Goldman Sachs has been in the news a lot recently, but most of the commentary is of the "Hey, these guys got a bailout and now they're making a lot of money, and that's so unfair" variety. Not real deep. Actually, I'm impressed that the public is even aware of the $13 billion gimmee they got out of the AIG "bailout," which I attribute entirely to financially sophisticated bloggers who were later read by less-savvy mainstream journalists. This stuff would have gone completely unnoticed a few years ago.
Here I am trying to paint a more complete picture of how Goldman and its ilk operate, and the multitudes of ways it has been sucking money from the public at large -- in this country, and many other countries as well. This is necessarily going to be a fairly sketchy outline. Maybe an enterprising journalist, or a financial industry retiree with plenty of free time, will write a book about it someday. We will at least try to show which rocks to look under.
Last time, we ended by looking at some of the ways that Goldman -- and also some other influential financial companies in a similar position -- has been able to make its losses disappear. The first way was simply to make them vanish by declaration alone, by way of an accounting mark-up.
Another way has been through the Federal Reserve, via the alphabet soup of "lending facilities" which basically amount to the Fed trading cash for what is potentially garbage: the TAF, TSLF, PDCF, AMLF, CPFF, and MMIFF. Unless I am mistaken, this takes the trash off the balance sheets of the financial institution and replaces with the fresh, clean cash, straight off the Fed's electronic printing press. The financial institutions normally have an obligation to buy the trash back, but they can do so when they please. For example, they can buy it back after the SEC changes the rules regarding how the trash is priced, or when they get enough profits from other ways of making money that they can offset the losses in the trash. There is still $497 billion of trash in the Fed's trashpile, although this figure has come down somewhat from earlier levels.
Or, they can buy it back when they find a sucker to buy it off them. Practically the whole investment world was a sucker back in early 2007, but there is a shortage of suckers these days. So, we go to the Sucker of Last Resort, namely the U.S. taxpayer.
You may have noticed that, right from the beginning, there was a coordinated effort to allow the Goldman types to dump their mistakes on someone else. The first was Hank Paulson's "Super SIV." This died, but came back to life as the TARP, which was supposed to buy bankers' garbage for way more than it was worth. Amazingly -- once again I think this would have been unnoticed if not for the financial bloggers -- the American Public actually figured this one out, and deluged their Congresspeople with letters which reportedly ran 100:1 against the plan. Naturally, the Congresspeople voted for it anyway, but the TARP soon morphed into something else which we'll talk about soon.
Apparently, nobody drove a stake through the heart of this plan because it came back to life once again as the PPIP. Once again, it stuffs the taxpayer with the bankers' mistakes -- up to a trillion dollars' worth of mistakes, which will be sold (for top dollar you can be sure) to the U.S. taxpayer via this program. So, you could, for example, take your trash out of the Fed's trashpile and sell it to the PPIP, magically turning your turd into gold via the ever-compliant U.S. taxpayer.
Needless to say, no hedge fund on earth has this mighty privilege.
Another favorite bailout mechanism for the big banks is the International Monetary Fund. You probably thought the IMF's purpose was as some sort of dispensary of good advice to governments in trouble, like a credit counseling hotline or something. Not at all. The IMF is another bailout mechanism. That is pretty much its only purpose.
Let's say you, as a bank, loaned some money to a company in Ukraine, or perhaps Thailand or Brazil in the past. This is a plain corporate loan, with no government guarantee. There's a crisis, and the company can't pay you back. Normally, this is when a bank takes a loss. However, at this point the IMF steps in and loans the government loads of money, and somehow convinces the politicians (probably with loads of money under the table) that the best interests of their nation would be served by paying back the troubled corporate loan. This IMF money spends no time at all in the country in question, but goes directly to New York. Of course, the IMF's loans also need to be paid back -- by the taxpayers of the country in crisis. Like what they needed, on top of their crisis, is a big debt incurred from bailing out the likes of Goldman Sachs.
This has gone on at least as far back as the Latin American debt crisis of 1982, in which the government of Mexico was somehow persuaded to guarantee a whole stack of distressed corporate debt, turning it into government debt. The Fed also helped out that year, buying busted Mexican debt with the printing press. You didn't think this was all invented in the last few months did you? That Timothy Geithner somehow invented the PPIP when he was sitting out in his backyard and an apple fell on his head?
So you see, dear U.S. taxpayer, you aren't the only taxpayer paying for the losses of our friends in New York. This is a worldwide thing. And it has been going on for a long time. Although, it must be said, usually not to the degree that we've seen recently.
Disclosure: the author has a short position in Goldman Sachs (GS)