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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.
And it all comes down to risk, or to be more precise, how much risk Morgan is willing to take on the taxpayers' dime compared to what Goldman Sachs is now taking. Morgan Stanley’s CEO John Mack, chastened by the firm’s own near-implosion last year when it too was forced to become a bank, has radically reduced the amount of borrowing, or “leverage,” Morgan is taking in trading. People inside the firm say it’s difficult to meet client demands without borrowing money.
“We just can’t get anything done,” said one senior Morgan Stanley executive, speaking on the condition of anonymity. Borrowing to finance trades amplifies gains, but it also amplifies losses when trades go bad. During the first quarter of 2009, Morgan borrowed just $11 for every dollar it had in capital (by comparison during the Wall Street boom, firms borrowed as much as $35 for every dollar in capital), while Goldman borrowed a significantly higher amount—close to $15 for every dollar it has in capital. "Our leverage is the result of risk-taking on behalf of our clients," Goldman spokesman Lucas van Praag says about the strategy.
And keep in mind this is only for the first quarter. Goldman’s second-quarter leverage is likely much higher given the fact that interest rates have remained remarkably low. Those low interest rates have had another benefit—it has allowed Goldman to make winning bets in the bond markets (bond prices rise when interest rates fall), the same place that decimated Wall Street in 2007 and 2008.
Of course, there are lots of reasons for Goldman’s success. The firm has amazing intellectual capital; some of the smartest people in the world of finance work there. It also knows how to game the system better than any firm on the face of the earth. Case in point: In mid-September 2008, when the world was crashing following Lehman’s bankruptcy, Goldman held $13 billion in highly risky mortgage bonds known as collateralized debt obligations. These bonds were insured by American International Group, which itself was about to go bankrupt.
Without that insurance, Goldman itself would have imploded because the bonds would have been marked down to just pennies on the dollar. The rescue of AIG was supposed to prevent a large-scale crash of the financial system, but it also prevented a crash of Goldman Sachs, which bought those crappy CDOs from Merrill Lynch, which was forced to find a buyer (Bank of America) because it too held the same sludge.
The Goldman purchase of the Merrill CDOs is proof positive that the geniuses at Goldman screw up like everyone else. And I don’t buy van Praag’s spin on the firm’s famous hedges that minimized its losses because the smart money in the markets didn’t at the time. Goldman’s shares were in a freefall, bottoming out at around $50 in the fall of 2008, compared to close to $235 just a year earlier.
Now with all the government help, Goldman is marching its way back up to $235 a share—trading at around $150 Monday—by embracing much of the same risk that nearly led to its demise. It would be nice, though, if the next time Goldman losses money taxpayers didn’t foot the bill.
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 book about the financial crisis, The Sellout, is scheduled to be published later in 2009.
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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.
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.
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
And the beat goes on.
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?
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
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.
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.
And little Timmy TurboTax doesn't seem to be making any waves.
Obama, just like anybody will be known, by the friends he keeps. Is Obama planning to go work for Sachs in 2013?
Based on campaign contributions, I think Obama is already on the payroll.
I doubt it considering, with any luck, he'll still be working for the American people by then.
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.
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
Goldman, AIG, Enron, Bernie Madoff, etc....Is there any difference?
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.
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.
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.
Already done - can't beat them - join them.
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.
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!!
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.
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?
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.
Read the Taibbi piece above, you don't know what you're talking about.
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.
Goldman pays zero income tax on all this while Obama labors to raise taxes on small business. There is a pattern here:
1. Goldman is a huge backer of the Obama campaign and stands to make billions from cap and trade
2. The UAW is a big backer of Obama and walks away with ownership of GM and Chrysler - paid for by US tax payers
3. The Service Employee Internaltional Union (SEIU) spends millions bankrolling Obama and they are the only ones who would benefit from Obama;'s health care program.
Gaspirino sounds more like Hugo Chavez than anybody else......Goldman made $3.4 billion? Good for them!
Profits are a good thing in capitalism. Does Charlie want them to make less money?
Charlie is a BEAR under Obama. But if its Romney, Bush etc. in the White House then he's suddenly all for capitalism. But a black guy? No way. He's not having any of that. Here are the facts: Obama saved the financial markets. Period. At the end of the last year (and beginning of this year) people thought we were going to see 4000 on the DOW or lower. Didn't happen. Why? Because Obama worked with Goldman to keep the markets afloat. And you know what...That isn't such a bad thing. What did he want for the markets to crash? Well, in a word he did. He wants to see Obama fail. But if Obama fails AMERICA fails. And I'm not having any of that, Charlie. Some of us love our country. And many of us want to make money not lose it.
Karl Marx would love Goldman Sachs. Time and time again, they have transferred wealth from their Capitalist shareholders to their Labor employees.
This time Goldman is flying without a net. If they fail, they will not be bailed out, as voters will vomit at their arrogance. They are an immodest version of Marie Antoinette I predict bankruptcy by Jan 2010.
@robertell, Goldman would have gone bankrupt if AIG hadn't been bailed out by the US taxpayer and their CDS contracts been paid out. What part of that has anything to do with Capitalism?
Gasbag Gasparino. Mr. Anti-Obama himself. Mr. Anti-Union. Mr. Corporate shill. The man of the hour. Not really. Just a loser made of cotton linen, silk and covered in bear's blood.
When Bush was in office not a peep out of this guy. But now that there's a liberal black guy as President he lets loose. Where were you the past 8 years of Bush? Got any more protein shakes to recommend, Charlie?
if you haven't; find and read the Tiabbi...it;s a mind blower........
.if you have.....what would Karl say?,
Marxx that is...
....will the gluttony of the rich and money workers rebith Marxism?
Thanks Gasp for the additional info on GS. Your pt about GS is a bit like Noam Chomsky says about some conspiracy theories: he notes that the real facts that nobody denies are often as bad if not worse than the conspiracy theories, and yet people ignore these damning facts.
And to the commentators accusing Gasp of selective criticism, your observations seem right, and I think it is not so bad. Until we past this all our problems are due to that other party, we will make no progress. Wall Street's stranglehold on our economy and our government is a bi-partisan corruption and we as a people will only end it when we unite against it. If it takes a Dem prez and Dem congress for conservative to start being critical of our financial policy and govt corporate cronyisms, so be it. If Obama admin was behaving in a progressive manner to Wall Street corruption, Gasp would have no basis for the above criticisms.
Finally, to you "greed is good" commentators, if GS was providing a service we need and doing it in a truly free and fairly refereed market, than you go GS. But I do not think insiders chosen by the govt to have special priviledges, access, who have monopoly position, who use insider knowledge of their clients to do their own inside trade against their clients interest constituent a free a fair market. The US revolution was in large part an economic rejection of the British govt supporting business monopolies which got unfair preferences form the King, choking out the native small businesses.
There is a difference between free markets and making lots of profits. Trusts and monopolies make big bling, that doesn't mean we should allow them, worship them and support them with our tax dollars. Monopolies and cronyism leads to moribond economies, even if it greatly enriches some, just as we see wrong in third world country's corrupt economies.
Our common economic interests are best served when there are free and fairly regulated markets, everybody competing on a level playing field finding efficiencies, providing services and products that better meet customer needs/wants. It is decidedly un-capitalistic and third-world-like to promote monopolistic, politically connected companies simply because they are rich. Dictators are rich, Saudi royal family is rich, but I'm sorry, I don't think the are good or worthy of applause, neither is GS
Charlie,
Wow, you really surprised me with a refreshingly blunt and insightful commentary on the biggest player in the financial world.You've got big ones to take on and call out GS.Changed my view of your reporting.
Goldman Sachs may well have some of the smartest financial minds on the planet in their employ, but too much of their success can be attributed to their "positioning". The revolving door at Goldman Sachs leads to positions of influence in political administrations. They've got it covered whether its Republican or Democrat. Whether it's Paulson or Rubin their ass is covered when their traders screw up and almost send the company over the cliff with high risk high leverage trading.
So the Masters of the Universe show themselves to care less how much pain is inflicted financially on everyone else as long as they can tap into the taxpayers expropriated funds.
And it seems their high rolling risk takers aren't reined in yet since more than half their profits came from trading in the markets - the commodity markets.
Thank you.
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