About Goldman Sachs, the exemplar of our financial system

The stories about Goldman Sachs seem to be arousing outrage, as deeper but more abstract analysis has not. As the saying goes, “It’s Goldman’s world; we just live in it”.

While Goldman is just one firm, it is first among equals in the financial sector and among the most successful of exploiting the current US political regime. Hence the focus on it is well-deserved and illustrative of broader truths. These two articles are both important and IMO should be read in full. These are sparks from the firestorm Taibbi ignited with “The Great American Bubble Machine“, Matt Taibbi, Rolling Stone, 9-23 July 2009.

“The Joy of Sachs“, Paul Krugman, op-ed in the New York Times, 16 July 2009
“The real price of Goldman’s giganto-profits“, Matt Taibbi, 16 July 2009, True/Slant, 16 July 2009

At the end of this post are links to other valuable articles on this theme. The following is not yet news, but probably coming soon (no excerpt):

“Goldman Sachs in Talks to Acquire Treasury Department“, The Borowitz Report, 16 July 2009

Excerpts

(1) “The Joy of Sachs“, Paul Krugman, op-ed in the New York Times, 16 July 2009 — Excerpt:

The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?

First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America. … Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.

… I won’t try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts .. What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.

… Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.

If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole.

The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.

(2) “The real price of Goldman’s giganto-profits“, Matt Taibbi, 16 July 2009, True/Slant, 16 July 2009 — Excerpt:

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!

Bullshit. 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. … 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?

… 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 shit — 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. …

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. … 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. …

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 10 years or so. …

5. The TARP Repayment Bonanza. … 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? …

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.

More analysis of this crisis in the American political regime

I strongly recommend reading all these, so you can tell your children that you were awake when America died. Or perhaps re-discovered itself. Depends on what we do now.

(1) The Big Takeover“, Matt Taibbi, Rolling Stone, 19 March 2009 — “The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution.”

(2) “Welcome to America, the World’s Scariest Emerging Market“, Desmond Lachman, op-ed in the Washington Post, 29 March 2009.

(3) “The peasant mentality lives on in America“, Matt Taibbi, posted at The Smirking Chimp, 14 April 2009

(4) “Teabagging Michelle Malkin“, Matt Taibbi, True/Slant, 15 April 2009

(5) “The Quiet Coup“, Simon Johnson (MIT professor, former IMF chief economist), The Atlantic, May 2009 — Similar thoughts, but more mildly expressed.

(6) “‘It’s time to enshrine Hank Paulson as national hero’ WTF?“, Matt Taibbi, True/Slant, 8 June 2009

A closing thought

The first step is not knowledge. Not logic. But rage, contempt at what we have become. From that other things can flow, good or bad depending on our character.

“Anger is easy. Anger at the right person, at the right time, for the right reason, is difficult.”
— Aristotle, in the Nicomachean Ethics, book IV, chapter 5 (lightly paraphrased)

“Telemachus, now is the time to be angry.”
— Odysseus, when the time came to deal with the Suitors. From the movie The Odessey (1997)

For us the time is now. The reason is the preservation of our nation. The target is ourselves, how we have become less than we were. Less than we should be. Less than we can be.

This is the opposite of most proposals offered today, which suggest blaming some combination of the world, the rich, the poor, terrorists, foreigners, or whatever. Or our leaders, who don’t kiss our boo-boos and cut the cake unfairly. Everybody is responsible, except us. Folks proposing such views suggest that we adopt the attitude of alarmed cattle. Or mice.

Afterword

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