The Back Alley Archives

CHICAGO, Illinois (CNN) -- Goldman Sachs Group Inc. announced record earnings Tuesday of $3.44 billion for the second quarter of 2009.

Goldman's stock price leapt 77 percent for the first half of 2009, and closed Tuesday at $149.66 a share.

Without an ongoing series of front- and backdoor bailouts financed by U.S. taxpayers, most of Goldman's record profits would not have been possible.

In April 2009, Goldman Sachs' CEO, Lloyd Blankfein, who received record salary and bonus compensation of $68.5 million in 2007, said that bonus decisions made before the credit crisis looked "self-serving and greedy in hindsight." Now, they look self-serving and greedy with foresight.

Goldman set aside $11.4 billion for employee compensation and benefits, up 33 percent from last year. That's enough to pay each employee more than $390,000, just for the first six months of this year.

In June, Goldman bought back its preferred shares, repaying $10 billion it received from the government's Troubled Asset Relief Program, or TARP, and setting it free of limits on executive compensation and dividends.

But pay is not the key issue. U.S. taxpayers deserve a large cut of the profits, not the chump change -- less than a half-billion dollars -- they got from preferred shares in the company and the relatively small amount they could get from warrants in its stock.

U.S. taxpayers should insist that a large part of Goldman's revenues and profits belong to the American public. TARP money was just part of a series of bailouts and concessions that allowed Goldman to prosper at the expense of a flawed regulatory system.

In March 2008, Goldman, a primary dealer in Treasury securities, was among the beneficiaries of a massive backdoor bailout by the Federal Reserve Bank. At the time, Henry Paulson, former CEO of Goldman Sachs, was treasury secretary.

In an unprecedented move, the Fed created a Term Securities Lending Facility, or TSLF, that allowed primary dealers like Goldman to give non-government-guaranteed "triple-A" rated assets to the Fed in exchange for loans. The trouble was that everyone knew the triple-A assets were not the safe securities they were advertised to be. Many were backed by mortgage loans that were failing at super speed.

The bailout of American International Group, or AIG, ballooned from $85 billion in September 2008 to $182.5 billion. Of that money, $90 billion was funneled as collateral payments to banks that traded with AIG. American taxpayers may never see a dime of their bailout money again, but Goldman saw plenty.

Goldman may be the largest indirect beneficiary of AIG's bailout, receiving $12.9 billion in collateral, including securities lending transactions, from AIG after the government bailed out the insurance company.

The key question is whether Goldman asked AIG to insure products that were as dodgy as the doomed deal from Goldman Sachs Alternative Mortgage Products exposed by Fortune's Allan Sloan in his October 16, 2007, Loeb Award-winning article: "Junk Mortgages Under the Microscope."

If the federal government had not intervened and if AIG had gone into bankruptcy, Goldman probably would not have received its $12.9 billion from AIG. U.S. taxpayers and the American economy are owed some of the bailout money passed directly through AIG to Goldman.

Wall Street firms also reaped trading windfalls when AIG needed to close out its derivative transactions. This was the most lucrative windfall business in the history of the derivatives markets. When AIG left money on the table, it was U.S. taxpayer money.

Goldman Sachs was granted bank holding company status in the fall of 2008. It already had the temporary ability to borrow from the Fed through the TSLF, which would have expired in January 2009. Now it has permanent access to lending from the Fed.

Goldman can now compete with the largest U.S. banks and borrow money at interest rates pushed as close to zero as possible by the Fed. Goldman gets a further benefit: favorable accounting rule changes. In addition, Goldman issued $30 billion of debt with a valuable government guarantee that remains outstanding.

Meanwhile, the American public faces a rising unemployment rate, falling housing prices, rising unemployment, higher local taxes and a dismal economic outlook.

Interested men with reputations and fortunes at stake rode roughshod over public interest. The American public is owed part of the profits Goldman was able to make because of the largesse of our Congress.

Wall Street's "financial meth labs," including Goldman's, massively pumped out bad bonds and credit derivatives that have melted down savings accounts, pension funds, the municipal bond market and the American economy. Risky assets, leverage and fraud led to acute distress in the global financial markets.

The biggest crime on the American economy may go unpunished with no consequences to the perpetrators. The biggest crime was not predatory lending, but predatory securitizations, packages of loans that did not deserve the ratings or prices at the time they were sold. They ballooned what should have been a relatively small problem into a global crisis.

Wall Street owes the American public for its key role in bringing the global economy -- and in particular, the U.S. economy -- to its knees. Goldman is not alone in owing the American public. It is not the worst of all of the Wall Street firms. But among all of Wall Street's offenders, it is the most well-connected, and Goldman was the firm that cleaned up the most as the result of government bailouts.

We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business. Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail. But that is all but impossible now and for the foreseeable future. Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.

If there is a lesson in this week's tale of two banks, it's that it won't be enough to give the Federal Reserve a mandate to "monitor" systemic risk. Last fall's bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share. Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer's dime.

One policy response to the incentives created by last fall's bailout is simply to restrict the proprietary trading done by the subsidiaries of bank holding companies that enjoy both FDIC deposit insurance and an implicit government subsidy on their cost of capital. This is what Paul Volcker proposed, only to be overruled by Tim Geithner and Larry Summers. Another answer would be an FDIC-style bailout tax, perhaps tied to leverage ratios, for those in the too-big-to-fail camp. Developing a template to facilitate the seizure and orderly winding down of failing financial giants is also an essential element of whatever reform Congress cooks up.

here's the thing - GS knew they were going to have a great quarter so now we all know why they were so eager to pay the TARP funds back ASAP

having said that, i don't know why people (lawmakers) are so enraged...these companies are SUPPOSED to be making money...it benefits the economy, it benefits our national GDP, it benefits employment....now that they're showing profitability, there's all of a sudden an "ISSUE"...lmao.

Lately the topic of Goldman's VaR has taken on significant prominence, not least because as Zero Hedge disclosed yesterday, it hit a record high. The implications for this were large enough that even Bloomberg picked up on this story. Many readers raised questions of how is it even remotely possible for the company to have a VaR in the low-mid $200 MM ballpark, yet to post a record number of $100MM+ trading days in Q1; Zero Hedge is willing to wager that the upcoming 10-Q release will demonstrate another record number of $100MM+ days in the just closed quarter as well. How is that possible?

The clue may come from a February 5 letter by the Federal Reserve to Goldman CAO Sarah Smith. The letter had come in response to GS requests for "temporary exemptions from the application of certain aspects of the Board's Market Risk Rules for state member banks and bank holding companies and the Board's general risk-based capital rules for bank holding companies." Basically through the end of 2009 Goldman is basically using non-traditional. {. . .}

The letter goes into detail explaining why a bank needs to follow a MRR VaR methodology. Yet what is not made clear is i) why does Goldman need almost a full year of alternative VaR calculation and MRR exemption and ii) what is the protocol for the SEC to enforce VaR compliance when Goldman's ultimate regulator is the Federal Reserve. The exemption raises critical questions not only with regard to the validity of the company's indicate VaR, but also downstreaming capital requirement reports. Zero Hedge would be remiss to point out that a very close relationship between the most critical financial company in the world and the most discredited regulator (SEC) does not bode well for confidence in this critical risk indicator, which as many have pointed out, is clearly the main metric by which to measure not only the performance, but the risk capacity of the world's largest government-backstopped hedge fund.

Don't be so myopic, rad. I'm sure you already know the stuff discussed....but the video below does a decent job summing up the problem with GS (Beck gets a little tinfoil or hyperbolic at times...but he's right on with this one):

http://www.youtube.com/watch?v=_wVQ3_ZaYB4#ws

here's the thing - GS knew they were going to have a great quarter so now we all know why they were so eager to pay the TARP funds back ASAP

having said that, i don't know why people (lawmakers) are so enraged...these companies are SUPPOSED to be making money...it benefits the economy, it benefits our national GDP, it benefits employment....now that they're showing profitability, there's all of a sudden an "ISSUE"...lmao.

Also, I should point out that GS is the lawmaker. You can't view them as separate from the government. They run the government.

http://www.youtube.com/watch?v=VSwWy4E6I04#

It would be OK if we didn't bend over backward at every turn to help GS.

guy is off the chart AA...he's comparing geithner to bin laden??? c'mon....guy's a joke.

here's the thing - GS knew they were going to have a great quarter so now we all know why they were so eager to pay the TARP funds back ASAP

having said that, i don't know why people (lawmakers) are so enraged...these companies are SUPPOSED to be making money...it benefits the economy, it benefits our national GDP, it benefits employment....now that they're showing profitability, there's all of a sudden an "ISSUE"...lmao.

No, the real objection of Taibbi and others (myself included) is that Goldman managed to steal $13 billion dollars of American Taxpayer money, without which they would not exist today. Having stolen that money through claims of imminent financial collapse made by their former head, Henry Paulson, at their urging, they now have speculated with that taxpayer money and kept the proceeds.

Nobody would object were Goldman to return not only their "TARP" money but also the entirety of the "passthrough" benefits they have received, specifically but not exclusively the $13 billion dollars that was funneled through AIG to them.

But if Goldman had done that, they would have posted a huge loss, and in addition would not have had the money to repay TARP.

Nobody I am aware of cares if a firm is able to turn a legitimate profit through their actions in the market. We object not to profit, but to blatant chiseling of the taxpayer after a company or individual makes a bad bet due to their own incompetence or willful blindness, then demands that the taxpayer cover it, yet when their bets turn out well, they keep the money and hand it to their "associates."

That's robbery, and I and others will continue to point it out until the shills who advocate for same and try to excuse it, along with Goldman themselves, are held to account.