're not day traders, and we're not looking for a return tomorrow" said Neel Kashkari, the director of Treasury's Office of Financial Stability, which oversees the $700 billion financial rescue fund. "Over time, we believe the taxpayers will be protected and have a return on their investment."

That would be more reassuring if I believed you had the first clue what you were doing, Neel (also if your name wasn't "Neel"). I mean, this latest plan to reinflate the housing bubble in a desperate attempt to get out of the Treasury Department alive is completely absurd.

Treasury Secretary Henry Paulson is considering a new plan to reduce mortgage rates in another bid to revive the U.S. housing market, a government official said.

The Treasury, which already has a program to buy mortgage- backed securities issued by Fannie Mae and Freddie Mac, could step up those purchases to drive down interest rates on some loans to 4.5 percent, the official said on condition of anonymity. The plan is preliminary and could change.

Note the words "some loans". Anyone that would qualify for these rates would not need the rate reduction, and there's no indication that those rates would be fixed. What's more, this would not apply to those who are upside down in their homes and looking to restructure their payments. While some homeowners have been able to refinance, in the main that is largely not those homeowners at risk, which is why you're seeing defaults at stratospheric levels, something like 10% of the market. And anyway, this just prolongs the inevitable. Running the US economy on home-buying is unsustainable. Houses are in most cases still overvalued.

(By the way, I'm also very concerned that Treasury Secretary nominee Tim Geithner, who's been in on a lot of the decisions made by Paulson and others, may be trying to force out Sheila Bair, practically the only person in the government who's focusing on the foreclosure side of the equation. The article contains a bit of hearsay, but I hope it's wrong and Bair is retained at the FDIC.)

Thankfully, some members of Congress are figuring out that Paulson and his cadres don't know what the hell they're doing and need to be swiftly separated from any future taxpayer funds:

Dec. 4 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd said he opposes giving the Bush administration the second half of the $700 billion financial rescue plan, joining Republicans upset with how it is being managed.

“I would be a very hard person to convince that this crowd deserves to have their hands on the next $350 billion,” Dodd, a Connecticut Democrat, told reporters today in Washington after a hearing on whether automakers should get government aid. “I am through with giving this crowd money to play with.”

Good. There are about 299,999,999 million other people I could think of that would manage this bailout money better. Instead of rebuilding the same failed institutions and putting no new restrictions on them, we need to restore competition to the marketplace, break up the concentrations of financial sector wealth, significantly reduce the leverage that these behemoths take on, and never again get ourselves in a situation where companies are too big to fail. We're in this mess because the financial industry was allowed to play all kinds of games with our collective future. Now the Treasury Department is doing virtually the same thing in restoring them.

We have to break this cycle.

All Cox' Fault?

Looks like the GOP has found a scapegoat for the financial meltdown. John McCain said today that he would fire Chris Cox as the chairman of the SEC. Now, Presidents don't have the power to do that, but clearly that showed a lack of trust in Cox on the part of the Republican nominee, and now CNBC is reporting (no link) that Cox will resign at the end of President Bush's term. In a way, McCain got what he wanted. And expect lots of articles about how lax SEC oversight was the proximate cause of this mess.

But how true is that? McCain tried to lay the blame at Cox' feet for the practice of naked short selling, which is when you can bet on a stock to go down without owning it, sort of like playing the ponies without owning the horse. This isn't exactly the best thing for the market, and Andrew Cuomo is launching an investigation to see if it's fully compliant with current law.

New York on Thursday began a probe into possible illegal short-selling in the stocks of Wall Street companies such as Goldman Sachs Group Inc and Morgan Stanley, Attorney General Andrew Cuomo said.

Cuomo said on a conference call with reporters: "I want the short-sellers to know today that I am watching. If it is proper and legal then there is nothing to worry about." [...]

The New York State prosecutor said his office also would look back into illegal short-selling that may have occurred in stocks of Lehman Brothers Holdings Inc and American International Group Inc, two companies at the heart of the crisis.

In the past week, Lehman has gone bankrupt and the insurance giant was rescued by the U.S. government.

Cuomo has asked the SEC for a freeze on short-selling.

But to suggest that this is why the markets are in turmoil is crazy. It's like blaming the guys betting on the horse for the horse carrying 200 extra pounds and stumbling to the finish line. The banks lent money to people who couldn't pay them back, and then hid the debt in all sorts of tricky new assets and securities that they tried to shovel out the door. That's the main problem, and no change in short-selling would alter that. The other problem is leverage, which may or may not be the SEC's fault.

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind.

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

You can credibly charge Cox with failing to conduct meaningful oversight and indeed encourage over-leveraging, but that's not what McCain said.

He talked about short selling, which is perfectly legal, thanks to the masters of the universe like Phil Gramm, who encouraged and supported the casino-like atmosphere on Wall Street that led to this mess.

If you want to know what happened to blow up the financial markets, it's relatively simple. The banks let anyone buy a house, securitized the mortgages, and over-speculated and over-leveraged themselves, so that investors were buying worthless pieces of paper that they thought were valuable. The fixes are also simple:

Reform One: If it Quacks Like a Bank, Regulate it Like a Bank. Barack Obama said it well in his historic speech on the financial emergency last March 27 in New York. "We need to regulate financial institutions for what they do, not what they are." Increasingly, different kinds of financial firms do the same kinds of things, and they are all capable of infusing toxic products into the nation's financial bloodstream. That's why Treasury Secretary Hank Paulson has had to extend the government's financial safety net to all kinds of large financial firms like A.I.G. that have no technical right to the aid and no regulation to keep them from taking outlandish risks. Going forward, all financial firms that buy and sell products in money markets need the same regulation and examination. That will be the essence of the 2009 version of the Glass-Steagall Act.

Reform Two: Limit Leverage. At the very heart of the financial meltdown was extreme speculation with esoteric financial securities, using astronomical rates of leverage. Commercial banks are limited to something like 10 to one, or less, depending on their conditions. These leverage limits need to be extended to all financial players, as part of the same 2009 banking reform.

Reform Three: Police Conflicts of Interest. The conflicts of interest at the core of bond-raising agencies are only one of the conflicts that have been permitted to pervade financial markets. Bond-rating agencies should probably become public institutions. Other conflicts of interest should be made explicitly illegal. Yes, financial markets keep "innovating." But some innovations are good, and some are abusive subterfuges. And if regulators who actually believe in regulation are empowered to examine all financial institutions, they can issue cease-and-desist orders when they encounter dangerous conflicts.

The SEC could have handled reform 2, but that's about it. There are also reforms that we can do to ensure that people stay in their homes, which would be novel, protecting ordinary people instead of the executives who caused this. AND, we could actually tax hedge fund managers on their income the way we do any other income-generating American, increasing federal revenue and having the people at least somewhat responsible for this mess partially finance the bailouts, as they are no longer creating public wealth.

This remains a scary time. China could decide that holding US dollars doesn't make any sense and divest, which would lead to what Michael Bloomberg has called a next wave crisis.

But you'll see that short-selling, which actually doesn't affect the market as much as claimed, because on the way down you have to buy the stock to cover the sale, isn't on anyone's reform list. The bottom line is that simple regulation that is actually implemented is much cheaper and more efficient than bailing out everyone on Wall Street with phantom money that is just created out of thin air and ends up becoming debt for our children and grandchildren. John McCain is out of touch with what is needed to soothe the markets, but it sounds manly to "strike forth" and fire a guy you decide is responsible. The responsibility lies with Republican love of deregulation, not any one person. You can scapegoat Chris Cox all you want, but it's a smokescreen.

...funny, too, how McCain can stand up to Chris Cox but not George Bush.

In private late Tuesday evening, the McCain campaign circulated a draft statement on the Wall Street crisis that attacked the Bush administration for a slow and "inconsistent" response, and charged that executives at several financial firms had made "misleading and false" statements.

But the criticism never appeared. After being circulated not only among McCain aides but also major campaign donors who have worked in the investment industry, the language was softened.