Even as the details of the Goldman Sachs Giant Vampire Squid private equity deal with Facebook emerge, I realized that I had been remiss in recent months—I have neglected the study of dangerous species in the taxonomic class Cephalopoda, order Teuthida. I will report on the Facebook deal later this week, but today I need to set the proper context for understanding it.
Since the Fed's disclosure of its loans and mortgage-backed security (MBS) purchases, new details have emerged about this dangerous predator (left). It appears that the Central Bank's efforts to feed the invertebrate menace were far more strenuous that had been previously thought, although many had suspected that some such story would come out sooner or later.
Agora Financial's Eric Fry provides the exquisite details that remind us that no stone was left unturned to keep the bloodsucking cephalopod alive. Space and time limitations prevent me from telling you everything you might want to know, but the quotes and chart below will give you a flavor for what went on.
... Goldman Sachs was “forced” by the Federal Reserve to accept a $10 billion loan from the TARP facility in October 2008. But Goldman’s top officers repeatedly – and very publically – bristled under the compensation limits the TARP loan imposed.
Therefore, as early as February 5, 2009, Goldman’s chief financial officer, David Viniar, remarked, “Operating our business without the government capital would be an easier thing to do. We’d be under less scrutiny…” And on February 11, 2009, CEO Llolyd Blankfein (left) magnanimously remarked, “We look forward to paying back the government’s investment so that money can be used elsewhere to support our economy.”
But at that exact moment, we now know, Goldman was operating its business with at least $25 billion of undisclosed “government capital.” [see the graph above]
In April, 2009, The Wall Street Journal observed, “Goldman Sachs group Inc., frustrated at federally mandated pay caps, has been plotting for months to get out from under the government’s thumb… Goldman’s managers have a big incentive to escape the state’s clutches. Last year, 953 Goldman employees – nearly one in 30 – were paid in excess of $1 million apiece… But tight federal restrictions connected to the financial-sector bailout have severely crimp the Wall Street firm’s ability to offer such lavish pay this year.”
On May 7, 2009, a Goldman press release states: “We are pleased that the Federal Reserve’s Supervisory Capital Assessment Program has been completed… With respect to Goldman Sachs, the tests determined that the firm does not require further capital… We will soon repay the government’s investment from the TARP’s Capital Purchase Program.”
On June 17, 2009, Goldman finally got its wish, thanks to some timely, undisclosed assistance from the Federal Reserve. Goldman repaid its $10 billion TARP loan. But just six days before this announcement, Goldman sold $11 billion of MBS to the Fed.
In other words, Goldman “repaid” the Treasury by secretly selling illiquid assets to the Fed.
One month later, Goldman’s CEO Lloyd Blankfein beamed, “We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake.”
As it turns out, the government continued to “revitalize” that small sliver of the economy known as Goldman Sachs. During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment. [see the graph above]
I'm really sorry—I always feel compelled to use the red font whenever I talk about Goldman Sachs.
Not once, but twice CEO Lloyd Blankfein refers to how important it is for Goldman Sachs to support the general economy continue doing "God's work." I've extracted those quotes for your convenience.
“We look forward to paying back the government’s investment so that money can be used elsewhere to support our economy.”
"We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake."
It is perfectly understandable if your bullshit detector is red-lining at this very moment. Be careful! It may actually break, and you'll have to go out and buy a new one. In a long article for the New Yorker, John Cassidy asked the question What Good Is Wall Street? Unsurprisingly, the answer turned out to be that much of what investment bankers do is socially worthless.
You should read Cassidy's long article, which I criticized in my post Is Wall Street Doing God's Work? You should read my article too, but bear in mind that I was not quarreling with Cassidy's main conclusion. My view was that Cassidy had grossly underestimated the intimate working relationship between the government (including the Fed) and the Giant Vampire Squid, as detailed above in Eric Fry's text.
I've included a video interview Cassidy did with Tech Ticker's Aaron Task. That story is called Wall Street banks are doing less and less good for society. This conclusion is somewhat akin to discovering that the Pope is Catholic, but I think it's good for people to say it outloud. In fact, every American citizen should rouse themselves from their beer and football-induced stupor and shout it out from the rooftops. Not that doing so would change anything, but it might make us feel a little better.
Today I have set the context in which you should consider the social worthiness of the Goldman Sachs/Facebook private equity deal. I'll return to that subject later this week.
Along the same lines, here is the latest taxpayer bailout BofA.
"Financial stocks just caught fire. Someone must be getting bailed out, right?
Why yes, say critics of the giant banks. They charge that Monday's rally-stoking mortgage-putback deal between Bank of America (BAC) and Fannie Mae and Freddie Mac is nothing more than a backdoor bailout of the nation's largest lender. It comes courtesy, they say, of an administration struggling to find a fix for the housing market while quaking at the prospect of another housing-fueled banking meltdown."
http://finance.fortune.cnn.com/2011/01/03/is-fannie-bailing-out-the-banks/
Posted by: BJ | 01/04/2011 at 03:28 PM