September 2008 Redux. There is much more at stake than the bonuses set to be paid over at Goldman Sachs. Follow the bread crumbs...
(Vanity Fair excerpt from Andrew Sorkin's newly released book, Too Big To Fail:
Friday, September 19, 2008 ...On Sunday the Fed decided to grant Goldman and Morgan Stanley bank-holding-company status. This would put both firms under tighter Federal Banking Regulations BUT it would also allow the firms to borrow at the Fed Window and obtain funds at the same low rate as banks.
Hoarse and a little haggard, Paulson made his way to the podium in the pressroom of the Treasury Building to formally announce and clarify what he had christened earlier that morning as the Troubled Asset Relief Program, soon known as TARP, a vast series of guarantees and outright purchases of "the illiquid assets that are weighing down our financial institutions and threatening our economy."
John Mack [Chairman, Morgan Stanley] had been watching CNBC on Friday morning when he received a phone call from Lloyd Blankfein [Goldman Sachs CEO]. "What do you think of becoming a bank-holding company?" Blankfein asked Mack.
Mack hadn't really studied the issue and asked, "Would that help us?"
Blankfein said that Goldman had been investigating the possibility and explained to him the benefits.
Well in the long run it would really help us." Mack said. "In the short run, however, I don't know if you can pull it off fast enough to help us."
"You have to hang on, " Blankfein urged him, clearly still anxious about how punishing the markets had become, "because I'm 30 seconds behind you."
On Monday the following press release was issued by Goldman Sachs (excerpt):
Monday, September 21, 2008
New York, September 21, 2008 -- The Goldman Sachs Group, Inc. (NYSE: GS) today announced that it will become the fourth largest Bank Holding Company and will be regulated by the Federal Reserve.
In recent weeks, particularly in view of market developments, Goldman Sachs has discussed with the Federal Reserve our intention to be regulated as a Bank Holding Company. We understand that the market views oversight by the Federal Reserve and the ability to source insured bank deposits as providing a greater degree of safety and soundness. We view regulation by the Federal Reserve Board as appropriate and in the best interests of protecting and growing our franchise across our diverse range of businesses.
...While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,” said Lloyd C. Blankfein, Chairman and CEO of Goldman Sachs. “We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources.”
...We intend to grow our deposit base through acquisitions and organically.
From New York Magazine:
It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill.
Even Goldman alumni were struck by the company’s shameless posture in ramping up the leverage again so soon after the government bailouts. “It’s a statement of arrogance,” says one former executive.
Fast forward a year to September 30, 2009 and take a look at this breakdown of Goldman's revenue. Does it look like a bank or a hedge fund? (Double click to see a larger image.)
The following are several excerpts from Mish's Global Economic Trend Analysis that continues the story of Goldman's rise from the ashes:
Rolfe Winkler at Contingent Capital is writing Letting Goldman Roll The Dice.
Is Goldman really such an indispensable financial intermediary? One look at the firm’s revenue breakdown shows that it’s more casino than anything else, and some of the markets it makes still put the economy in danger.And:
Goldman, in other words, generates most of its revenue trading its own money and earning vigorish on customer transactions. It’s a hybrid hedge fund and bookie, with an investment bank and asset management business thrown in for good measure.
With that in mind, one is left to wonder whether Goldman was really worth saving last year. What have taxpayers received for the $50 billion worth of cash and guarantees, for giving Goldman access to the Federal Reserve as its lender of last resort?
Saving Goldman was largely about saving the derivatives market, which is so big and unstable that the death of one counterparty could mean the death of all. With big commercial banks like JPMorgan Chase in deep, saving the derivatives business was as much about protecting depositors and maintaining the integrity of the payment system as it was derivatives themselves.
To Goldman’s credit, they’ve rebuilt their capital levels faster than anyone. Their leverage ratio has fallen from 35 to 16 in less than two years, despite pressure from equity analysts to juice returns by deploying “excess capital”. But at $50 billion, the bank’s mark-to-myth, or level 3, assets remain as high as its tangible common equity, the cushion it has to absorb losses.
Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit..
According to ABC News in October, 2008, Goldman "spent more than $43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington, D.C. since 1989" and their "bankers have been the country's top political campaign contributors this year." "They are almost in a class by themselves," said Sheila Krumholz, the executive director for the Center for Responsive Politics. As Michael Moore has been pointing out, Goldman was the number one source of funding for the Obama 2008 presidential campaign. The bailout of AIG -- which resulted in massive federal government monies to Goldman -- was engineered at a meeting between Paulson, Geithner and Goldman CEO Lloyd Blankfein. Last year, Goldman paid top Obama economics adviser Larry Summers $135,000 for a one-day visit to Goldman. Mish
Gary Gensler, Chairman of the Commodity Futures Trading Commission says Derivatives Bill’s Loophole May Exempt Most Firms.
Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.And what's really maddening? It's legal.
A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.
“It is clearly the weakest of all the proposals I’ve seen to date,” said Christopher Whalen, managing director of Institutional Risk Analytics in Torrance, California, in an interview before the hearing. Whalen, who has testified before Congress on derivatives regulation, is an independent bank analyst. “Frank’s committee seems to be intent on gutting any meaningful reform.”
The draft would ease trading and clearing requirements for derivatives dealers such as Morgan Stanley and Goldman Sachs Group Inc., compared with the administration’s proposal.
Pay the guys whatever you want. No complaints here. Just pass some regulation to level the playing field Barney. Can the playing field be leveled for investors? Are we repeating the exact same mistakes that precipitated September of '08?
Many think so.