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!