Goldman Turns Into a Financial Frankenstein While the Fed Snoozes Away

Before the financial crisis, before Goldman was the recipient of billions of Tarp funds, before the financial collapse of September 2008 when even the viability of Goldman was put into question, before the rescue of AIG and their derivative contracts comprising $13 billions that we know about -- that were held by Goldman and whose value had dropped to near zero, for which AIG, with bailout funds from the government, was able to pay Goldman 100 cents on the dollar in counter party settlements -- and before the myriad telephone calls at the height of the crisis between Lloyd Blankfein, Chairman of Goldman Sachs, and Treasury Secretary Hank Paulson, ex-Chairman of Goldman Sachs, Goldman Sachs was a tried and true investment bank active in proprietary trading and investments battling away in the world of you win some you lose some with their own money.

And then, at the height of the crisis, financial wizardry reached a new apogee of magical transformation. "Abracadabra!" The Federal Reserve, in consort with the Treasury, waved their magic wands and Goldman Sachs, almost overnight was magically transformed onto a bank holding company to ensure it had access to varied government lifelines during the heavy weather of what many feared was an incipient financial meltdown. It further sent a crystal clear signal to the world marketplace, that after the collapse of Lehman, that Goldman was too big to fail and the government wouldn't let it happen. At that moment of financial havoc, it was a priceless endorsement.

Now what does that mean? Goldman not only received the government's implied guarantee that it was too big to fail, essential to Goldman, given the financial turbulence at hand, but many other benefits, as well. For example, access to the Fed Window and dirt cheap money (less than 1% on borrowings), access to money from bank deposits that would now be guaranteed by the FDIC, myriad Fed programs in support of the banking system, and of course with the implied guarantee of being too big to fail, giving it license to swing for the bleachers.

The Financial Times, commenting on Citigroup's sale of its oil trading unit to Occidental Petroleum,made a fundamentally key observation that applies in spades to Goldman Sachs: "The divestment of Phibro ... enables the bank to redeploy billions in capital the unit needs but deprives it of a big profit engine." An even more accurate observation would have changed the text to read "a big profit/risk engine," because that is the nature of oil trading and virtually all proprietary trading -- be it bonds, currencies, financial derivatives and all manner of commodities from copper to soybeans. And here lies the core of the Financial Frankenstein that the Fed, our oversight agencies and our government, has created and continues to nurture.

You see, Goldman was not assisted by the government to become a voracious and even heftier investment bank. Rather, one can presume that the government's assistance was to prevent systemic failure and to enable Goldman and others to function as banks in order to assist in the restructuring of the American economy. One can presume that it was the Treasury's and the Fed's intent and expectation that, given the extraordinary assistance extended to Goldman, they would pitch in toward calming the nation's economic trauma by assuming many of the responsibilities attendant to being a bank -- helping the economy to get back on its feet by extending loans to businesses large and small, to homeowners, doing what banks do to help communities throughout the land. That Goldman would have committed many of those billions, now swept up in its propriety trading, to desperately needed banking functions, helping the cash strapped economy with liquidity and thereby supporting the underpinnings of what is imperative to save jobs, create new ones, help people stay in their homes. One might have expected Goldman to redeploy a large measure of the government's largess to the less profitable, less risky, but urgently needed retail banking, and to spur local economies.

Would it have been too much to ask that Goldman would do this out of a sense national obligation and perhaps an ounce of gratitude? Not simply siphoning probably hundreds of billions out of the economy for proprietary trading, gorging themselves on government funded programs with virtually the sole purpose of enhancing their bottom line with the result all too often of increased prices for the consumer. One can seriously ask, did Goldman's trading in oil play an important role in pushing the price of oil to $147/bbl helping to crush the economy?

It could be said that here is a gross misallocation of government funds and programs. It stands to reason that the purpose of Goldman's transformation from investment bank to bank holding company was not simply to enhance Goldman's ability to trade and profit, swallowing billions upon needed billions away from a cash starved economy to bloat the bonus pool of those with the know-how and connections to game the system along with the Fed's and Treasury's programs and largess, thereby simply advancing their own interests. Written or not, there is a moral obligation here that goes far beyond pulling in the biggest buck!

 

Comments

[givesflack]

Demand a return of all bailout money and loans with a 24% applied to them to show what it's like to pay high interest. NOW
We should break up the "too big to fail" (lower case intentional)
Nationalize the banking industry to create real business investment.
Consumer Protection Agency with full protection
Take over telecommunications- where do they get the nerve to charge those prices?
Stronger Anti trust Bills to break up cartels
No Net Neutrality
Public Exchange for all stocks or, just get rid of Wall Street- it's only for the top 10% anyway- let them play with themselves.
Raise minimum wage lower pay at top extremely.
ITS OUR MONEY TOO- should be our slogan forever.
Income Equality Rights- A bill that makes wealth a sharable and fairer commodity so we all share in the benefits of society that we helped create instead of working to make other extremely wealthy while we get nothing.
Bring investigations to the open and bring all who created financial crisis to justice, name names and companies. Prosecute without leniency.
Undo all of Reagan Clinton and Bushes policies over the last 30 years to neutralize the underhanded work Greenspan, Paulson, Gramm, Gingrich, Summers, Rubin, etal...
Bring back all of FDR's policies and if you want to change them again, you can only do so if you strengthen them.
By the way, if Wall Street can receive welfare and claim bankruptcy without impunity why can we?
WE DESERVE BETTER AND WE DESERVE MORE

[givesflack]

It was a win/win to the power of 5 for the banks and those in government who handed them a windfall financial transfer from the treasury to banks in front of our faces! It's not about business it's about profits. Any legislation over the past 30 years was created to amass more profit and is completely anti business in nature. How does a investment firm go and by up companies, increase costs, decrease wages all the while pocketing all the profits and then sell it while shorting it at the same time while a century old company dies- that's not business that's profit! Wall Street has been killing off our economy, business, jobs, income in it's money lust to suck every last dime into their coffers as they can and are even more powerful to do so with the treasonous bailouts. We are suffering while the meaningless stock exchange is on another nation killing splurge past 10,000, and will get the rest of the treasuries money when the next and soon bubble burst. Greenspan/ Paulson/Be rnake are all rubbing their nuts together in glee since it only makes them and their selfish kind earn money they don't deserve.

84

[Carl Caroli]

Corporations do not have any social conscience and to expect otherwise is wishful thinking. That is why we need strict regulation and oversight. Giving them money without any strings attached is as silly as asking a bank to loan me money with no strings attached. Unfortunately when you have GS insiders pulling the levers of the Fed, this is what happens. They need to be busted up, as do the numerous banks too big to fail, and the "personhood" with respect to representation, campaign contributions and so far must be eliminated.

[TJCole]

Obama chose Goldman Sachs, over all those Americans that put their faith and trust and hopes in him...

Simple as that...

[iridium53]

I hope they send Paulson and Bush their share.
They deserve it.
They bamboozled the country into giving Paulson's former firm the money they needed to become the biggest. They made this happen for them.

What is particularly sad, though, is that Obama, Geithner, and Summers just went along with the whole deal - giving $billions to banks without the slightest strings, no quid pro quos and no laws restricting their bad behavior.

So, I suppose, GS should send them a bonus check too. Oh, sorry, that's right, they already did - campaign financing.

[emsique]

Drunken frat boys playing high stakes poker with Mom and Dad's money.

[evan la]

Taking all of the risks and none of the consequences.

I'm appalled.

[bayviking]

At least a few people understand what's going on

Thank you Mr. Learsy

[Philclock]

What's happening with the billions in bad debt owned by FNMA & FHLMC?

[williambanzai7]

Goldman Sting II

http://www.youtube.com/watch?v=o2OxIlCx3EA

[Antiks]

Scary stuff about the latest crises. Amy Goodman interviews William Black, who took on the 80's S&L scandal. http://www.democracynow.org/2009/10/15/black

[grateful4thedead]

Great article.

Mr. Learsy says: "Would it have been too much to ask that Goldman would do this out of a sense national obligation and perhaps an ounce of gratitude?"

There is no "asking" Goldman to do this, just like Obama "asked" at Federal Hall and Summers "asked" yesterday at Buttonwood. They have to be told by laws that are ENFORCED by our incompetent regulators.

The discount window must be closed to Goldman.
The bank holding status must be taken back; Goldman is primarily a hedge fund first, I'ment Bank second.
They must immediately retire the 20+ billion of FDIC guaranteed funds.
Goldman is not helping the country, they are using our cheap money to game the markets at the expense of the little guy.
The SEC must conduct a full investigative audit of the many allegations lodged against Goldman and it must be done by a new SEC commissioner, with Mary Schapiro relieved of her duties.

[Teadye]

As I recall GS was forced to change banking status. It wasn't by choice. Nothing like making things up to fit your opinion.

[rye mahall]

Bring FDR back to life, he will save the nation and the world from this nightmare

[rye mahall]

Ok. We are all in basic agreement. Goldman Suchs is an attack dog, one of the many hit men deployed by the intrinsically imperialist, depraved and amoral British monetarist system. After decades of misery and destruction laid at the feet of the citizens of the world; iIt is concluded by all sane and intellectually moral peoples that this system has failed humanity. In fact, it has duped the citizens of the more and most powerful nations into complicity in this wholly evil scheme of world destruction and domination. The peoples who have suffered at the wretched hands of British colonialism understand this intimately. Now Americans, who have in fact by their denial and lust for decadence become inescapably implicated in this whole mess, are now suffering dearly. This I hope proves to be the catalyst that affects true awareness of the root of the evil which will bring real and sudden thunderous change. Antithesis to the variety offered by the Big O, which is simply more British deception. Going backwards; Obama, Geithner, Summers, Bush, Cheney, Paulson, Bernake, Greenspan et al. Nixon, Johnson, Truman, et al. are traitors, to the core, of the constitution and true liberty. Get with the program people.

http://www.larouchepac.com/

[evan la]

When you grow up you will stop using cutesy little names for your adversaries. It cheapens your argument.

[Teadye]

Actually we are not all in agreement.

[peterg76]

"Goldman was not assisted by the government to become a voracious and even heftier investment bank."

Of course it was. What part of 'scam' are you confused about?

[diak0n0s]

Right you are.

BTW. . . . who's in charge of the economy?

[OrangeCatholic]

I think he was being polite.

[Jannsmoor]

Banks are chartered, highly regulated and given special treatment not available to the middle class. They are allowed to exist because they serve a higher societal purpose - namely providing security for those who have capital and providing capital to those can turn a loan into profit.

Exactly what purpose is served by Goldman buying and selling stocks and commodities? No good purpose. When they make a profit, the ultimate purchaser of oil, soybeans, wheat, etc. pays a higher price than they otherwise would have. So actually Goldman's highly touted trading programs are a drag on the economy because they such out capital that should be put to a better purpose than paying Goldman's employees bloated salaries and bonuses.

So where is the Fed? Bernanke may have been the right person to avert the second great depression, but he is proving himself to be the wrong person to continue as head of the Fed.

[outnow]

Sometimes one subconsciously brings about what he fears the most. Helicopter Ben has seen himself as the resurer of the crashing bubble with a government largess to insiders. Flying above in a helicopter and dropping the newly-minted bills down of the people is not what he actually did. Instead, Ben Bernanke showered money and privileges on GS.