Blame Goldman Sachs

Brian Doherty | March 24, 2009

A pithy reminder from the D.C. Examiner, that even when we thought it was AIG, it was Goldman Sachs all along:

But let’s not forget that the sturm und drang over AIG bonuses serves a serious purpose for those politicos fueling the drama – it diverts the public’s attention away from other far more revealing facts like those surrounding the role of Goldman Sachs....Goldman Sachs has been everywhere in the crisis, yet has almost entirely escaped critical public attention. Goldman Sachs alumni have been in the forefront of the government’s response to the crisis under both the present and former presidential administrations.....

What Goldman giveth, Goldman also taketh away. While little is known about where the AIG bailout money went, we do know that Goldman Sachs received $12.9 billion of it. As one Wall Street insider recently observed to The Examiner: “This is an investment bank that earned more than $12 billion and paid its CEO $68 million in 2007. Even in 2008, this self-proclaimed home to the ‘Masters of the Universe’ paid out more than $10 billion in compensation and received its own $10 billion in taxpayer funding.” Congress ought to stop swatting at AIG bonus gnats and take on the real masters of the bailouts.

For more infuriating details about the bold new Goldman Sachsified political economy, see Matt Taibbi's sharp and funny article in the latest Rolling Stone.

Comments

|3.24.09 @ 10:40PM|#

If they had a Palestinian name, the gubmint would be on em like stink on feces.

tarran|3.24.09 @ 10:43PM|#

Murray Rothbard often commented that treasury officials "come from somewhere."

It's telling how often these quantum leaps in regulation that supposedly are required to correct for flaws in the previous, more free markety financial systems seem to benefit the companies that had earlier employed the guys who promulgated the benefits.

It's almost like they are giving out goodies to their old friends and then lying to the populace with rationalizations as to why its a good thing for everyone else.

Timothy Geithner|3.24.09 @ 11:40PM|#

Goldman Sachs moves the Treasury paper.
You wouldn't want the government to go broke and only be able to afford that bare bones stuff in the Constitution would ya?

Well STFU, bend over and take it like a bitch.

|3.24.09 @ 11:55PM|#

the last shoe hasn't dropped yet. that'll be when the taxpayers go on strike.

|3.25.09 @ 12:03AM|#

Let's not forget that Goldman Sachs, like Wells Fargo and a few others, was strongarmed into taking bailout money in the first place. Paulson, et al didn't want there to be a "stigma" associated with banks that took bailout money, so they made even the healthy big banks take a share. You can't force them to take the money (which GS, at least, has declared they will pay back ASAP) and then complain about how they use it.

endpoint|3.25.09 @ 12:07AM|#

There will be no taxpayer strike, lest you wish to be deemed and treated as an enemy combatant or terrorist. Abu Ghraib and Gitmo were, in the end, warnings to Americans. Cautionary tales of what life is like if you are deemed (MIAC'ed?) a terrorist. It sickens me to actually think such things but nearly every day brings more news of cetralizing of power. How many weeks before China and Russia get their recently requested world currency?

OBAMABOT|3.25.09 @ 12:18AM|#

You can't force them to take the money (which GS, at least, has declared they will pay back ASAP) and then complain about how they use it.

YES WE CAN!™

Hammeredhead|3.25.09 @ 1:28AM|#

Couldn't get through it all. Too much complaining about the evil CDOs. Perhaps if we hadn't bailed anyone out the problem would already be over.

Didn't AIG insure most of the CDOs held by GS. It was an amazing stock of genius for Palson/Geithner to bailout GS by demonizing AIG.

It is a sad day when Europe is much more fiscally responsible than the US. Even France doesn't want to increase spending or taxes.

Viva New Zealand.........

|3.25.09 @ 3:08AM|#

Here's what's especially fucked up about this.

A lot of these CDSes were purchased on mortgage backed securities. Securities which were overvalued for reasons we're all aware of.
Since the MBSes were being treated as if they were bonds, their now "toxic" status means that AIG has to pay GS the "face value" of the MBSes. But the face value was based on an inflated market prices.

So, in effect, you CAN'T LOSE. Buy something at the top of the market, insure it, and then when the price falls, collect the freakin insurance.

Only hitch is ... what if the insurance company goes bust.

Well, you've got your man at the Treasury department to make sure that someone is designated "too big to fail".

Ebeneezer Scrooge|3.25.09 @ 3:21AM|#

Okay, might as well start out with the fact that I'm an engineer and not a financier. [roll eyes now and get it over with]

Now here's a serious question that I haven't found the answer to anywhere. At least not in a way that makes any sense.

HOW did they manage to convince congress to go for this bailout mania in the first place? And how have they kept them going along with it?

How did they get congress to agree to have no real oversight? Hell, not even any real *insight* into what's going on? And that, in the face of clear, obvious, public disapproval of the whole bailout in the first place.

What did they do, that convinced our politicians at the national level (read: questionable moral integrity no matter which party) to essentially slit their wrists?

CptBlood|3.25.09 @ 6:08AM|#

The Fed is to the post-cold war era what the CIA was to the cold war era and nobody wants to hear it.

What I learned from that article:

Repurchase agreements... $0

Even the smallest sense of transparency is now gone. Oh well.

KipEsquire|3.25.09 @ 6:49AM|#

There are few political heuristics more reliable than this: When Maxine Waters and Pat Buchanan agree on something, it's dead wrong.

And they agree that this all Goldman Sachs' fault.

Some Guy|3.25.09 @ 7:08AM|#

If there's a revolution, I have said that Paulson should be first in line for the (whatever we use for guillotines these days.)

Untermensch|3.25.09 @ 7:33AM|#

This seems as good a place as any to share a few cartoons that a friend in Russia pointed me to that seem pretty accurate:

* Titanic
* Uncle Sam as Darth Vader
* Fedegra (a bit like Stimulis

Enjoy

|3.25.09 @ 7:36AM|#

"You can't force them to take the money (which GS, at least, has declared they will pay back ASAP) and then complain about how they use it."

ASAP meaning some time this century? Goldman took full value on their CDS's from AIG...so why do they even need TARP money? Why haven't they given it all back? I can complain all I want about how they use it, since I don't think they should have been given a dime on the first place.

Fluffy|3.25.09 @ 8:34AM|#

Brian24-

Your statement that Goldman Sachs was "healthy" rings a bit hollow when you consider the volume of counterparty funds they took from AIG.

Had they been forced to rely on the actual resources and actual creditworthiness of all of their counterparties, how healthy were they?

I can run a "healthy" bank too if the government will step up with the dough if my biggest clients fail to pay.

In addition, I would love to see what CDS payments Goldman has avoided having to make because the underlying companies have never actually gone bankrupt. If Goldman sold CDS on any one of the bailed out companies, the bailout has kept them from having to pay out on the trade that they LOST.

We have no way of knowing whether Goldman "would have been" solvent or not, because neither you nor I knows what their books would look like if the government hadn't guaranteed their assets and prevented significant liabilities from springing into existence upon the outright failure of one or more firms.

Cabeza De Vaca|3.25.09 @ 8:35AM|#

"If there's a revolution, I have said that Paulson should be first in line for the (whatever we use for guillotines these days.)"

Circumsision.

Cabeza De Vaca|3.25.09 @ 8:37AM|#

*circumcision*

DJF|3.25.09 @ 8:48AM|#

Brian24 says
"""""Let's not forget that Goldman Sachs, like Wells Fargo and a few others, was strongarmed into taking bailout money in the first place."""

What strongarming? Did the government put a gun against their head? NO.

At most the government might have bribed GS but there was no strongarming. GS had its man at the Treasury, Hank Paulson, and he provided GS with the money it needed to cover its bad debts. He also allowed GS to overnight transform itself from an Investment Bank to a Bank Holding Company which allowed GS to get all sorts of low interest loans and other special privileges. Without these special deals GS would have been bankrupt months ago.

The only threats would be that GS would no longer be the governments favored child of the banking industry and since that involves nothing to do with the free market but insider government power I say its not a legitimate threat since the privileges received are not legitimate

Also does GS plan on giving back all the taxpayer money that was funneled through
AG and others to pay off its CDS deals?

Unless I see some specific allegation of strongarming I put that story in the propaganda file

Xeones|3.25.09 @ 9:23AM|#

From the Taibbi piece:

But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron - a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

You mean the federal government was not that already?

Alan Vanneman|3.25.09 @ 9:37AM|#

Why are the G-S details "infuriating" to Reason? If G-S paid its CEO $68 million, he must have earned it, right? Because that's how markets work, right? And markets are never wrong, right? And if it's wrong for G-S to receive federal money via AIG and pay out big bonuses, should the federal government regulate every company that gets federal cash via an AIG payout?

Billy!|3.25.09 @ 9:55AM|#

I don't get it. Of course Goldman Sachs has been everywhere in the crisis... it's the biggest player in the industry that's in trouble and it's also the top employer of the kind of folks that would get fancy government jobs like, say, Treasury Secretary.

I had a friend, back in 2001, complaining about the fact that Hamid Karzai was involved in the oil industry. It proved all sorts of horrible conspiracies about Big Oil and the war, etc. But if you're a smart ambitious guy in Afghanistan, there ain't much else to do besides the oil industry.

Same thing here. If you're a big shot financial type, chances are your gonna be involved with Goldman. Because, well, if you are or want to be a big shot... that's where you go.

DJF|3.25.09 @ 10:01AM|#

Alan Vanneman says
""""And markets are never wrong, right? """

The markets weren't wrong about GS. Without the bailouts the markets would say that GS should be bankrupt and its stockowners should lose all their invested money and GS lenders should lose all or most of what they lent GS and the management and board of directors should be looking for new jobs and probably looking for lawyers to protect themselves from civil and maybe even criminal liability.

In real life just like in real markets, there is not always immediate feedback of all the consequences. If I was to eat a gallon of ice cream I would feel great, until I started to feel sick. If I did not get sick that day I might start eating a gallon of ice cream a day, and it would only be latter that the negative consequences would be felt.

The same with GS and its management, stockowners and lenders, they ate the ice cream and felt great short term benefits, now they need to feel the long term consequences

|3.25.09 @ 11:36AM|#

Brian24 wins most naive poster award.

DJF is exactly right. But this is an issue a lot of pro-business libertarians refuse to address - how do you prevent a corporation from gaining so much power, as GS apparently has, that it can bend the Federal government to do its will? Is the answer to abolish the government so that coporations can't abuse that power? Or to regulate the size of corporations? I'm becoming more sympathetic to the idea that "corporations" themselves are a bad idea - maybe we need to encourage more personal responsibility and stop letting people hide behind legal structures that we pretend are natural, but in reality are an artificial outgrowth of our legal system. There's no reason a free market needs corporations.

endpoint|3.25.09 @ 12:48PM|#

Each day dawns anew... Geithner 'open' to China proposal on currency
via Drudge

Ebeneezer Scrooge|3.25.09 @ 1:22PM|#

I'm becoming more sympathetic to the idea that "corporations" themselves are a bad idea - maybe we need to encourage more personal responsibility and stop letting people hide behind legal structures that we pretend are natural, but in reality are an artificial outgrowth of our legal system.

So I'm not alone anymore? Corporations as they currently exist are *not* rational actors in the Adam Smith sense. And that, I submit, is crucial.

There's no reason a free market needs corporations.

But at the same time I'm not sold on this idea.

Huge corporations serve an important role in accumulating the necessary capital and resources to provide essential capabilities in a modern capitalist economy. Problem is, I'm not convinced that "one man empires" could work today, the way they did a century ago. Because I doubt one man or woman, could keep their arms wrapped around what all is going on in an operation that size.

I'm not sure what the solution to the problem of modern corporations is. But somehow, I'm convinced, we need to change the legal structure so that they are at least much closer to being rational actors.

Because without rational actors running the production side of things, a key foundation stone of in the theory of capitalism vanishes.

Unfortunately too many libertarians are too naive about corporations. They like to parrot BS like "can a corporation put me in jail"? Maybe not directly, but what you must understand is that they don't have to have the conventional government powers to still be a real threat to our liberties.

I swear, if libertarians can figure out how to crack this nut, they could sweep the field politically (that and we'd need at least a couple of rational, personable candidates but details). The fact that libertarians refuse to even acknowledge a problem with corporations is, I think, the main reason our economic messages get ignored by the educated masses.

That, and the masses are mis-educated. But that's another story.

|3.25.09 @ 1:51PM|#

Well, Ebeneezer, perhaps if we only had one-man empires than no company could ever get "too big to fail".

Still, I am not convinced that there is any inherent problem with corporations, and I don't think you have made much of a case that they are "not rational actors". If anything the general argument against corporations runs the opposite direction - that corporations are hyper-rational and focused on profits to the expense of any morality, in a way human beings are not.

However, It's even possible that the stability and success of modern economies is largely *because* corporations are hyper-rational - they aren't as sucesptible to the predictable errors that human beings make.

Of course, they could have built in irrationalities that we havn't figured out yet, but that would be par for the course.

(Someone should do some experiments on biases in aggregate decision making.)

I do think that large corporations, as all large businesses, suffer the same information problems that centrally planned economies suffer from. It's always more efficient to keep everything in one brain. As soon as you start having to hire others, inefficiencies develop.

But I don't see how large corporations are inherently wrong or unjust or anti-liberty in the way your suggesting.

Craig|3.25.09 @ 2:21PM|#

Let's not forget that Goldman Sachs, like Wells Fargo and a few others, was strongarmed into taking bailout money in the first place. Paulson, et al didn't want there to be a "stigma" associated with banks that took bailout money, so they made even the healthy big banks take a share.

Looking back, it was an obvious scam. There were no "healthy big banks" -- they all needed the money desperately to stay in business, so they "agreed" to take billions they "didn't need" to remove the stigma -- the stigma of admitting that your company is essentially bankrupt.

Craig|3.25.09 @ 2:23PM|#

But this is an issue a lot of pro-business libertarians refuse to address - how do you prevent a corporation from gaining so much power, as GS apparently has, that it can bend the Federal government to do its will?

Easy -- limit the power of the government so no corporation can abuse it.

Paul|3.25.09 @ 8:10PM|#

Why are the G-S details "infuriating" to Reason? If G-S paid its CEO $68 million, he must have earned it, right? Because that's how markets work, right? And markets are never wrong, right?

Correct. Markets are never wrong. Let's take the federal bailouts out of the equation. You know, just for yucks.

GS Exec heads down to the Paymaster after the crash.

GS Exec: I'd like my bonus now. Afterall, it's a "retention" bonus, so it's all contractual 'n stuff.
Paymaster: Yeah, that's true but uhh...

looks over shoulder at open, empty vault

Paymaster (cont'd): we're uhh, a little short right now. Tell you what, you take this IOU, and come back next week and uhh, try then.

Ebeneezer Scrooge|3.25.09 @ 9:44PM|#

But I don't see how large corporations are inherently wrong or unjust or anti-liberty in the way your suggesting.

Well first of all, did you read the Rolling Stones article? Not a bad place to start.

Still, I am not convinced that there is any inherent problem with corporations, and I don't think you have made much of a case that they are "not rational actors".

Sorry, I didn't do a brain dump here just now. That could nearly be a small book in its own right, but it has been debated in the literature and I'm not the only one who's argued that corporations are not rational actors in the conventional sense.

I'm not going to do the book length put on it here, but I'll toss out some food for thought.

I'll begin by noting that my experience with corporate America runs back about 20 years. I can remember how business was done when I was starting out, and I know how it's done today. Attitudes have changed dramatically. With a very few exceptions, most of the people I've heard arguing "there's nothing wrong with corporations" are people who have never actually rubbed up close against how these behemoths actually think and function.

Consider a couple arguments I've posted around here before (and nobody yet has refuted them in my mind -- but I'm listening if somebody can):

Large businesses used to serve as something of a check on government power. In the days of one-man empires, if the federal government wanted to impose stupid, counter-productive rules and laws, the business owners would tell the feds to go pound sand. Howard Hughes is a famous example.

Now look at what today's corporations do. The federal government has imposed "affirmative action" rules on American industry. Under these rules it doesn't matter who is most qualified to fill a position. If a (appropriately politically connected only) "minority" has the bare minimum qualifications for the job -- and sometimes even if they don't quite have that -- then under affirmative action rules, the "minority" gets the job and that's that.

I can see Howard Hughes telling congress what to do with this asinine law. But today's corporations said to the feds "You want me to do *what*? Oh, well, okay, if you say so....."

So what, you might say. But look at the consequences. I've spent most of my career in the automotive and aerospace industries. It used to be that we had the creme de le creme of the engineering crop, because people's lives depend on what we do. You have to be dedicated to make it here, because when a design and/or finished hardware goes out the door, it absolutely has to be right. Doesn't matter if you've already put in your 40 hours, if you see a mistake it's got to be fixed.

Instead today, we have people who are marginally competent (and in some cases I've seen, outright incompetent) being promoted to positions of significant power, in the hardware design-build-test-manufacture process.

I'll let you guess what that could mean when 737 take off, or when a family gets behind the wheel of their brand new car.

Have documented, catastrophic failures happened yet because of affirmative action laws? Debatable right now, I admit. But I see what's going on inside industry over the past couple of years and I for one am positively frightened.

I suppose my book isn't going to sell until there are documented catastrophes, but by then we probably won't need it.


There is no one on the playing field that stands in opposition to the stupidity of imposing affirmative action rules on critical industries. Because, there are no Howard Hughes types left, there are only corporate boards, and with persistence you can get a corporate board to agree to almost anything.

You can also be certain that these same rules are being applied to the engineering firms that design buildings and bridges.



Corporations were less prone to agreeing to stupidity like this when there were still a few one-man empires out there to compete with. Now that there are essentially none left, corporations over the past decade have moved into a whole new phase of their existence. The boards of directors can be conned into agreeing to nearly anything.

Here is just one example of where corporations are not rational actors in the conventional sense. This is not hyper rational, it's hyper destructive.


The conventional lassez faire argument really doesn't work as a solution to this problem. "Well some competitor will come along and put them out of business."

Sorry but you aren't going to see that happen today. Because nobody's company gets big enough to be a real competitor today, before one of the behemoth corporations buys him out. The captains of the behemoths aren't even shy about the fact that they don't want that kind of competition -- but you'll only hear it if you're walking the hallways inside the behemoths.

Howard Hughes types are not going to be competing with today's behemoths, because they'll get bought out. Which is all fine and good for Howard Hughes, and there's nothing wrong with him selling out his holdings to Mega-Corp X. But remember how Mega-Corp X is doing business, and what the consequences are.

Ebeneezer Scrooge|3.25.09 @ 9:48PM|#

Easy -- limit the power of the government so no corporation can abuse it.

Partly right. But at the same time, you have to consider how powerful international conglomerations can get. The government does have to stay big and strong enough, that it can keep these jokers in line.

I've worked inside international conglomerates, and I can just see them getting up one morning and telling Uncle Sam "hey, I don't feel like playing by your rules anymore". If you think it's impossible for them to get big enough to get away with it, think again.

As the economy grows, it really is necessary that there will be some growth in the size and power of government. Government cannot impose law and order if there's only one sheriff and six dozen banditos.

OTOH, our government may be just a tad larger than one sheriff.

Ebeneezer Scrooge|3.25.09 @ 10:16PM|#

Hazel,

One more example and I'll stop.

For a few years in the 90's I worked in the telecom industry (my brief stint outside auto and aerospace). I won't name companies here but, ours was a highly capital intensive venture. We were a corporation, on the size scale of a one-man empire of old, but we were bought by a much larger behemoth end of second year I was there. Things changed drastically after we were bought.

Historically, ours had always been a feast or famine business. In any given year we either made a couple hundred million, or lost a couple hundred million, and there wasn't much in between.

When I started in this company, during good years we did two things: 1) we invested in future technologies that would insure our competitveness, and 2) we saved up a bunch of our earnings, knowing that a bad stretch would come and we'd need it to tide us through. This simple little scheme worked quite nicely for this corporation, for about 25 years (on the history books).

Then we got bought by Mega-Corp, and it all changed. Our gross revenues amounted to less than 3% of Mega-Corp's total for the year, so we were barely even a blip on the radar screen. We were bought out in a good year, but Mega-Corp immediately put an end to our historical financial game plan. They cut back our investment in future technologies significantly. They also did not allow us to keep some of our current profits for the next dry spell. They wanted our profits, all of them and right NOW thank you very much.

And when the inevitable dry spell did come a year later, I'll let you guess what happened. Corporate central treated us like near-criminals, from the attitudes we got. How dare we not provide a profit for them to collect? And how dare we expect to get some of last year's profit in order to tide us through.

We went from a smart, stable business, to one that was in the throws of collapse two years after Mega-Corp took over. I didn't watch this go on for very long before I was sending out my resume. Two years after I left, that business unit that I'd worked in was closed down.

To this day I contend that if we hadn't been Mega-Corp'ed, that industry would still be going today. Instead, it's gone.


What you must understand is that corporations do not think about profits with anything like a long term eye on the game -- like Howard Hughes would have. Instead, Mega Corps are run by MBAs who like to "really sharpen their pencils" (a phrase I've learned to despise). MBAs cannot find any way to justify spending profits in hand, on the technologies we'll need to stay competitive tomorrow. In fact once you've cut the MBAs loose and given them reign over the company, they cannot find a justification for anything beyond the accounts receivables department, where people open checks that have arrived in the mail and log the payments into the system.

This is really not much of an exaggeration.


The only reason innovation has kept going at all in recent years, is that Asian companies are now the ones putting US companies under competitve pressure. But now you're starting to see the Asians become similar giants, and their attitudes are becoming like ours......

You can say there's nothing wrong with huge corporations running the whole economy. But I for one am hard pressed to see how we're more wealthy, because MBAs are now deciding how things get done (read: stupidly and without the same kind of rational self interest of a Howard Hughes).

MBAs don't give a shit about anything, as long as the company bottom line looks good right now.

Which doesn't mean the one-man emporers were always good either. But they at least were capable of rational self interest in the conventional sense. If you think modern Mega Corps are motivated by this same kind of rational self interest, you've sadly misunderstood them.


I can hear the parrots babbling already. "Oh don't worry, some competitor will come along and put them out of business."

No, the truth is that some genuine competitor will come along, and Mega Corp (X, Y, Z, or W) is going to borrow the money and buy him out. Meanwhile the MBAs will continue to call all the shots. And they already are/have bought out the competition over seas.

And now, we have Uncle Sam bailing out the Mega Corps.

In the long run, Mega Corps and government have a strong tendency to merge into extensions of one and other. Our government actually likes them much better than the Howard Hughes types of old. Howard Hughes was way too likely to actually argue with stupid new rules and regulations. Corporations just go along with it.

endpoint|3.25.09 @ 10:31PM|#

There was at least one congressman saying threats of martial law were tossed out should the first bailout bill not pass. Doubtless someone, somewhere(other than tax taxpayers) was forced in to something in all this. http://www.youtube.com/watch?v=gnbNm6hoBXc&feature=player_embedded

endpoint|3.25.09 @ 10:37PM|#

And apparently I need to pay more attention to my html... a few members were even told that there would be martial law in America if we voted no