The more I think about it, the more convinced I am that some of that $700 billion authorized by Congress to bail out the financial system will be diverted to serve private interests. I am not an accountant, and I don’t know much about the complex world of derivatives. But I know how to Google “Goldman Sachs.” And I found the investment bank was in dire distress before the bailout package was approved by Congress. Here’s a mid-September report from The Guardian (an English newspaper):
Goldman Sachs has rejected predictions of the death of the traditional Wall Street business model, in spite of the worst slump in the investment bank’s profits since it went public in 1999. Third-quarter earnings dived 70% to $810m (£450m) as the credit crunch crippled financial markets and the firm’s usual flow of advisory fees on corporate deals evaporated.
You and I know that the traditional Wall Street business model has since died, and that former investment banks (including Goldman Sachs) are reinventing themselves. Meanwhile, the former CEO of Goldman Sachs, Henry (“Hank”) Paulson (pictured above with President Bush) – now secretary of the treasury – has sold the nation a $700 billion bill of goods. The sales pitch was that the financial system would fall off a cliff and Wall Street would collapse if our elected representatives didn’t pledge billions in future taxes to the mysterious bailout plan. So what has happened? Here’s the latest Associated Press report:
Wall Street tumbled again Monday, joining a sell-off around the world as fears grew that the financial crisis will cascade through economies globally despite bailout efforts by the U.S. and other governments. The Dow Jones industrials skidded nearly 500 points and fell below 10,000 for the first time in four years, while the credit markets remained under strain. The markets have come to the sobering realization that the Bush administration’s $700 billion rescue plan won’t work quickly to unfreeze the credit markets, and that many banks are still having difficulty gaining access to cash. That’s caused investors to exit stocks and move money into the relative safety of government debt.
While the rest of the financial system is falling off that cliff Paulson warned us about, Goldman Sachs seems to be doing much better, thank you. Here’s a recent report:
Billionaire investor Warren E. Buffett will pump at least $5 billion into Goldman Sachs, restructured this week as a bank-holding company, as the firm tries to quell concerns about its access to financing…. The investment by Buffett represents a major vote of confidence in the battered financial system from one of the country’s most respected investors.
Well, maybe not so much a vote of confidence in “the battered financial system” as a vote of confidence in Goldman Sachs. And with good reason. Here’s a stock analyst’s report from last week:
Goldman Sachs’ share price is still $80 short of its high of $200 during the summer, but Buffet’s investment in the company has caused other investors to take note, and the stock today jumped by $7 as a result. This is at least partially the result of increased consumer confidence caused by Buffet’s investment, and I’d be willing to bet that Buffet’s support is going to snowball, leading Goldman Sachs to a recovery.
Everywhere I look in this murky mess, I see the shadow of Goldman Sachs. That’s where Neel Kashkari (photo at left) – the Treasury Department official who will reportedly have the job of running the $700 billion bailout – used to work, for example. And not only was Paulson the firm’s chief executive but his former No. 2, Robert Steel, was vice chairman of Goldman. Another former Goldman Sachs executive, Karthik Ramanathan, serves as director of the government’s Office of Debt Management.
It looks to me as if the $700 billion package might not bail out the financial system, after all, but it will probably bail out Goldman Sachs. The irony is that I think it was someone at Goldman Sachs who started bundling risky mortgages and slicing the bundles into “tranches” that could be sold like stock. I know the giant investment firm was a major force in that market. Here’s an excerpt from a column by Allan Sloan in Fortune magazine last October:
It’s getting hard to wrap your brain around subprime mortgages, Wall Street’s fancy name for junk home loans. There’s so much subprime stuff floating around – more than $1.5 trillion of loans, maybe $200 billion of losses, thousands of families facing foreclosure, umpteen politicians yapping – that it’s like the federal budget: It’s just too big to be understandable. So let’s reduce this macro story to human scale. Meet GSAMP Trust 2006-S3, a $494 million drop in the junk-mortgage bucket, part of the more than half-a-trillion dollars of mortgage-backed securities issued last year. We found this issue by asking mortgage mavens to pick the worst deal they knew of that had been floated by a top-tier firm – and this one’s pretty bad….
This issue, which is backed by ultra-risky second-mortgage loans, contains all the elements that facilitated the housing bubble and bust. It’s got speculators searching for quick gains in hot housing markets; it’s got loans that seem to have been made with little or no serious analysis by lenders; and finally, it’s got Wall Street, which churned out mortgage “product” because buyers wanted it. As they say on the Street, “When the ducks quack, feed them.”
Guess what the first two letters in GSAMP stand for? You guessed it: Goldman Sachs. So now we are asking these former Goldman Sachs characters to go and buy up the junk loan pieces, put them together again and re-sell them – then turn over the profits to us. Isn’t that like sending a skulk of foxes to put your hen house in order? As Abraham Lincoln said, I laugh because I must not cry.