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Goldman's Outrage
Richard Drew / AP Photo
How the Wall Street giant used your money to make $3.4 billion in profits.
The Daily Beast's Dan Colarusso: Is Goldman Out of Tricks?
They will never admit to this at Goldman Sachs (they don’t really fess up to much over there at the Big G) but in the fall of 2008, just after the Lehman Brothers bankruptcy gave the world a lesson in systemic risk, Goldman, the world’s greatest risk taker, was finished too.
That’s right, it was toast. Finished. Kaput. Until, that is, the firm that was built on wheeling and dealing in some of the most esoteric investments the world of high finance had ever seen, needed a government bailout to stay afloat, which included $10 billion in cash from the Treasury Department (granted by its former CEO, then-Treasury Secretary Hank Paulson) and more importantly, full access to the Federal Reserve’s discount window to be a commercial bank.
Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume some of the same risk-taking activity that got it in trouble in the first place.
Goldman, of course, is a commercial bank like no other. You won’t confuse Goldman with the ol’ Bailey Building & Loan. It has no customer deposits—which are what the access to the discount window was first set up to protect—and you won’t be getting a toaster or a debit card from Goldman Sachs anytime soon.
But being a bank has its rewards. With full access to the discount window, Goldman can now borrow cheaply and massively from the Fed in a pinch, and because of that access, it can borrow more cheaply in the credit markets. It’s a loophole that has allowed Goldman to turn back the clock and once again resume much of its risk-taking activities, only this time it’s being financed by the American taxpayer.
There are, of course, many urban legends about Goldman and how it uses its clout in Washington and in the financial business (both Paulson and another former CEO, Robert Rubin held the Treasury secretary post) to advance its allegedly nefarious corporate agenda.
Recent reports have the firm gaming the energy markets, creating the dot-com bubble, and the subprime-debt crisis that took down Wall Street, and then for a time benefitting from its implosion when it “shorted” subprime-related investments, a trade that allowed the bank to profit from the downward spiral. (Hell, I’m sure there are people who also believe Goldman was somehow behind the swine-flu epidemic to corner the market on drug stocks.)
Some of these stories have a basis in fact and some don’t—I’ll leave it up to the reader to figure this out—but what is true is equally disturbing: Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume the many of the same risk-taking activities that got it in trouble in the first place.
The question I have, of course, is why is the Obama administration, which has decried corporate greed whenever it’s politically feasible, allowed Goldman all the advantages of a bank, when it is really a big hedge fund?
The Treasury Department won’t say and it's obvious why Goldman is doing what it is doing: Money, and lots of it. The firm announced Tuesday morning that net income for the second quarter was $3.44 billion, while its biggest rival, Morgan Stanley, is likely to announce a quarterly loss.
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Paul Schrodt is a writer living in New York City. He has contributed to New York magazine, Radar, and Esquire.com.
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The Daily Beast is dedicated to news and commentary, culture, and entertainment. We carefully curate the web’s most essential stories and bring you original must-reads from our talented contributors.
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Charles Gasparino is CNBC's on-air editor and appears as a daily member of CNBC's ensemble. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.
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Charles Gasparino is CNBC's on-air editor and appears as a daily member of CNBC's ensemble. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.
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Charles Gasparino is CNBC's on-air editor and appears as a daily member of CNBC's ensemble. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.
meghann
THANK YOU for covering this. I've been staring at my Rolling Stone for a week, wondering why there wasn't an outrage over Matt Taibbi's article.
jdx60009
If there's anybody out there who hasn't read this, you need to read it.
You don't know what you're talking about until you do.
http://www.rollingstone.com/politics/story/28816321/the_great_american_b ubble_machine
neverlate
And the beat goes on.
hockeydog
Does this mean that Robbie Rubin, Hanky Paulson, Timmy Geithner, and their little circle of friends will see their holdings in Goldman Sachs' stock increase in value?
GPatton
AIGS has helped pull off the biggest scams in the history of the world. And, left to their own devices, they'll do it again, and again, and again. They've admitted that their black box computer program, whose software was stolen by a former employee, could destabilize markets. This should be looked into very closely by the authorities. Will it be? Given the fact that AIGS is so politically powerful, it'll probably be swept under the carpet. George Patton
midasw
For months now, I've written in NY Observer and Forbes.com about Goldman using free govt. bailout money to ramp up its program trading. I hope Charlie's excellent piece creates resonance. This is a scandal - as I called it a couple of weeks ago on Forbes.com, "a moral obscenity" - the American electorate needs to wake up to and grasp.
maddymappo
Leaving it up to us to figure out? Sure, Secy Paulson took care of his buddies at Goldman and screwed the the rest of us.
AiriqS
And little Timmy TurboTax doesn't seem to be making any waves.
KemCho
Obama, just like anybody will be known, by the friends he keeps. Is Obama planning to go work for Sachs in 2013?
AiriqS
Based on campaign contributions, I think Obama is already on the payroll.
gak001
I doubt it considering, with any luck, he'll still be working for the American people by then.
gak001
This is an excellent article. We need regulations to prevent this sort of nonsense. Of course, businesses have a duty to maximize profits and many will naturally find the path of least resistance. This is a prime example of why regulation is needed.
splinter
You've obviously failed to grasp the meaning of the article. GS is manipulating the system to generate enormous profits, while passing the risk to the taxpayer
AlwaysOptimistic
Goldman, AIG, Enron, Bernie Madoff, etc....Is there any difference?
Michael22
Charley, Thank you for this article and especially referencing the article by Mike Taibbi in Rolling Stone. Everyone needs to read this article. I have been a financial advisor for 25 years and I'm seriously considering leaving this business. Goldman represents the lowest of GREEDY SCUMBAGS. The way they operate, usurps one's ability to honestly and genuienly advise one's clientele when they are allowed to manipulate the markets to line their own pockets. I pray the pension funds that are suing Goldman are successful and don't settle. We need to make Congress aware of how much influence they truly have. However, we need to take the initative and make our Senators aware as well.
sophia5
Didn't Paulson work for Goldman Sachs, and was he not Treasury Secretary, and if so was it his decision to allow Goldman's competitor Lehman Brothers to fail ?
If true, why would he allow a competitor to fail? Duh !
Is that what you would call a conflict of interest?
So what can we look forward to?
A government controlled by Goldman, and General Electric?
Will G.E. control a large portion of Carbon Credits during the
"greening of the economy?"
Would they even allow any competitors to have access to
those credits should G.E. actually have control ?
Something could stink out loud, and it wouldn't the power plants.
ThinkAgain
If you believe that it's all rigged so they can't lose in the long run, buy some stock so it won't bother you.
splinter
Already done - can't beat them - join them.
seetheforest
So they don't pay taxes to the federal government on those profits, Charlie? Come on, if what you say is true it is the best use of taxpayer money since WWII. Much better than the stimulu package, just ask Martin Marrietta. And for all the gnashing over the compensation, I can think of one group who can't wait for those checks to go out. The NY department of treasury, or whatever they call it in New York. I am surprised by this populist angle from you CG. Kudlow is going to have your >>> for this one.
jomama
NO it is DEFINITELY NOT good use of that money - they are playing trading games - making money by moving money around - it's like playing poker with all the other traders - IT'S NOT VALUE CREATION, and definitely not JOB CREATION. And of course, they are doing it with huge risk. The gov needs to give the bailout money to Warren Buffet - who will put it in the places that will make money - which is good as you say - but are also investing in the economy, creating NET VALUE (Godlman is just grabbing other poeple's pieces of the pie, Buffet's investments grow the pie), and JOBS, which is the only way the economy will recover. GOLDMAN IS ROBBING PEOPLE ON A SINKING SHIP - putting the responsibility on others to save the ship as well!!
seetheforest
So when I buy groceries at the store is that value creation? The grocery did not grow the tomatoes or raise the chickens. They are just storing it and selling it to me at a PROFIT. Eh gads. Look jomama and others of your ilk, 60 miles off the coast of Florida sounds good for you. They have great cigars. Funny you mention Buffest since he is a large recent investor in Goldman. So to use your linear, simplistic argument; the governement gives the money to Buffet and he lends it to Goldman. Cream rises to the top.
NJtrader
Why did it take so long for the press to report on this? On Sunday Paulson announces that BofA will buy Merrill, but Lehman and AIG will have to file chapter 11. No problem. Then on Monday we find out that
Paulson has changed his mind and now the government is going to bail out AIG. And nobody from the media asks the question, "What happened from Sunday afternoon to Monday morning to change things for AIG?"?? The Paulson / Goldman connection wasn't OBVIOUS??? Why has the media become so inept?
ChanRobt
Gasparino asks, "...The question I have, of course, is why is the Obama administration, which has decried corporate greed whenever it's politically feasible, allowed Goldman all the advantages of a bank, when it is really a big hedge fund?"
Simple: Wall Street bankers are very generous with Democrats. They are, after all, New Yorkers.
Meanwhile, if we're going to be giving money to corporations, I'm glad we picked a winner this time. Don't know if we'll ever see much back from GM. though, I hope Mr. Lutz can pull off some miracles and make them a happening company again.
jdx60009
Read the Taibbi piece above, you don't know what you're talking about.
floridaPOed
We all comment but we need to organize and MARCH! I've had it with taxpayers money funding banks. People need to go to jail and then maybe Americans will feel as if some justice has been done. How do we put this together nationwide and I'm not talking the lame teaparty stuff. A real 60's protest march on the nation.
Thank you.
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