Goldman Sachs is a Problem and the Symptom of a Worse Problem

by: Ian Welsh

Wed Jul 15, 2009 at 20:35

Let's chat about Goldman Sachs profits, why they're making so much money, and why it's a problem rather than a case of "good for them".

Market Manipulation Zero Hedge has made the case that Goldman could be using their program trading to move the markets in the direction they prefer, as the largest program trader in the market, twice as large as the next biggest. The case was reasonably strong, but was made stronger when the New York Stock Exchange suddenly decided to stop releasing the data on program trading which made it possible to track what Goldman was doing. Coincidence? Possibly. It is also possible that you may wish to purchase this fine bridge I have for sale, only ever driven over by a little old lady.

Government Bailout Money Through AIG Goldman received 13 billion from AIG, after receiving 5.9 billion before the bailout, which caused AIG to collapse (not that it wouldn't have eventually).  The 13 billion is a straight government giveaway, since if AIG had been allowed to go under, GS would have received cents on the dollar, at best.

Goldman Sachs is now a bank. And that means they get money at bank rates from the Fed, which means their cost for money is as low as it is possible to be, which increases their profits.

Goldman Sachs has contacts at the highest levels of government.  Glenn Greenwald laid this out best, with a stunning list of occasions in which Goldman was present for decisions or where Goldman Sachs employees (the most significant of whom was Hank Paulson) were hired for key spots in the Treasury department.  He also notes that Goldman's executives were the top campaign donors for the year.  I'd say they've gotten their money's worth.

Privatize the Profits, Socialize the Losses.  Or, as a friend put it "Goldman trades high volatility".  Which is to say, they take risks.  Big risks.  If those risks fails (as when they were AIG's largest customer), well then, they get bailed out by the government.

Heads Goldman Sachs wins. Tails the taxpayer loses

It's a good game, if you can be in on it.  And this is only an overview.  For example there is some speculation that Goldman may have been front running other traders (knowing what trades were coming up and putting in their orders first to take advantage of it.)

The larger issues are simpler...