Thursday, July 16, 2009
Arianna's delight
Arianna Huffington is full of joy that yesterday's Wall Street Journal editorial, titled "A Tale of Two Bailouts," spoke in less than glowing terms about Goldman Sachs. She thinks that it shatters the "left vs. right prism" with respect to financial regulatory policy.
Goldman doesn't need any help from a lowly blogger to defend itself, but the fact that it has been nimble enough to post very healthy profits during the second quarter (largely attributable to its trading activities) in an otherwise difficult business environment would make me think that the firm has a great number of very smart people working there, regardless of whether one believes that there is an explicit or implicit federal government guarantee behind it:
"Meantime, Goldman's own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.I don't know, maybe this is a WSJ taunt directed at the Obama administration trying to goad it into not rescuing Goldman, should the need arise at some point in the near future. I don't think that such a need is likely, nor do I think that it would be politically feasible now. Goldman should do well -- or not -- on its own.
"Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it's not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong."
Certainly Goldman had the benefit of a great deal of bailout money flowing through the zombie AIG conduit, as did other financial institutions who happened to be on the correct side of a contract with AIG (and not imagining that there was a significant counterparty or credit risk when the bet was made). Once the decision was made to cover AIG's bad bets, so that the firm as a whole would not collapse rapidly, perhaps resulting in an insurance crisis and a real business crisis, Goldman was helped, and the fact that its former chairman pushed through that decision while he was Treasury Secretary makes people wonder.
I am not so sure, however, that a "taxpayer backstop" exists for Goldman's trading activities, as we sit here in July 2009. Is there anyone out there on a trading desk who wants to share some first-hand knowledge of how other traders view Goldman right now?
17 Comments:
By 
, at
Thu Jul 16, 03:31:00 PM:
Matt Taibbi seems to agree how smart these guys are, but is not quite so gung ho on their ethics:
http://trueslant.com/matttaibbi/2009/07/16/on-goldmans-giganto-profits/
By , at
Thu Jul 16, 04:21:00 PM:
Funny how people love to criticise the ethics of companies that make it rain and pay a lot of taxes.
Who criticizes the government of California and the ethics of the people that run it when they DELIBERATELY have a made themselves insolvent
Ditto New Jersey and New York.
Who criticizes the ethics of a Congress that votes to spend huge amounts of money to pay off their political interest base and calls it "a stimulus".
E81, you have illuminated the issue exactly; the pass through from AIG into Goldman-Sachs. The Treasury cannot have been so dumb as to not know this would happen, but now Goldman-Sachs is the perfect foil for the collectivists now running our government.
-David
By , at
Thu Jul 16, 04:31:00 PM:
Matt Taibbi (and his father too, for that matter) are hardly my idea of the right judge of Goldman's ethics. The only communists to appreciate the value of capitalists are all Chinese.
By , at
Thu Jul 16, 07:57:00 PM:
Who criticizes the ethics of a Congress that votes to spend huge amounts of money to pay off their political interest base and calls it "a stimulus".
Don't say stimulus anymore. Use "stabilization".
By billy Bob Corncob, at
Thu Jul 16, 08:56:00 PM:
The figures need more analysis. Goldman and JPMorgan have lost their three principal competitors, Merrill, Bear Stearns and Lehman Brothers. The difference between two and five firms is all the difference in the world, both in the ability to exercise pricing power and in the demand for product (a grocery store goes out of business; its customers go somewhere).
Almost the entire, in fact, more than the entire gain came in FICC and Equity Trading. This was "client driven" according to Goldman - meaning not proprietary or for its own account. Some parsing of the 10Qs is in order once released. I believe however that they will likely show that this is not new business for the industry, but new business for Goldman (because of an absence of competitors).
This is important because people are drawing inferences about a turnaround led by financials. But there is reason to believe these financial entities in particular are anamolous since their only 3 competitors disappeared.
Of course, if the issue is investor confidence, then false positives are still positives; and the result should be additional confidence, a perception of lower risk, and greater investment -- all good things the Fed has had to contend with because of the liquidity trap we are in.
(You'll know when the liquidity trap is over ... the Fed will pump up the yield on Treasuries rapidly over a short term.)
By , at
Thu Jul 16, 09:22:00 PM:
Here's Karl Denninger at the Market Ticker today:
CNBC: You Owe America An Apology
By , at
Fri Jul 17, 06:23:00 AM:
Link,
It's banana republic crony capitalism. Between Goldman, GE, Warren Buffet, google, etc. Add in the zombies -- including GM, Chrysler, Fannie and Freddie.
I half believe the Goldman conspiracy theories. They facilatated runs on Bear and Lehman -- it's just a question of how much scienter they had doing this. The Democrats fixation on executive compensation wsa distraction.
By , at
Fri Jul 17, 08:59:00 AM:
How could GS deny the so-called "credit backstop"? It's a proven fact, or is there another explanation for TARP, TALF, etc etc etc.?
At this stage, nobody could argue the fact. What matters now is the impact it'll have on the company going forward: do we want to enforce least common denominator standards of risk taking, compensation, business mix, customer lists and employment rules? Or do we want globally competitive, even leading, banks?
If asked I'd vote for the latter, but I'm worried we'll get the former. Every social engineer in America, even the conservative ones, will now want to enforce their standards on GS.
By 
Cardinalpark, at
Fri Jul 17, 10:00:00 AM:
Goldman isn't making money due to any bailouts. First off, they didn't need it. It was imposed upon them by the Fed and Treasury because of the overall systemic risks catalyzed by the Lehman bankruptcy. Lehman is the caution to all banks - as is Bear Stearns, that a bailout isn't likely to be there for non-consumer deposit-taking money center or large regional banks.
And the FDIC stands ready to seize failing banks which don't endanger the system. They have and they do. the reason for bailouts is to prevent bank runs - i.e. depositors pulling their money. Full stop. Beyond that, it's about an analysis of systemic risk. That analysis maybe wrong, but that's why AIG, FNMA and Freddie were nationalized. Again, not a abilout insofar that the owners got wiped out in each case.
Goldman is making money for 2 reasons - 1) we have a substantially positively sloped yield curve. This condition is created by the Fed via interest rate reductions specifically to remotivate banks to take risk and make profit by, simplistically, borrwing short, lending long and making a big spread. 2) They have taken most of their medicine for bad assets already (of which they had a lot less than others bc they were better risk managers), and therefore benefitted from the rise is credit-related assets and increased liquidity, both prop and customer flow, without having offsetting losses.
JPM is also making a great fortune right now in the same way as Goldman. However, they have more medicine to take in tough consumer businesses like credit card losses and mortgages that offset some of their profits.
And BBC made the correct point earlier that each of them has much weaker competition that they had prior to the cycle. Reduced capacity and competition means the strong got stronger. Nothing new there.
By , at
Fri Jul 17, 11:03:00 AM:
From Link ...
We may never know what really happened with Lehman's failure.
SEC Chairman Cox removed the up-tick rule for short selling which had been in place for like 50 years. This rule helped prevent short-sellers from purposefully pounding a stock into the ground. Whatever you think of liberalized short-selling, non-bank financials are different because of the risk of runs and liquidity driven failures. Manipulating the credit default swap market isn't hard -- this was how the sharks yelled "fire" in a crowded theater. Basic disclosure driven rules should have been in place for this market -- but they weren't. The SEC had rules against naked short-selling, but they weren't enforced. This all helped contribute to Bear Stearns demise.
So after Bear's failure Cox put the up-tick rule back in place temporarily, but then let it lapse in the summer of 2008. A few months later and the same thing happened to Lehman. In the height of the panic, Cox put the rule back in place for financial stocks which helped to settle things down. If you wanted to run a controlled experiment in how to create financial panics this was it. [note to self -- this is more scientific than any proof of AGW]
The government engineered a bailout of Bear Stearns, but not of Lehman. From what I hear, just letting Lehman fold was a mistake. It seized up the credit markets for a couple of months. In hindsight, Lehman was too big to fail. The government engineered a bailout of AIG, for the same reason it should have done more for Lehman.
Both Bear Stearns and Lehman had assets greater than liabilities when they failed. These were liquidity driven failures. Traders at Goldman executed the panic. How much this was purely on behalf of clients, how much the Goldman traders were driving it, how much Blankfein knew, we'll probably never know.
Then the panic got so bad that Goldman and Morgan Stanley almost went under in October. After the Reserve Fund "broke the buck" we skated close to "bank runs" on money market mutual funds, which would have been disastrous. From what I saw, two days more of bad trends and Morgan Stanley would have been gone. If that had happened, Goldman would have been a week behind. Some people made a lot of money shorting financials during this period with shaky dealings in credit default swaps. The SEC has supposedly been investigating all this, but they couldn't find their own ass with both hands. I once had to explain to my incredulous NYPD detevtive relative that with the Madoff affair the SEC wasn't corrupt just incompetent. He couldn't believe how the SEC could be handed compelling evidence of a huge crime and just sit on it.
The independent investment banks were vulnerable to runs because they didn't have implicit backing by the government. Bear and Lehman didn't have to fail but they couldn't survive a panic. Compare the 1980s savings and loans, which couldn't be put out of business because they had insured deposits.
Don't kid yourself -- Goldman needed the TARP money back in October ... exactly when Paulson stepped in with it. It told the world the US wouldn't let them fail, so it stopped any self-fulfilling liquidity problem from happening. Since then Goldman has become a bank holding company, they've sucked on the financially lucrative tit of FDIC guaranteed borrowings. So now we have a implicitly government-backed entity making billions as a trading shop.
I could go on .....
Link, over
By , at
Fri Jul 17, 11:43:00 AM:
From Link -- A tale of two Citis
The merger that created Citigroup compounded problems at both Citibank and Travelers. Sandy Weill was called "The Postman" because he always delivered his numbers to Wall Street. He did this by doing M&A deals and then using "cookie jar" reserves to fuck with the numbers. But he needed an even bigger deal to keep the game going. John Reed was tired of overseeing the little UN that was Citibank's management.
Along the way, Sandy Weill had acquired Solomon Brothers. Buried away in Solomon's Philco subsidiary was a little energy trading operation out of England. I read a couple of years back that it had grown so much that it was generating as much as a couple of hundred million profit every year. This was run by one guy and a handful of people. He's supposed to be the smartest energy trader on the face of the planet, and he may be. As far as I could tell the net-net was that he was taking very long bets that energy would go up a lot in the very long-run. If you gave me a billion to play with and told me I could keep 10% of the ups ... I'd make that bet too. Nine years out of ten, this works. The tenth year, it'll blow up.
Citigroup got killed because of its involvement with Structured Investment Vehicles. This was a clever way to invest in AAA product with a lot of leverage and to thus skim the excess returns. Because it was supposedly off-balance sheet, no capital was required ... so on paper it gave Citi an infinite return on equity. This was the left hand not knowing what the right was doing as another part of Citi -- along with other banks -- was creating AAA product that wasn't so AAA -- this is the shit that wound up in the "Structured Investment Vehicles."
My point is that neither side of Citigroup knew the bodies buried in the other. No way can the Board or regulators understand this until it becomes a big problem.
By CarmelaMotto, at
Sat Jul 18, 04:46:00 PM:
Evil capitalists!
Everyone needs a boogeyman.
I don't think Goldman needed the TARP. They had very little exposure.
Anywho, no one point fingers at the state pension funds or failing economies of states. Continue with your boogeymen. It's easier.
By , at
Sat Jul 18, 07:39:00 PM:
So CarmelaMotto, how much an hour does Goldman pay you to plant astroturf?
By PD Quig, at
Mon Jul 20, 01:19:00 PM:
Tiger,
Follow Zero Hedge for a few weeks, and your Pollyanna stance re: GS and JPM will melt away. The list of their perfidy is too long to be recounted in this forum. From effecting the assasination of their competition through the US Treasury, to overt market manipulation, to pushing Hank to prop up AIG in order to receive 100pennies on the dollar counterparty payouts. The story may never be told, but it would be a doozy of a book.
By PD Quig, at
Mon Jul 20, 01:26:00 PM:
By the way: in which strawman world is 'evil capitalism' incompatible with idiotic government? What kind of limited thought process cannot accommodate both 1) venal politicians running states into the ground for the benefit of the unions and 2) powerful corporations paying both sides of the political aisle for their benefit? Why either or?
By , at
Mon Jul 20, 02:30:00 PM:
Link,
I stand with PD Quig on this. Goldman is a hedge fund that's now in bank holding company drag. They shouldn't have it both ways.
There are two many big companies making their deals with Obama & Co. It's banana republic crony capitalism. Meanwhile Healthcare would kill small business. Get used to permanent 15% unemployment.
Link, over
By Best Credit Cards, at
Thu Jul 23, 12:11:00 PM:
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