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Goldman Sachs Spinning Gold

Politics / Credit Crisis 2010 Apr 07, 2010 - 05:58 AM GMT

By: Janet_Tavakoli

Politics

Best Financial Markets Analysis ArticleGoldman Sachs claims great risk management skills, while it shirks responsibility for its role in the near collapse of the U.S. economy. The former is a myth, and the latter is a dodge. [1] As taxpayer wealth was destroyed, Goldman exploited the financial crisis it helped cause, while the U.S. was (and remains) at war.


Goldman Sachs released its 2009 annual report today showing it made net revenues of $45.17 billion with net earnings of $13.39 billion. In its shareholder letter, Goldman says it repaid TARP money, but did not mention the massive new taxpayer subsidies it continues to enjoy.

"Goldman did not and does not operate or manage our risk with any expectation of outside assistance."
Yet due to the influence of highly placed Goldman Sachs former officers, Goldman received--and continues to receive--enormous assistance from taxpayers.

Goldman cleaned up at the expense of average citizens. For example, hard-working U.S. taxpayers bailed out Goldman Sachs, Goldman's trading partners, and AIG. Goldman grabbed new status as a financial holding company, FDIC debt guarantees, access to near zero-cost taxpayer-subsidized borrowing, new lax accounting standards, and more. Now Goldman is making a killing as the Federal Reserve keeps interest rates near zero. Goldman reaped windfall profits to replenish its capital, and paid bonuses of over $16 billion to its employees.

Goldman's Cover Story

Goldman claims it did nothing wrong. ("Goldman Sachs: Don't Blame Us," Business Week cover story, April 14, 2010.) There is a lot to discuss about Goldman's actions prior to the financial meltdown, but this commentary will focus only on the largest part of the U.S. economy, the housing market.

When Goldman created collateralized debt obligations (CDOs), it was obliged to perform thorough due diligence. Previous securities frauds (unrelated to Goldman) were public knowledge, and there were multiple multi-year reports of predatory lending and fraudulent loans (Ameriquest, FAMCO, and many more). Despite self-serving denials by former Fed Chairman Alan Greenspan, there were many studies in the public domain that showed that even new non-fraudulent loans had a higher likelihood of default when zero or slim down payments were made, including a March 2005 report from the St. Louis Fed. Separate from this, lending standards slid, which made the problem even worse. In addition to that, newly created loan products posed greater risk to borrowers, even when other factors such as lower lending standards and fraud were absent.

Goldman failed in its duties as a creator (underwriter) of these CDOs. Goldman's excuses that others were doing it or that Goldman was only providing a "customer" service do not relieve Goldman of its own responsibility.

Goldman tries an evasive maneuver when it says it sold CDOs to "sophisticated," investors. The damage was so pervasive that retail investors were caught in the web. Moreover, taxpayer money bailed out the financial system and bailed out investors in Goldman's CDOs. Caveat emptor no longer apples. The unsophisticated public ended up being an unwilling investor.

Built to Fail

There was fraud by borrowers and speculation, but there was also massive widespread predatory lending. Most victims were the least sophisticated borrowers. Mortgage lenders engaged in a variety of frauds including phony appraisals, altered documents, hidden fees, lies about the type of loan, and lies about the maximum payments. As for CDOs, the SEC dropped seminal investigations.

Many of Goldman's "investments" crashed like an airplane made from faulty components. Some of the CDOs Goldman created--including some sold to French banks that traded with AIG--ended up in money market funds (as asset backed commercial paper) bought by retail investors.

Imagine that Goldman packaged a herd of cattle for sale. Industry standards require it to investigate the herd. (Rating agencies do not perform the inspections; it was Goldman's responsibility.) Cattle had a history of health problems, so Goldman had all the more reason to perform thorough due diligence on each herd. A sample would have revealed that, say, 60% of the healthy-looking herd tested positive for hoof-and-mouth disease, and the disease could possibly infect the others.

Goldman claims it did nothing wrong when it slapped good labels--via complicit rating agencies--on its loan packages, and then sold them. Goldman claims to be good at risk management, yet despite public red flags, it now claims it didn't know any better.

Beyond the original problems with Goldman's CDOs, some appear "built to fail." ("Congress Exposes Potential Profiteering in AIG's Deals." - Huffington Post, January 28, 2010.) I wrote about the danger of these types of structures in a book published in 2003. Goldman cannot claim competence and also claim it didn't know any better.

(See also "Wall Street Wizardry Amplified the Crisis," WSJ, December 27, 2007, "Goldman Pays Junior CDOs Before 'Junk' Senior Classes," Bloomberg News, Nov 12, 2009, "Goldman Fueled AIG's Gambles, WSJ, December 12, 2009, and "Banks Bundled Bad Debt, Bet Against It and Won," New York Times, December 23, 2009.)


Billions of Taxpayer Dollars for Corrupt Finance

The Fed abused the taxpayers' trust when it bailed out AIG's trades for 100 cents on the dollar. The Fed claims its loan for purchases of the CDOs may be paid back, but that is only 40% of what taxpayers are owed. The loan was only for the 40 cents on the dollar that remained after Goldman (and others) already took billions out of AIG. The purchases should be reversed, and taxpayers should be paid 100 cents on the dollar--the original principal amount (less interim principal payments). [2] The proceeds can be used to pay down AIG's public debt.

Goldman's CEO, Lloyd Blankfein, quipped to a reporter that he is doing "God's work," yet Goldman participated in the transfer of wealth from hard-working taxpayers to fee-seeking agents of corrupt finance. Then Goldman accessed taxpayers' funds to protect and enrich itself, as did other banks. That's not only a self-serving interpretation of "God's work," it's a perversion of capitalism. Goldman Sachs has become a symbol of the aristocratic tyranny from which our Founding Fathers sought to protect our Republic.

The following video (C-Span, April 2009) explains how cheap money, wide-spread bad (often predatory) lending, phony securities, credit derivatives, and Wall Street banks' massive over-borrowing led to our current financial crisis. Yet there is still no meaningful reform.

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2010 Copyright Janet Tavakoli- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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