November 25, 2008

Is what's good for Goldman Sachs good for America?

Treasury Secretary Hank Paulson (former Goldman Sachs CEO) has bailed out Citi-whatever, whose "consigliere" is former Treasury Secretary Robert Rubin, (a former co-CEO of Goldman Sachs) on terms that were described in the Washington Post as:

"It strikes me as unbelievably generous," said a former Fed official who has been in touch with Citigroup.

Commercial bank Citibank's merger with investment bank Salomon Smith Barney was illegal under the New Deal Glass-Steagall Act, but Rubin helped get it made legal in the late 1990s, just before quitting the Clinton cabinet and going to work there.

Meanwhile, AIG, a close associate of Goldman, is getting a rolling bailout that appears to be mounting to the sky.

Only one massive financial institution didn't get a bailout and been allowed to fail: the investment bank Lehman Brothers. After it went bankrupt, the economy fell off the edge of the world.

Is it just a coincidence that Lehman Brothers was a rival of Goldman Sachs?

Ironically, just as Rubin's reputation for genius is is being flushed away, three of his proteges -- Geinther, Summers, and Orzag -- are getting top economic jobs in the Obama Administration. Funny how that works...

For some long term perspective on a dress rehearsal for what's happening now on much more massive scale, here are John Brimelow's reviews from 2000-01 in VDARE.com of two books on the collapse of Long-Term Capital Management (LTCM) in 1998 (first and second):

LTCM was set up to profit from irrational disparities in valuation between similar financial assets, primarily bonds. The assumption that these occurred randomly in a normal distribution pattern had become an article of religious faith at U.S. Business Schools in the previous 20 years. Two of the progenitors of the view, Robert Merton of Harvard, and Myron Scholes of Stanford (and of the Black/Scholes option valuation model) were LTCM partners. (Fischer Black had had the judgment to die an untimely death previously.) Careful reading of their work reveals that they assumed continuous markets and stable volatility ranges (neither always present in reality) and they acknowledged but ignored the fact that probability distributions in financial markets often show "fat tails" -- in other words that extreme events occur far more frequently than a normal curve would predict. But they nonetheless built a "school" of like-minded thinkers and disciples. This group had become very influential on Wall Street by the late 90s.

Wall Street, in a sense, became a victim of the principal vice of the U.S. academic profession: the eagerness to set up introspective communities, dedicated to a dogma, which insulate themselves from fact-based criticism by exclusion and intimidation rather than argument. ...

Given that LTCM's "stunning losses betrayed the flaw at the very heart - the very brain - of modern finance" and that the concept it used "prevails at virtually every investment bank and trading desk," it is very strange to find Greenspan and Rubin (when Secretary of the Treasury) blocking all efforts to improve transparency and improve regulation even to the extent of forcing out the former CFTC head, Brooksley Born. ...

The saga of the Long Term Capital Management hedge fund - its rise, fall, and the peculiar circumstances surrounding its rescue in September 1998 - more and more appears paradigmatic of Clinton Era finance. Esoteric and secretive in action, operating through special relationships and understandings, involving greed and ambition on astonishingly uninhibited scale, and ultimately giving rise to suspicions of ominous fusion between private commercial objectives and the formulation of public policy, it lays out a pattern likely to become all too familiar as documentation of the period becomes more available.

43 comments:

Anonymous said...

GS probably benefits from a GM bankruptcy filing by being long GM CDS, but don't expect Congress to figure that out.

SKT said...

Just compare how they treated the Detroit auto executives to how they treat Wall Street. No Wall Street executive was summoned to Congress and berated. Over the weekend, it was announced Citigroup was in distress, and without any debate or any conditions, they were quickly given $20 billion. The automakers, which collectively are bigger than all of Wall Street put together, asked for the same amount *in loans* and were denied.

There's no doubt that the financial departments of the government are very New York centric, Wall Street centric. But what's worse is that so many of their leaders come from one area, investment banking, and in fact one firm, Goldman Sachs. It's like whatever is good for Goldman Sachs is good for the country.

Fungible said...

Governor of the Bank of Canada Mark Carney is a Goldman Sachs man too. Goldman Sachs holds some options on our biggest media group (Canwest) too, meaning Goldman alumni will be in charge of the banks *and* a large chunk of our media.

Someone (Economist?) recently did a piece on the large amount of Goldman guys in very high places around the globe; might as well just outsource government to them, FFS.

Canada did a bailout proportional to the USA's, $75 billion in our case, but the press is so useless it is being sold as a money making investment (!) to Canadians.

This is "end of democracy" stuff.

Henry Canaday said...

What appears to be unique about the current collapse is not the use of state-of-art financial models, but their application to a debt sector, U.S. home financing, that 1) had been systematically corrupted by government, and 2) was huge enough, in trillions of dollars, to bring down the U.S. and global financial systems.

headache said...

Well, you have to give it to them. They had us believe they were geniuses, meanwhile they had their hands deep in the governmental cookie jars. And when they got caught out, in front of our noses they are using OUR money to fix the mess they created. On top their proteges are being given lucrative posts in the new game (which they have decided on), and next they will tell us again that we are just dunces and they are gods. There's a word which describes this attitude, but I cannot think of it now...

Pat Shuff said...

Occam's Razor would hold that stupidity and incompetence are more ready explanations than conspiracy. Conspiracies are messy, complicated with moving parts and timings. As the saying goes, three can keep a secret if two are dead.

Anonymous said...

"No Wall Street executive was summoned to Congress and berated."

Some were. The former CEO of Lehman Brothers was.

By the way, the fellow who turned down Lehman's request for assistance, precipitating that firm's bankruptcy (and all the crap that subsequently hit the fan) was Tim Geithner (two weeks later he agreed to throw Goldman a life line). Geithner is now going to be Treasury Secretary.

- Fred

rightsaidfred said...

>>>>Funny how that works...

And now it's time to cry.

ben tillman said...

Wall Street, in a sense, became a victim of the principal vice of the U.S. academic profession: the eagerness to set up introspective communities, dedicated to a dogma, which insulate themselves from fact-based criticism by exclusion and intimidation rather than argument. ...

It sounds like John Brimelow's read The Culture of Critique.

Stopped Clock said...

If the US auto companies file for bankruptcy, it will send a signal to US consumers that American cars just can't cut it against the Japanese. They'll never fully recover their image and likely will never get out of bankruptcy.

John S. Bolton said...

I'm wondering if they will try to blast through the credit jam by loosening capital requirements, making them easier for a given bank in proportion as it increases its loan volume.

Anonymous said...

One thing to keep in mind is GS handles virtually all the Fed's trading business.
That is, when the "plunge protection team," decides to print money and buy into assorted indexes, Goldman handles the orders.
Just to be clear, at certain strategic intervals, Bernanke creates money electronically, then uses that "money" to assert massive buy order's into the major indexes at certain price points to keep the market from falling off a cliff.
Trader's, particularly the hedge funders, who would normally aggresively short the market, know this, and that makes them take pause, at important price points, for fear of Bernanke arriving and clobbering them if they take huge short positions, and that suits the Fed just fine.
This may explain why, in past quarter's when other brokerage firms were posting significant losses, Goldman was posting significant profits.
Another reason for the profits is Goldman, due to it's close position with the Fed, can use Fed information to insider trade.
This may be one of the reasons that it has so far been impossible to get the minutes records of the "plunge protection team" meetings.
Last I heard, when the records were subpeanaed, the "team" claimed they kept no such records of their many meetings.
These meetings may take place just amongst themselves, or include the CEO of Goldman Sachs.
With no such records available for congressional review, insider trading by Goldman is fully protected by the President. Goldman is an agent for the President, and the Fed.
So, bottom line, Goldman Sachs is the right hand man of the Fed, though undeclared for obvious reasons.
So the canary in the fiscal coalmine is Goldman Sachs. If you start seeing them bellying up, buy guns, buy gold, stock up on K Rations, and secure your house.

Anonymous said...

The first thing Obama should do is regulate hedge funders, and force them to be transparent.
The most important new rule for them would be to not allow them to trade commodities on margin.
If you've noticed oil prices dropping, the major reason is hedge funders getting massive margin calls, effectively taking their sociopath sensibilities out of the market.
They were trading up oil futures regularly, and I believe were primarily responsible for the pointless price rise.
Why should we allow forty-something aspiring sociopaths, with 10 Billion dollars in margin buying power, or more, to sit in their underwear in a mansion in Connecticut, and trade up world market oil prices, simply because they can?
Why do we need this?
With a stroke of a pen, Bush could have stopped the oil runup in it's tracks, simply by regulating that hedge funders can only trade commodities with their OWN money. No margin.
It would have made a difference, but, for whatever reason, he didn't, and accelerated the decline in consumer spending.

MQ said...

Good post and good thread. This stuff is true.

Eric said...

The automakers aren't going bankrupt. They would like to, so they can get out from under union contracts, but I don't think Congress will allow it - the Democrats need all that UAW phone bank and GOTV support when the next election rolls around.

Anonymous said...

Esoteric and secretive in action, operating through special relationships and understandings, involving greed and ambition on astonishingly uninhibited scale, and ultimately giving rise to suspicions of ominous fusion between private commercial objectives and the formulation of public policy,...

Yes, this is how banana republics are run. We've got the banana republic government. We've got the banana republic MNC'S. All that's left is to fill the place up with banana republic citizens.

--Senor Doug

RKU said...

Yes, this is how banana republics are run.

Yes, indeed!

I've been discussing it with a friend or two, and we honestly can't bring to mind another example of a "First World" country of the last couple of centuries whose top-level government officials are so totally corrupt, incompetent, and so totally uninterested in the well-being of their own citizens.

The closest that came to mind was the Ottoman Empire during the last century or so of its disintegration, but no one back then regarded it as a "First World" country.

bbartlog said...

I'm wondering if they will try to blast through the credit jam by loosening capital requirements

You haven't been paying attention. They already did this (maybe a couple years back at this point) to keep the gravy train rolling. But sometime earlier this year the net capital holdings of many of the major banks went negative, at which point it no longer matters what multiple they allow you.

testing99 said...

Democrats DO want Detroit bankrupt and out of business. As one commenter noted, a bankrupt Detroit is finished, consumers will never ever buy them again.

Democrats are coastal elites, I-Bankers, Silicon Valley Venture Capitalists, Lawyers, entertainment moguls, publishing, etc. They HATE the Auto companies.

Case in point, Waxman, Mr. Green himself, has replaced Dingell and promises to load up Detroit with an auto-industry killing "Green" requirement, one after another. Dems are not stupid -- they know this will KILL Detroit and want it killed.

I've blogged on this extensively, most of American politics is based on the Coastal Elites wanting their way (as Steve points out cheap labor, expensive land) and the interior populists wanting the reverse.

Somewhat OT: Obama and McCain are going to combine to push Amnesty and Open Borders, in a recession. Importing about 40 million Mexicans. In times of economic crisis. This is part and parcel of the coastal elites.

Anonymous said...

headache said...
" There's a word which describes this attitude, but I cannot think of it now..." 11/25/2008

Hubris is the word.

Nemeses is the end game as the night follows the day.

Dan Kurt

SFG said...

I wonder...did Goldman let Lehman die because they thought 'if we bail these guys out everyone will scream Jewish Banking Conspiracy'?

Remember the Jewish guy who didn't make the cut at the Harvard Crimson...and it turned out it was because the other nine guys were Jewish and were nervous about things looking too monolithic?

ben tillman said...

Occam's Razor would hold that stupidity and incompetence are more ready explanations than conspiracy.

No.

Stupidity is not in anysense "simpler" than self-interest.

CJ said...

Democrats may indeed be coastal elites, but the UAW is one of their big contributors and sources of election volunteers (their collective agreements give them election day off work in order to help the Dems) and the state of Michigan is presently under Dem management with two D Senators. Hence the very high probability of a bailout.

Svigor said...

Hubris is the word.

He was being sarcastic, and the word is chutzpah.

Big Bill said...

"There's a word which describes this attitude, but I cannot think of it now..."

In their native tongue it is "chutzpah", I believe.

Big Bill said...

"we honestly can't bring to mind another example of a "First World" country of the last couple of centuries whose top-level government officials are so totally corrupt, incompetent, and so totally uninterested in the well-being of their own citizens."

Gentlemen, in their culture one just moves from country to country until one finds a friendly regime. At which point one may stay there until it becomes unfriendly, and then one moves on. There eternal truth is that no place is truly home for them.

As far as citizenship, what difference does it make who the other passport holders are?

This year it may be Anglo-Saxons. A generation from now it could be Pakistanis and Mexicans.


Fifteen years ago Prague, London and Moscow were hot.

Fifteen years from now it could be Shanghai (again!) or Singapore, or Tallinn.

This whole notion of "fellow-citizens" is so "closed borders", so mid-20th Century.

Anonymous said...

Anonymous said: "So the canary in the fiscal coalmine is Goldman Sachs. If you start seeing them bellying up, buy guns, buy gold, stock up on K Rations, and secure your house."

Well, I hope you already got some gold because it's becoming harder and harder to get a hold of any nowadays:

Demand for Gold Coins Creates Shortage

Jun said...

RKU: I've been discussing it with a friend or two, and we honestly can't bring to mind another example of a "First World" country of the last couple of centuries whose top-level government officials are so totally corrupt, incompetent, and so totally uninterested in the well-being of their own citizens.

Pick any random country in Western Europe -- Britain, France, Germany.... Even Iceland, for cripes sakes. :-|

David Davenport said...

If the US auto companies get big bailout handout $, it will send a signal to US consumers that American cars just can't cut it against the Japanese. They'll never fully recover their image and likely will never get out of insolvency.

PA said...

My first impression is that PC thrives in all-white places, like Canada and Vermont. Then again, not necessarily:

All-white (for the most part), PC:
Canada, Minnesta, Australia

All-white, non-PC:
Utah, East-Central Europe, Russia, Italy, Austria, Arabs/Turks if you count them as white

Diverse, PC:
The UK, California, US Northeaset

Diverse, non-PC:
The South, the old South Africa

PA said...

crap. That comment was meant for the Canada thread.

Anonymous said...

when did you ever think this was a democracy?

Anonymous said...

Is Silicon Valley really coastal (and cool) enough to jerk the tears of the Democrats, or any elite for that matter?

Somehow I doubt it. Back in 2001, the eternal-high-school-jocks of the boardrooms were laughing at the poor "nuuuuuuuuuuuurds" of the dot-com bubble.

Now a good many non-nerds are in the same boat.

AS said...

Plunge Protection Team discussed on CNBC

http://www.ritholtz.com/blog/2008/11/cnbc-discussing-the-plunge-protection-team/

Mr. Anon said...

"testing99 said...

Somewhat OT: Obama and McCain are going to combine to push Amnesty and Open Borders,..."

Would that be the same John McCain you were recently urging us to vote for? A man who is now free to look his constituents square in the eye and give them some of his patented straight talk (funny, but his straight talk always amounts to "screw you").

I agree with your prediction however. Look for it to happen when Kennedy croaks. The Senate will get all weepy-eyed and pass the "final nail in the coffin of America" bill........"for Ted". Orrin Hatch might even sing one of his corny country and western songs to mourn the passing of his good friend.

RKU said...

In many respects, America's situation today seems to recall that of Weimar Russia in the late 1990s, when the government went bankrupt and as a consequence the entire national wealth was looted by the Oligarchs.

However, in America, it's actually the Oligarchs who've gone bankrupt...but are nonetheless still using the opportunity to loot the entire national wealth!

I get the feeling there's also some other similarity out there...but I just can't quite put my finger on it...

SKT said...

I'm not a jock, and I thoroughly enjoyed it when all those California computer freaks lost their jobs in the dot.com bust, just because of their arrogance and contempt for average Americans.

Anonymous said...

Arabs/Turks if you count them as white - PA

If you do, then you yourself are buying into PC.

Ronduck said...

So the canary in the fiscal coalmine is Goldman Sachs. If you start seeing them bellying up, buy guns, buy gold, stock up on K Rations, and secure your house.

The post-election hysteria caused me to finally get out and buy a gun like I always wanted to. The clerk at the gun counter at Walmart said that normally their store sells 1 gun a day, but since the election they have been selling 8 a day. I am now the proud owner of a Mossberg 535.

nckdn said...

Please plug this: we're all suffering.

http://www.cbsnews.com/stories/2008/11/28/eveningnews/main4637578.shtml


“The foreclosure crisis began mostly as a problem for lower income households,” says Mark Zandi of Moody’s. “It is now a problem for all households: low, middle income and even higher income households.”

More than 2 million prime mortgages, traditional loans for people with good credit, are now delinquent. That’s 624,000 more than this time last year, according to the mortgage bankers foundation, Tracy reports.

“We didn’t necessarily expect the distress levels that we are seeing at this point,” says economist Mark Fleming.

It used to be if you couldn’t afford your mortgage you could always try to refinance or sell your home and pay off your loan. But these days, for a lot of people, those options no longer exist.

That’s because 12 million households now owe more than their homes are worth, according to Moody’s.

Homeowners with risky adjustable rate mortgages are getting help from banks, but there are no programs to aid those who already have good loans but no jobs.

“I wake up in the middle of the night thinking about it,” says Terri Osier, a struggling homeowner.

Meanwhile, Judy Jones is hoping her bank will lower her payments until she finds work.

“If they don’t, I’m not going to drain my savings, I am not going to drain my 401k, I am going to walk away,” Jones says.

David said...

Mr. Anon said

Look for [passage of an amnesty bill] to happen when Kennedy croaks. The Senate will get all weepy-eyed and pass the "final nail in the coffin of America" bill........"for Ted".

I've been predicting that since the tumor.

"His last wish was that we should pass this bill."

I even think Ted will make an "heroic" last appearance on the floor of the Senate and, covered by all the major networks, weakly rasp out a plea for passage, including cutaways to the rest of the teary-eyed old frauds, including Hillary. The lemmings will eat it up. The Wall Street Journal will be in the ninth heaven: "This, finally, erases Chappaquiddick" will be their editorial line. Just wait and see.

(Here was a rehearsal.)

David said...

headache said

they will tell us again that we are just dunces and they are gods.

They've always told us this. Most recently, Ayn Rand's latest hatchet man (Yaron Brook, dual citizen) pushes the line "they should be paid handsomely for their services." The parachuting Einsteins of Wall Street should be regarded with absolute reverence. On your knees, you shareholding rabble!

none of the above said...

People protect their own kind--they identify with their problems, and often are willing to try to help them out of their difficulties, even when the difficulties are of their own making. In recent years, there've been scandals about this w.r.t. doctors covering for one another, and cops, and soldiers, and priests. It's human nature.

When the financial meltdown happened, the folks deciding how to respond were all wall-street types or people who identified with them. They covered for their friends, for their old colleagues, for their kind of people. Although there was plenty of scope for conspiracy (a culture of secrecy, networks of people who trust one another with big things, obscene amounts of money at stake), you don't need one to explain what happened.

What's interesting to me is how willing the politicians and media types have been to cover for it. The vote was lined up so that both parties voted for it, and both major presidential candidates voted for it. Maybe this was good, maybe it was bad, but it made sure that there would be no clear way for voters to have any voice. Our opinion is not wanted.