For those who don't know, investment banks are not like commercial banks where you have your checking and savings accounts. Investment banks do not accept deposits. .They provide various services to the corporate and financial world. One of their principal businesses is underwriting new stock offerings, IPO's, and in more recent years they've gotten into commodity trading in a big way. Another important part of their business is creating or inventing new financial instruments , which they believe they can convince investors that they can't live without including this new type of investment in their portfolio.
Much of what I'm about to say about investment banks in general and Goldman Sachs in particular, I got from two sources, one, a New York Times blog called Deal Book and the second source was an article titled " The Great American Bubble Machine" written by Matt Taibbi for none other than Rolling Stone.com. Mr. Taibbi is clearly not a friend of free enterprise/capitalist economics. But that's okay. As I've said before, sometimes those on the left have something to say that we on the right should listen to.
Let me share a couple of quotes from Mr. Taibbi. The first quote refers to what the Secretary of Treasury had to say about the crisis in 2008.
" Last year, when Hank Paulson told us all that the planet would explode if we didn't fork over a gazillion dollars to Wall Street immediately....the entire rational....was that Wall Street once rescued, would pump money back into the economy, create jobs, and initiate widespread recovery. This , we were told, was the reason we needed to pilfer massive amounts of middle-class tax revenue and hand it over to the same guys who had just blown-up the financial world. We save their asses and they would save ours. That was the deal."
I still believe that the government had no choice but to bail them out. The alternative would have been even worse for us. But what about where Taibbi accusation that these were the people who were responsible for just blowing up the financial world. We shall see. Now for the second quote.
" From tech stocks to high gas prices, Goldman Sachs has engineered every major manipulation since the Great Depression _ and they're about to do it again."
So here is what I learned starting with the Internet stock bubble that burst in the 80's. Goldman Sachs was the primary underwriter of Internet IPO's ( initial public offerings ) and they were very successful in spite the fact that most of these new companies failed. Why? Because they were using practices known as " laddering" and " spinning". Suffice it to say that these practises drove prices up for these new stock with no justified basis. These practises are illegal. Goldman was sued in federal court where without admitting any wrong doing they agreed to a settlement for $110 million. Seems like a lot right? No. They made billions while the NASDAQ alone lost $5 trillion when the bubble burst. That is right; Goldman Sachs made billions while the investors lost trillions. The $110 million fine was a joke.
What about the housing bubble? Early in this decade a Goldman Sachs wizard came up with a two pronged plan. First they would convince commercial banks and other lending institutions to approve mortgages for people with little or even bad credit ratings which they would put together in packages called Collateralized Debt Obligations and sell them to investor as supposedly sound investments. Goldman also pressured the rating agencies, Moody and Standard & Poors, to give these instruments AAA rating. With that rating they had no trouble selling these CDO's that were in fact backed by junk mortgages. One of rating agencies went so far as to say that they estimated there would be no more than 10% defaults. It turned out that there were 18% defaults in only 18 months. The second prong of the plan was that Goldman convinced AIG and other insurance underwriters to issue insurance against default of these mortgages using instruments they called " credit default swaps", which are difficult to explain; but Mr. Taibbi used the following description:
" The swaps were essentially a race track bet between AIG and Goldman. Goldman was betting there would be a lot of defaults and AIG was betting there would not be a lot of defaults."
Goldman Sachs was betting against the very thing that they were promoting to their investors. This fraud, right? Yes it is. And about five years too late they were sued in federal court. But by the peak of the housing boom, in 2006, Goldman Sachs had already underwrote $76.5 billion worth of mortgage backed securities a third of which were backed by these sub-prime mortgages. Many of the investors were pension funds and insurance companies. As for the law suit in federal court, again Goldman admitted no wrong doing but did settle the dispute for $500 million. Again it sounds like a lot of money but to Goldman Sachs it was chump change. One of their executives was heard to say " for us it was a low cost no-brainer".
With people and businesses like this its no wonder free enterprise/capitalism are getting such a bad name. A whole bunch of these people belong in jail for defrauding the public and they should loose the wealth they accumulated in this manner. Maybe that would finally get their attention.
While the housing bubble was growing, there was an oil bubble growing also. Everyone thought it was a problem too much demand and too little. Apparently another Goldman wizard had an idea to make some more big bucks. This guy goes to the the Commodities Futures Trading Commission, CFTC, who has over site and regulating powers over the commodities markets, to petition the CFTC to allow J Aaron Company, a subsidiary of Goldman Sachs dedicated to commodities trading, to call itself a "physical hedger". Hedging was originally approved in the 30's as a means to smooth out large price swings and, thereby, provide a tool for producers and buyers to protect themselves. Goldman got their approval and they immediately began promoting oil futures as a way to benefit from ever increasing oil prices, which they would well into bonuses. the future due to economic growth in India and China. Sounds like a good plan, right? The problem reached a head in 2008 when oil prices reached $147 a barrel and gasoline in the US was over $4 a gallon. Well what could anybody do? There was too much demand and too little supply, right? Wrong. It turns out there were far far more futures being traded than there were real oil buyers. Congressman Stupak of Michigan, who serves on the House energy committee, got it right. He said
"We have the highest supply of oil in the last 20 years now and demand is at a 10 year low. And we're all paying $4 per gallon for gasoline only because the investment bankers want more money for bonuses."
The fact was an average barrel of oil was being traded 27 times before it actually reached a buyer to be consumed. So, when the bubble burst oil fell until reach $33 a barrel. These guys really are good at what they do. They manipulate the markets and get filthy rich and you and I pay for it. Do you think its time to put some control on these people? I do.
So the house of cards falls and the government, i,e, the tax payers to bail everybody out.
Paulson, Treasury Secretary and and ex-muckitymuck of Goldman Sachs, helps finance Bank of Americas buyout of Bear Sterns; but he decides to let Lehman Brothers, Goldman's biggest competitor, go under. He then decides we have bailout AIG and they receive $85 billion. This is nice they then use this bailout money to pay $13 billion for the credit default swaps that Goldman is holding. Once again Goldman Sachs comes out the big winner. But Goldman isn't done yet, not by a long shot. The government has another bailout plan;The $700 billion Troubled Asset Relief Program or TARP. Now, investment banks are not eligible for these funds, so what do our friends Goldman Sachs do, they decide they are no longer an investment bank but a bank holding company. This idea gets quick government approval and they are now eligible for $10 billion in low interest TARP funds. These people have no shame!
Whats the next bubble? Not to worry. Goldman Sachs already knows exactly what is going to be the next bubble and they intend to get a big piece of it. They have spent a few million dollars over the last couple of years promoting government mandates to lower carbon emission that in part responsible for global warming. They are doing this because they are such a socially minded company, right? Wrong. The administration is planning to propose a law limiting carbon emissions from coal plants, utilities, and natural gas distributors, whereby, if a company goes over their limit for carbon emissions they will have to but credits from companies that have been able to stay under their allotment. Estimates vary from about $640 billion to $1,8 trillion of these credits will be necessary over the first seven years of the program. Our green fiends at Goldman Sachs are planning to turn these carbon emission credits into the next high flying commodities futures trading game. They see this as the biggest and best cash generator yet. This is crazy even if we all agree that reducing carbon emissions is a good idea. What the administration is proposing is essentially to impose a tax on companies to get them to reduce their emissions. Fine! But in this plan its not the government who will be collecting the tax and use the funds generated for the national good. Instead it will be Wall Street (Goldman and friends) who will be collecting the tax to pay themselves huge bonuses for being so green. America we some how must get our law maker's attention and demand real reforms and control over these characters. You think? Is Goldman Sachs the worst of the bad guys? I think so.
There you have it. Sense or Nonsense?
No comments:
Post a Comment