When Theft Met Profit

Last week Goldman Sachs reported a spectacular quarterly profit -- close to $3.5 billion -- and according to the company, it is on track to award an average of about $700,000 in bonus for each employee by year end.  Right before Goldman released its quarterly earnings, Rolling Stone published a scathing article by Matt Taibbi about the financial giant called "The Great American Bubble Machine," pointing out that Goldman has miraculously been on the win side of every major speculative bubble in America since the Great Depression.  Following the earnings release and the Rolling Stones article, not a few economic pundits have weighed in on the profit-machine that is Goldman Sachs of America.

Of course, by this weekend, it was the Washington Post to the rescue, calling the various sources clamouring about the inherent injustice of the Goldman profit and compensation scheme as "braying," full of "conspiracy mongering" and "priming the pump of outrage".  And in the great tradition of calling everyone who doesn't see the world your way a "socialist", WaPo then passively aggressively insists that the Goldman detractors simply have a problem with profit-making ventures.

Excuse me, but it's not profit when it is theft.

In a separate blog post I wrote last week on my personal blog, I referenced several of the ways that government policy (and taxpayer largesse) have allowed GS to reap its magnificent bounty.  But whereas my financial wonkery is generally too much for Momocrats, the analysis of how the government bailout of AIG directly impacted Goldman's bottom line that I found today by Karl Denninger at Market Ticker was too juicy not to share.

Let's review the AIG debacle.  Over the last several years, Goldman Sachs has entered into a "metric ton" of credit derivative swaps (CDSs) with AIG.  CDSs basically act as insurance - in other words, Goldman paid AIG a tiny premium, and in return, AIG promised to pay Goldman the full value of a derivative should the derivative default.  AIG made a killing selling CDSs, because while the derivatives were not defaulting, all the premiums being paid to AIG was pure profit, with little cost. 

At the same time, by purchasing the CDSs, Goldman was able to manipulate around its capital requirements.  Since the derivatives that Goldman held as assets were insured (by AIG), they were "guranteed" to pay 100%, and so were booked as being worth 100% of their face value (as opposed to the actual market value of those derivatives).  This meant that they could buy and hold more junky derivatives and buy more insurance from AIG on those junky derivatives.  And profit, profit, profit...

Except, as it turned out, AIG didn't actually have enough money of its own to make good on all those insurance policies when it turned out that all those derivatives were, in fact, junk.

This is why AIG was considered so systemically important.  AIG not only guaranteed derivatives that were held by Goldman, but by all the large, important banks in the US and around the world.  That's why when the government "saved" AIG by throwing more than $100 billion dollars of taxpayer money into the firm, about $13 billion of that money went directly to Goldman Sachs: to "pay off" AIG's guarantee obligations to Goldman.

In a free market system, there is risk not only in where you choose to invest, but who you choose to buy your insurance from.  Buy life-insurance from a shady, fly-by-night insurance company, and I guarantee you that the government won't be bailing you out when that insurance company dissolves, along with whatever premiums you paid.

Goldman effectively made a bad "bet," by choosing to be insured by a company that surely the "brightest people in the room" should have seen was enormously under-capitalized.  When the government rescued AIG, and those funds went directly into the pockets of Goldman and other banks, the taxpayers were forced to eat the banks' bad bets. 

"That $13 billion was in fact unearned - they had no right to it, as AIG was in fact insolvent and [Goldman] would have collected zero [or close to zero] had the firm gone into bankruptcy.  Goldman and these other banks were either unable or unwilling to rescue the firm themselves, so through the use of political influence peddling they got the taxpayer to do it for them, thereby collecting on a transaction that they either knew or should have known had no chance of being paid off at the time they entered into it."

Once "rescued", Goldman entered more bets, now on a much thinned playing field (Bear and Lehman - out, Citi and BOA - crippled).  Of course, the point is that had Goldman not gotten the $13 billion from the taxpayers, they would have been in a far weaker position at the beginning of this year, without the resources to place their winning bets.

"[T]he 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."

Sounds an awful lot like highway-robbery to me.

(Picture is a reference to Matt Taibbi's article, in which he refers to Goldman Sachs as a "great vampire squid wrapped around the face of humanity.")

Comments

[cynematic]

I think I had to get a nightguard from all the tooth-grinding and jaw-clenching this inspires in me. :(