The Real Price of Goldman's Giganto-Profits
by Matt Taibbi
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Equity underwriting boomed during the period as dozens of banks raised money to strengthen capital and repay Troubled Asset Relief Program funds. The business reported record revenue of $736 million.
via Article — WSJ.com.
So what's wrong with Goldman posting $3.44 billion in second-quarter profits, what's wrong with the company so far earmarking $11.4 billion in compensation for its employees? What's wrong is that this is not free-market earnings but an almost pure state subsidy.
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.
Now, the counter to this charge is, well, hey, they made that money fair and square, legally, how can you blame them? They're just really smart!
Bulls__t. One of the most hilarious lies that has been spread about Goldman of late is that, since it repaid its TARP money, it's now free and clear of any obligation to the government — as if that was the only handout Goldman got in the last year. Goldman last year made your average AFDC mom on food stamps look like an entrepreneur. Here's a brief list of all the state aid that is hiding behind that $3.44 billion number they announced the other day. In no particular order:
1. The AIG bailout. Goldman might have gone out of business last year if AIG had been allowed to proceed to an ordinary bankruptcy, as AIG owed Goldman about $20 billion at the time it went into a death spiral. Instead, Goldman gets to call upon its former chief, Hank Paulson, who green-lights this massive, $80 billion bailout of AIG (with Lloyd Blankfein in the room), at least $12.9 billion of which went straight to Goldman. Moreover, let's not forget this: both Goldman and Bank Societe Generale had been tattooing AIG with collateral calls in the period before AIG's collapse, with Goldman extracting a full $5.9 billion from the company during that time. It was those collateral calls that really killed AIG.
Now, ask yourself: exactly how big would Goldman's profits be this year, if they had to fill a still-extant $13 billion or even a $20 billion hole on its balance sheet from AIG's collapse? You think it would still be $3.44 billion? What if Hank Paulson had elected to save Lehman instead of saving AIG/Goldman, how big would Goldman's profits be then? Is anyone even asking this question?
I keep hearing people say, "Well, so what — it's only fair that Goldman got paid off for its deals with AIG. After all, AIG was contractually obligated to Goldman. Goldman deserves that money, because it was doing the right thing in buying insurance from AIG in the first place."
That's bulls__t, too. As Rich Bennett over at the hilarious monkey business blog pointed out to me the other day, Goldman was insane and reckless in making those deals with AIG. Goldman wasn't removing risk from its books by buying CDS protection from AIG, they were exchanging one kind of risk for another kind of risk, counterparty risk. "If you have too much risk to one entity and they go bust, you're s__t outta luck," Rich says. "They took AIG for a ride, and when the music stopped, they and their partners were going to be taking up the proverbial tookus."
So to review: Goldman makes insane bets, runs wild on AIGFP's house idiot Joe Cassano for a while, sticking him with $20 billion in risk, and when it all went to s__t — as it inevitably had to — they drove a big stake through AIG's heart and got the government to step in and pay them off using our money. How's that for market capitalism? Just like Adam Smith drew it up, right? They're just smart guys!
2. TARP. Much discussed, no need to really review here. Goldman got its $10 billion. It paid off its $10 billion. Good for them. However, there's one thing to note here, and it hasn't been mentioned really at all in the press. It is continually reported that now that Goldman has repaid its TARP money, it no longer has restrictions on its executive compensation. That's actually not true. The government still holds warrants from Goldman and other companies that it acquired during the TARP process, and until the banks pay off those warrants (and they're all already trying to pay them off at below market prices), the Treasury still technically has the authority to prevent lavish bonuses. Not that that will happen, of course, and this is yet another government handout — a firmer government would be hard on Goldman to the end of the process, while this government is doing its matador job and waving through these massive bonuses early on in the repayment schedule.
3. The Temporary Liquidity Guarantee Program. So Goldman last year converts from an investment bank to bank holding company status, which now makes it eligible for a new program that gives commercial banks FDIC backing for unsecured debt. This is not a direct subsidy in the sense of us actually handing over a bunch of money to Goldman, but it's almost better, in a way. This basically hands over a free AAA rating to the big banks and allows them access to mountains of cheap money, with all of us on the hook if something went wrong. This is the equivalent of telling Exxon it can take crude from the Strategic Petroleum Reserve at below-market rates during an energy crisis and then turn around and sell it on the market at whatever price it wants, and pocket the difference, for the good of God and country. Goldman took full advantage of this deal, issuing $28 billion in FDIC-backed debt after its conversion. Exactly how hard is it for a bank to make a profit when it has unlimited access to virtually free money? It is almost impossible for banks to not make money when their cost of capital sinks this low.
Ask yourself this question: has borrowing money gotten any cheaper for you this year? Did someone from the government walk up to you after you foreclosed on your house or missed payments on your charge card and, as a favor, just because you're so cool, jack your credit score back up to the 99th percentile and invite you to start all over again? Because that's what happened to these assholes. They made every bad move you can think of and they not only got a clean credit slate but a virtually ceiling-free spending limit.
4. The Fed Programs. By converting to a bank holding company, Goldman also became eligible for a whole galaxy of new bailout programs administered through the federal reserve like the Term Asset-Backed Securities Loan Facility (TALF); it also became eligible to borrow cheap money from the Fed's discount window. There is so much to cover here that it would take forever to get to all of it, but the key number to remember here is $2.2 trillion (not billion, trillion). That's how much the Fed has lent out in assistance since this crisis started and we have no idea how much of it went to Goldman or any other firm, thanks to Ben Bernanke, who refuses to disclose this information. But you can bet that Goldman has taken full advantage of all the various programs designed to relieve the banks of the worthless crap assets they acquired while they were playing roulette the past ten years or so. We just have no idea how much crap they unloaded on the Fed, or how much they borrowed. Would you really bet that it wasn't much?
5. The TARP Repayment Bonanza. See the story at the top of this piece. As part and parcel of the TARP program, the banks that received money had strict guidelines imposed on them by the state in the area of how they could raise the money to repay. TARP recipients had to issue new equity according to certain parameters, and guess who one of the only major equity underwriters left on Wall Street is? That's right, Goldman, Sachs. So say International Reckless Dickwad Bank needs to issue $100 million in new stock to pay off TARP; they hire Goldman to do the deal, and since the fee for equity underwriting is 7%, Goldman gets, in essence, a state-mandated $7 million fee. Because so much money was lent out under TARP, the underwriters on Wall Street made a massive bonanza on all the new bank stock. As noted above, Goldman's equity underwriting department hauled in $736 million this quarter. Does this happen without the bailouts? No. Do the bailouts happen if banks like Goldman hadn't blown up the universe in the first place? No. You do the math; this is another subsidy.
And that's just some of the help they've gotten. Should we bother to count Goldman's status as one of just 17 remaining primary dealers in U.S. Treasuries, which naturally did a crisp business last year as the U.S. borrowed its way out of a hole the banks had themselves created? Should we count the ban on short-selling Goldman asked for and got last year? Or how about the seemingly obvious fact that the bank used all of this state assistance and guarantees as a crutch to prop up lots of new risk-taking activity, which was the exact opposite of what was supposed to have been achieved by the bailouts, which were supposed to usher in an new era of austerity and temperance?
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 "f__k 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.
There are going to be some people who say that some of this stuff isn't government subsidy so much as ordinary government contracting. After all, do we criticize Boeing for making airplanes or Electric Boat for making submarines during a war? If we don't do that, then why should we be pissed about Goldman making a profit underwriting TARP repayment stock issuances, or Treasuries?
The difference is that Boeing and Electric Boat didn't start the war. But these guys on Wall Street caused this crisis, and now they're raking in money on the infrastructure their buddies in government have devised to bail them out. It's a self-fulfilling cycle — beautiful, in a way, but at the same time sort of uniquely disgusting. That they're going to get away with it is bad enough — that they're getting praised for it, for being such smart guys, is damn near intolerable.
This article originally appeared on True/Slant and is reprinted with permission.
July 18, 2009
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