UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

July 15, 2009

THE GOLDMAN SACHS RIP OFF CONT'D

Robert Reich - Goldman's resurgence should send shivers down the backs of every hardworking American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs. Why? Because Goldman's high-risk business model hasn't changed one bit from what it was before the implosion of Wall Street. Goldman is still wagering its capital and fueling giant bets with lots of borrowed money. While its rivals have pared back risks, Goldman has increased them. And its renewed success at this old game will only encourage other big banks to go back into it.

"Our model really never changed, we've said very consistently that our business model remained the same," Goldman's chief financial officer tells Bloomberg News. . .

Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Which means you and I are still indirectly funding Goldman's high-risk operations. . .

Recall that last fall, at a closed meeting between Treasury Secretary Hank Paulson (formerly Goldman's CEO), Tim Geithner (then at the New York Fed), and a handful of others to decide on the fate of giant insurer AIG, Goldman's chief executive, Lloyd Blankfein, was at the table. The decision to bail out AIG resulted in a $13 billion giveaway to Goldman because Goldman was an AIG counterparty. Indeed, Goldman executives and alumni have played crucial roles in guiding the Wall Street bailout from the start.

Wall Street Journal -
Yesterday saw one TARP recipient, Goldman Sachs, report $3.44 billion in profits even as another, CIT, teeters on the edge of either bankruptcy or another taxpayer bailout. Which way CIT will tip remained unclear as we went to press, but its very plight shows how the government's approach to systemic risk has created groups of financial "haves" and "have nots."

What the Goldmans of the world have in addition to profits is the widespread belief that they are too big to fail. Both Goldman and CIT converted into bank holding companies at the height of the financial panic last fall, which made them eligible for TARP injections. Goldman also benefited at a crucial moment from the Federal Reserve takeover of AIG, and it received the additional filip of FDIC-guaranteed debt issuance through the Temporary Liquidity Guarantee Program. CIT was excluded from the latter program on grounds that it didn't pose a systemic risk, even as larger competitors like General Electric were allowed in. . .

Goldman's traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman's own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.

Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it's not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.


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