Goldman Sachs has openly, blatantly gone back to business as usual, knowing they will be bailed out by taxpayers if their high rolling gambles don't work, and they don't care who knows about it.
The reason they can be so breathtakingly arrogant, so stunningly cavalier about not giving a damn about things that any other company's PR and government relations department would advise them against, is that they know they have the power to do anything they want to do. The Obama White House needs to take Goldman Sachs to the woodshed rhetorically, and they should have the Justice Department investigating them for anti-trust violations and all manner of stock manipulation. It is time to start squeezing the management at Goldman, and making them nervous about being broken up into pieces that are not too big to fail.
Here's (with brief intro) Matt Taibbi, Rob Johnson, and myself taking about Goldman Sachs on what is rapidly becoming my favorite media program for discussing economic issues, GRITtv:
If you've seen the news today, you know Goldman Sachs exceeded its second quarter expectations for earnings, making $3.44 billion after dividends. As I wrote yesterday, this gigantic, much better than expected profit is largely from engaging in the same risks that got Goldman and other companies into trouble in the first place- taking massive risks on things like volatile currencies. The same risks that has helped lead the country to economic collapse. Apparently the only thing Goldman learned from the financial collapse was that the government would bail it out if it kept taking big gambles, which isn't the lesson I was hoping it would learn.
And hey look, even more thrilling, it's been reported in late June that the company plans to pay its employee record bonuses. Congrats, guys.
Okay, Goldman. So as long as you're paying record bonuses to many of the same employees that engaged in these wildly speculative trading ventures, how about paying back the $13 billion you got from AIG by way of the U.S.Treasury? Or the unrevealed billions (likely many tens of billions) from the Federal Reserve?
Now I wouldn't be so irritable about all this if unemployment wasn't still going up, and most economists weren't saying it will continue to go up through 2010. I wouldn't be so irate if unemployed folks were getting jobs, home prices were starting to up again, and as a result bankers also made money. I wouldn't be so completely pissed out of my mind if we didn't already know, based on the last eight years, that the trickle-down economics of making sure the biggest banks recovered first just didn't work for everyone else in this economy.
It is time for a movement to take on the big bankers and change the economy so that it produces jobs for the rest of us.
There are many terrifying things in the world, but for my money the most terrifying news article I have read in weeks was the one in the New York Times today by Graham Bowley and Jenny Andersen headlined For Goldman, a Swift Return to Lofty Profits. Now it's obvious from my writing that I am not a fan of the big banking companies like Goldman Sachs, but why would it scare me so much that they had made big money this last quarter? Because of how they made it:
In essence, Goldman has managed to do again what it has always done so well: embrace risks that its rivals feared to take and, for the most part, manage those risks better than its rivals dreamed possible.
"It is, in many respects, business as usual at Goldman," said Roger Freeman, an analyst at Barclays Capital.
Traders said Goldman capitalized on the tumult in the credit markets to reap a fortune trading bonds. It profitably navigated a white-knuckled run in stock markets. It bought and sold volatile currencies, as well as commodities like oil. And it reaped lucrative fees from the high-margin business of underwriting stock offerings, which surged this year as other, more troubled financial institutions raced to raise capital.
So what Goldman is doing is the exact same kind of high-risk, "white-knuckled" trading that led us to the economic collapse of last fall. And because their bets are- so far- paying off, they will be giving out 18 billion dollars in salaries and bonuses to their traders; and because those bets are paying off, most of the other big Wall Street firms will be following them back into these speculative trading ventures.
Goldman is happy to take these risks because, hey look, they are still too big to fail. They know that even if their luck runs out, the Federal Reserve and American taxpayers will still be there to back them up.
This article should be raising five-alarm, all hands on deck red alerts all over Washington, DC. But I fear too much of the business media and DC politicians are once again not paying attention. The good news I can report is that high-level sources in the White House are paying a lot of attention to this, and are very troubled by it. I am very glad about that, but am still concerned that Treasury and most of Capitol Hill seem not to understand the consequences of Goldman and their ilk going back to the exact same dangerous games they had been up to before. It's like last fall's financial collapse never happened.
Now just so you think I'm all doom and gloom, since I started with the scariest article I had read, let me end on the funniest article I've read in weeks. Peter Wallison at the American Enterprise Institute wrote an article attacking the idea of a consumer financial protection agency, in other words, regulations on those big banks' trading practices, saying the idea of protecting consumers and our entire economy from high risk trades is "elitist". Wow, that is comedic chutzpah on a very high level: defending Goldman Sachs and their friends from more regulation, defending the most elite and irresponsible speculators in the world, by calling those of us who want some regulation of them elitist.
That kind of comedy gold is exactly what got us into the mess we are in today. Which I have to admit, isn't so funny after all.
More evidence that the big financial conglomerates on Wall Street are back to their old tricks: check out this article from Naked Capitalism. The money paragraphs are at the end of the post where they quote from the Lex Column:
Those clever investment bankers are at it again. It was surely only a matter of time before banks tried to apply their financial innovation skills to finding ways of profiting from the very crisis that misuse of those skills brought about...
On one level, such initiatives might be welcomed as industry practitioners try to find a market solution to their own problems, reducing the need for taxpayer-funded bail-outs. But there are dangers here. As studies of the origins of the financial crisis such as the UK's Turner Review have concluded, one of the keys to creating a sounder banking system is increasing the quantity and quality of bank capital - which also, of course, means lower returns. Since the new schemes being developed are designed to cut the capital cost of risky assets, they potentially go against the spirit of such proposals.
As I have written before, the big banks, having been resuscitated without having been restructured, are quickly going back to what caused the financial crisis in the first place. We need to fundamentally change the system: realign the incentives, regulate the hell out of trading, and break up these too-big-to-fail companies so that even if they make reckless gambles, the consequences don't come raining down on the rest of us.
Will the new regulations proposed by the Obama administration help? Yes, they add some additional protections, but they don't go nearly far enough. We need to fundamentally restructure this system.
A couple of items in the financial sector, but both can be summarized in these words: the powerful and greedy continue to run things with impunity in the financial world.
First there's the news that Goldman Sachs is making record bonus payments for the first half of the year. Let me repeat that: RECORD bonus payments. Bigger than 2004 or 2005 or 2006 or 2007. Bigger than at the height of the bubble. In spite of all the toxic assets they have created. In spite of all the government bailout help. In spite of all the stunning damage to the American and world economy. In spite of all of that (or maybe because of some of it), for the very, very short term, the company has good profit numbers. Ergo post hoc, they are giving out really awesome bonuses to their big enchiladas.
Then, there is the massively infuriating article entitled "Treasury's Got Bill Gross on Speed Dial". It seems that Bill Gross is extremely happy these days. Everybody in government seems to hang on his every word. The plan that he helped develop, the Public-Private Investment Program (the PPIP for short), which would coincidentally make him billions of dollars, is being pushed by Tim Geithner.
Read these two articles back to back; and if you are not sputtering with rage at the end, you must truly be the most pro-corporate libertarian around.
Hey, I know it takes a heck of all ill wind not to blow somebody some good. And I knew that when the Summers-Geithner policy of resuscitation of the financial system rather than restructuring it was adapted, that lots of people would make money off the deal. But reading these two articles really does make you wonder who won the election, and how these greedy folks can get away with doing whatever they want.
Check out this absolutely terrific post by Drew Westen, one I had really wished I had written because it's so on target. I want President Obama to succeed more than I've ever wanted anything politically, but it's not going to happen unless he (a) wrenches the control of the economy away from the greedy, and (b) confronts the greedy directly. You have to decide which side you are on, Mr. President: the struggling tens of millions barely hanging on, or not hanging on at all, in this dreadful economy. Or the greedy bankers and health insurance executives. I trust that you have good values and instincts, and I want to be on your side in these fights. I appreciate the good things you've done so far on the stimulus, the budget, health care, the environment. But at some point, you are going to have to confront the greedy, or you are not going to inspire and you are not going to win.
Fight the good fight, Mr. President, and there will be tens of millions of us who will fight it with you. Avoid these fights, and your Presidency will be adrift, with neither set of allies fighting for you or big legislative victories.
In a New York magazine article, "My Manhattan Project: How I helped build the bomb that blew up Wall Street", former programmer Michael Osinski tells of his part in the making of the financial meltdown. But along the way he also tells us something of the trader culture he helped to enable, where the really big bucks were. For example:
Now that I was spending more time on the floor, I wondered why the men's room always stank. Then one afternoon at three, when I was in there taking a leak, I discovered the hideous truth. Traders had a contest. Coming in at eight, they never left their desks all day, eating and drinking while working. Then, at three o'clock, they marched into the men's room and stood at the wall opposite the urinals. Dropping their pants, they bet $100 on who could train his stream the longest on the urinals across the lavatory. As their hydraulic pressure waned, the three traders waddled, pants at their ankles, across the floor, desperately trying to keep their pee on target. This is what $2 million of bonus can do to grown men.
These are the guys we have to keep happy?
I'm not just after a cheap shot here. Last month, the Compulsive Theorist posted a couple of posts on "business and cultural norms in the financial sector". The little vignette above is simply a vivid reminder of just how warped those norms have become. And you know what? The conservatives are right: the issue of moral values goes right to the core of our politics, and the fate of our nation. Only it's their values that are the problem.
Over the past few weeks, it's been pretty common for people like me, who have favored bank take-overs, to be portrayed as favoring a more "radical" approach to dealing with the financial crisis--and in one sense, that's certainly true. "Radical" comes from the Greek "radic", meaning "root", and radicals are those who want to solve problems at their roots. While bank takeovers might not really get at the roots of the problem, they'd certainly get us closer to the roots, so in that sense, it's a more radical approach.
But it's also a more conservative approach, too. How can it be both? Simple: this problem we face is severe and systemic. The most prudent, conservative thing to do is it to take action now, not just to repair damage and correct past mistakes, but to ensure against a repeat. And to do that, mere tinkering will not suffice. From The Compulsive Theorist:
Why a second best bailout may not be good enough
....
Two things about the aetiology of the crisis stand out. First, perverse incentives for agents within the financial sector played a central role in bringing about the crisis. Second, there were (and remain) issues of poor system design in the financial sector: even perverse incentives might have had limited consequences in a robust system. The problem with the Geithner plan is that even [if] it works in terms of stabilizing the economy in the short-term, it does relatively little (the uncharitable would say almost nothing) to correct either incentives or system design. But the business and cultural norms and system-wide conflicts of interest which form the backdrop to the crisis run deep, and will not change without substantial impetus. It is precisely these deeper issues that we must address if we are to reduce the risk of a re-run of the crisis, probably on a larger scale, in a few years time....
This case can be put very simply: if we do not use current political momentum to fundamentally reform a system which has shown itself to be unstable and even dangerous, a second opportunity may come at a very high price. And this is not a gamble I wish to see our leaders make.
Not gambling: that's being conservative. That's me.
Furthering my point, this same essay links to an article in the Financial Times...
The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system - that what we're facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
In a later post, Krugman went on to further clarify: there are two basic reasons for bank failures--the run on a sound bank is just one of them, and it's the one the Geithner plan is based on. But it's not the problem we're facing:
Why was I so quick to condemn the Geithner plan? Because it's not new; it's just another version of an idea that keeps coming up and keeps being refuted. It's basically a thinly disguised version of the same plan Henry Paulson announced way back in September. To understand the issue, let me offer some background.
Start with the question: how do banks fail? A bank, broadly defined, is any institution that borrows short and lends long. Like any leveraged investor, a bank can fail if it has made bad investments - if the value of its assets falls below the value of its liabilities, bye bye bank.
But banks can also fail even if they haven't been bad investors: if, for some reason, many of those they've borrowed from (e.g., but not only, depositors) demand their money back at once, the bank can be forced to sell assets at fire sale prices, so that assets that would have been worth more than liabilities in normal conditions end up not being enough to cover the bank's debts
Behind all the complex razzle-dazzle, this is the basic question here: what kind of bank failure do we have? And there really doesn't seem to be much question about that. The term "toxic assets" gives you all the answer you need: the problem is the assets themselves, not a run on basically sound banks. That's why the troubled banks can't be saved as they currently exist.
While arguing over the $815-825 billion stimulus grab bag and what it contains and should contain, the real big picture continues to be the massive bailout of America's massively incompetent bank executives and the massively foolish chumps who bet on them, bank shareholders. The WSJ reports that Obama/Geitner/Summers will throw these two constituencies $1 to 2 trillion more of our money. Yup, this is in addition to the $700 billion already committed to the banks (emphasis added):
Government officials seeking to revamp the U.S. financial bailout have discussed spending another $1 trillion to $2 trillion to help restore banks to health, according to people familiar with the matter.
President Barack Obama's new administration is wrestling with how to stem the continuing loss of confidence in the financial system, as it divides up the remaining $350 billion from the $700 billion Troubled Asset Relief Program launched last fall. . . .
The administration, which could announce its plans within days, hasn't yet made a determination on the final shape of its new proposal, and the exact details could change. Among the issues officials are wrestling with: How to fix damaged financial institutions without ending up owning them.
((Why!? They're insolvent otherwise. We should own them and fire their execs and give their fool investors nothing! Or not help them and invest in solvent banks with competent management, even if we have to start those up from scratch. More on the obsequious concern for the financier class from Barry Ritholtz and Josh Marshall further down.))
. . . The administration is expected to take a series of steps, including relieving banks of bad loans and distressed securities. The so-called "bad bank" that would buy these assets could be seeded with $100 billion to $200 billion from the TARP funds, with the rest of the money -- as much as $1 trillion to $2 trillion -- raised by selling government-backed debt or borrowing from the Federal Reserve.
[Other options are then discussed, including the government buying common shares of bank stock (and so propping up the banks' share prices and helping out shareholders)] . . .
Here's Josh Marshall, and no, Josh, you aren't missing anything important:
According to an analysis by CNBC, "Financial Crisis Tab Already In The Trillions" , the financial bailout tab already stands at $4.28 trillion and counting. That's about 20 times the cost of the Louisiana Purchase (adjusted for inflation), and more than anything else CNBC could come up with, including World War II, which cost $3.6 trillion by their estimate. They have a slideshow of "Big Budget Events" here.
However, they overlooked the obvious: our spending on nuclear weapons from World War II forward was estimated at $5.5 trillion in a Brookings Institute Study completed in 1998 (summarized most recently here). Adjusted for inflation, that's roughly $7.2 trillion in 2007 dollars. Total military spending over this same time period amounted to $22.8 trillion. Still, that's $22.8 trillion over half a century. Bush ran up $4.28 trillion in a matter of months.
The numbers are so staggeringly big that one really does have to use these sorts of historical comparisons just to begin to grasp the enormity of what's going on right in front of us, while the political class continues to pretend that the money being spent isn't really real, unlike, say, money to pay for health care or education.
Every morning lately, we have turned anxiously to the news to see if financial markets are in freefall...and some days, they actually are.
Governments across the world have responded over the past two weeks--including a massive commitment by the United States Treasury that is, to say the least, highly controversial to the American voter.
As this is being written markets are opening in Asia. At the moment things are somewhat stable, and except for Shanghai and Taiwan, they're heading upward. During the writing process, Europe has opened, and there are gains there today as well.
The US credit markets did not open today (although the stock markets did) because of the Columbus Day holiday-but anyone who recalls Mr. Dow's Wild Ride last Friday is quite nervous ahead of the Tuesday opening.
Despite all that bailout stuff we're hearing about, confidence doesn't seem to be returning to the markets. Why?
Excellent question, Gentle Reader, and I have a few helpful answers.
Last night, on Bill Moyers Journal (transcript here), we saw both sides of Bill Moyers. We saw him, if not at his very best, then certainly very, very good, and better than most folks ever get on tv. He interviewed George Soros, and they covered a wide range of big topics in very straight-forward, demystifying terms.
Then in the second half, we saw his bad side. Not the worst, by any means, but the worst in terms of regular features, which is to say, Kathleen Hall Jamieson and her drum-beat "balanced" criticism of the presidential campaign. Jamieson actually does some very good work, and is sometimes extremely sharp. But she also gets lazy, sloppy and/or thoughtlessly conventional at times, and that was certainly the case last night. I'll deal with her segment in a second, briefer diary. But for now, I want to look at the good--not perfect, not spectacular, but definitely quite good side of what Moyers had to offer last night.
It's not really that amazing. But it's clearly stated, and it comes from a guy who's as rich as sin, so calling him a DFH just rolls off his back like water off a duck.
In a MAJOR reversal, the flexibility to buy shares in troubled banks--as Britain is doing--may be taken up as the primary direction, the NY Times reports. The result would be a giant step toward Paul Krugman's preferred alternative:
Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.
Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks' balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.
The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.
The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.
I'm the regional manager of a small business paper company in rural Scranton, Pennsylvania. I'm not the smartest person in the world, and though I may be a little simple-minded and ignorant at times, I ultimately am a kind person who so desires to be loved that I trust anyone that shows me affection.
Enter my boss. We'll call her Corporate America. Corporate America has treated me terribly over the years. She has threatened to cut my health care, fire me from my job, and embarrass and mock me at many turns. Despite Corporate America's faults, I still love her, because she is a beautiful country that, though selfish and ego-centric, has some fundamental good qualities that I can trust. So I believe, for now.
And so, despite being tormented by Corporate America, when Corporate America loses her job in the big city I let her move in with me in Scranton. I think, "we'll work on this problem together -- we'll reach out and help each other." After all, I am still struggling. Other big businesses are running me into the ground because they don't need working people anymore; all they need are computers and the ability to outsource jobs overseas.
And Corporate America is struggling, albeit for her own faults. She is conceited, and doesn't work very hard, and focuses on excessive shopping and gratuitous bouts of vacation. As she moves in with me, she continues a long-practiced pattern for her of racking up my debt.
My debt just explodes, while she stays fat and lazy. I get a second job to try and help us both get by -- me and Corporate America -- to make sure enough money is coming so she stays lazy while I work harder. But one day, finally, I can't do it. I just can't do both jobs.
So, out of all other options, I declare bankruptcy:
As it turns out, it doesn't matter. Corporate America has led me down their path of racking up debts. I never knew what was happening, and that was partly my fault. But I can't help feel that Corporate America -- if she cared about me, the small town business man -- would have helped me out.
So I run away to a train, to run away from my problems, just as I assume people did in the Great Depression. That's all I have left to do, because now I am scared.
Interestingly, this is where the analogy between the fictional episode of The Office episode "Money" and real world temporarily ends. Because in the end of this episode of The Office, Corporate America -- played by Jan Levinson -- comes to the small town businessman. She reaches out to him, admits that she made mistakes, and she commits to seeing it through together.
In real life, Corporate America never reaches out to the small business company. Instead of reaching out to restore consumer confidence herself, she runs to elected officials, who bail her out and leave the small business man holding the bag.
Nathaniel Frank, a gay historian who teaches at UC Santa Barbara, has an insightfull diary at HuffPo, "The Moral Subtext of the Bailout Debate", which makes no direct mention of George Lakoff, but lays out an argument about the conservative morality behind the bailout that comes straight out of Lakoff's work nonetheless.
Put simply, Lakoff says that conservative ideology is rooted in an authoritarian "Strict Father" family model which assumes a hostile world in which evil must constantly fought against. From this it follows that the wealthy are virtuous because their wealth is a sign of moral strength in fighting off evil. In addition to this point-which Frank explores-there are two other aspect of conservative ideology that merit specific attention. One is the emergence of racist arguments, shifting blame for the crisis onto minorities. Another is the distinct nature of finger-pointing rightwing populism, which McCain briefly and fitfully embraced. While populists on both the left and the right are justifiably angry, there are significant differences that need to examined, not ignored. Undersanding what makes the two different can prove crucial in gaining ascendency for the leftwing version.
