Totally Busted: The Truth About Goldman's Bailout by the Fed

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by Robert Wenzel: Five
Things You Shouldn’t Mention at a KochanackChristmasParty



Eric Fry
has put together the pieces, searched the articles and has done
the timeline that show’s how the Fed shoveled money into the coffers
of Goldman Sachs. Even to help Goldman pay off its TARP debt.

This investigative
report from Eric Fry is must reading. It should also be kept in
mind that this is separate from the Goldman/AIG antics that Janet
Tavakoli has
been reporting on

Recent disclosures
from the Federal Reserve reveal that honesty was one of the earliest
casualties of the 2008 financial crisis. These disclosures contain
a number of juicy tidbits, like the fact that Goldman Sachs received
tens of billions of dollars in direct and indirect succor from the

Thanks to these
spectacularly large taxpayer-funded bailouts, Goldman was able to
continue “doing God’s Work” – as CEO Lloyd Blankfein
infamously remarked – like the work of producing billion-dollar
trading profits without ever suffering a single day of losses.

Thanks to the
Fed’s massive, undisclosed assistance, Goldman Sachs managed
to project an image of financial well-being, even while accessing
tens of billions of dollars of direct assistance from the Federal

By repaying
its TARP loan, for example, Goldman wriggled out from under the
nettlesome compensation limits imposed by TARP, while also conveying
an image of financial strength. But this “strength” was
illusory. Goldman repaid the TARP loans with funds it procured days
earlier from the Federal Reserve. Then, over the ensuing months,
Goldman recapitalized its balance sheet by selling tens of billions
of dollars of mortgage-backed securities to the Fed.

And the public
never knew anything about these activities until two weeks ago,
when the Fed was forced to reveal them….

Secret bailouts
do not merely benefit recipients; they also deceive investors into
mistaking fantasy for fact. Such deceptions often punish honest
investors, like the honest investors who sold short the shares of
insolvent financial institutions early in 2009.

Some of these
investors had done enough homework to understand that no private-market
remedy could ride to the rescue of certain financial firms. Therefore,
these investors sold short the shares of certain ailing institutions
and waited for nature to take its course. But the course that nature
would take would be shockingly unnatural. We now know why. The Federal
Reserve altered the course of nature, and did so without telling

Many of the
investors who sold short ailing financial firms in 2009 were alert
to the possibility that bailouts by the Federal Reserve could change
the calculus. In other words, the Fed could make the bearish case
less bearish…at least temporarily. Therefore, many of these investors
studied the Federal Reserve’s disclosures, as well as corporate
press releases, in order to quantify the Fed’s influence.

Based on all
available public disclosures, the story remained fairly grim into
the spring of 2009. Accordingly, the short interest – i.e.,
number of shares sold short – on Goldman Sachs common stock
hit a record 16.3 million shares on May 15, 2009 – about 3.3%
of the public float. But over the ensuing six months, Goldman’s
stock soared more than 30% – producing roughly $500 million
in losses for those investors who had sold short its stock. Not
surprisingly, the total short interest during that timeframe plummeted
to less than 6 million shares, as short-sellers closed out their
losing positions.

Was it just
bad luck? Or was something more nefarious at work here?

Let the reader
decide. But before deciding, let the reader carefully examine the
chart below, while also carefully considering a selection of public
announcements from Goldman Sachs during this timeframe.

Based upon
contemporaneous public disclosures, Goldman Sachs was “forced”
by the Federal Reserve to accept a $10 billion loan from the TARP
facility in October 2008. But Goldman’s top officers repeatedly
– and very publicly – bristled under the compensation
limits the TARP loan imposed.

as early as February 5, 2009, Goldman’s chief financial officer,
David Viniar, remarked, “Operating our business without the
government capital would be an easier thing to do. We’d be
under less scrutiny…” And on February 11, 2009, CEO Blankfein
magnanimously remarked, “We look forward to paying back the
government’s investment so that money can be used elsewhere
to support our economy.”

the rest of the article

17, 2010

Economic Policy Journal

Best of Robert Wenzel

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