“Except for con men borrowing money they shouldn’t get and widows visiting handsome young men in the trust department, no sane person ever enjoys visiting a bank.”
- Martin Mayer.
Lewis Carroll would have been proud. “Leading” London bankers are reported to be critical of relatively modest proposals to rein in their executive privileges and to make more transparent the earnings of their best paid employees. One naturally unnamed banker reportedly told the Financial Times,
“Risk should be managed by executives hour by hour, not by non-executives month to month.”
Banks’ risk should be managed, we can all agree on that. But it wasn’t. Not by senior bankers at any rate, many of whom are only enjoying the fruits of employment now thanks to the involuntary appropriation of taxpayer assets. If “leading” bankers want to avoid being kicked to death in the street by a mob they are doing their damnedest to outrage, they would do well to keep a lower, humbler, more discriminating and less obviously self-interested public profile. Some hope. More evidence of the ‘Alice Through The Looking Glass’ world we now inhabit comes from Matt Taibbi’s much feted critique of Goldman Sachs. After the biggest banking bust in world history, the most trenchant criticism of investment banking (Rolling Stone’s “The Great American Bubble Machine” – warning: replete with some colourful expletives) has appeared in a rock magazine. Mr. Taibbi has also given us perhaps the most memorable description of an investment bank yet coined: Goldman Sachs as
“a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
With bank results being filtered through a mostly supine investment media, the public are not necessarily getting the full picture. Some may be interpreting Goldman Sachs’ $3.4 billion in second quarter profits as indicative of some kind of financial or economic recovery. Mr. Taibbi suggests that these are not so much free market earnings but almost pure state subsidy. (Some might say quid pro quo: Goldman Sachs staff amounted to the largest corporate donors to the Obama presidential campaign.)
“We constructed this massive bailout infrastructure, and instead of pumping that free money back into the economy, the banks instead simply hoarded it and ate it on the spot, converting it into bonuses.”
Taibbi lists the various iterations of state aid that have padded Goldman’s figures (and others):
- The AIG bailout. If AIG had been allowed to proceed to bankruptcy, Goldman might have gone out of business since AIG owed Goldman about $20 billion before it failed. Instead, former Goldman CEO Hank Paulson endorsed an $80 billion bailout for AIG which in turn facilitated a $12.9 billion payment directly to Goldman. Goldman separately managed to extract $5.9 billion in collateral calls before AIG’s collapse. Taibbi states the process essentially as follows: Goldman makes ridiculous bets and exploits AIG’s executive ignorance; when the firm is brought near to collapse, it then drives a big stake through AIG’s heart and gets the government to pay them off using US taxpayers’ money. That is not quite the same thing as “an uncompromising determination to achieve excellence in everything we undertake”.
- TARP. Although Goldman has repaid the $10 billion it got from the US government, the US government still holds warrants from Goldman giving it at least technical authority to prevent lavish bonuses.
- The Temporary Liquidity Guarantee Programme. Goldman converted last year from a brokerage company to a bank holding company, making it eligible for a new programme offering commercial banks FDIC support for unsecured debt. At the risk of stating the blindingly obvious, an investment bank is not a commercial bank, and merely changing nominal status does not change that reality. A more cynical observer might ask how a company with no deposit base and in breach of most of Basel II can qualify as a bank in the first place..
- The Fed Programmes. Following on from the above inherent non-bankness of Goldman Sachs, by converting to a bank holding company structure, Goldman is now eligible for what Taibbi calls “a whole galaxy of new bailout programs administered through the Federal Reserve like the Term Asset-Backed Securities Loan Facility (TALF); it also became eligible to borrow cheap money from the Fed’s discount window”. Believers in democracy and executive accountability, look away now: the Federal Reserve has lent out $2.2 trillion in “assistance” during the crisis and refused to disclose how much has been given to Goldman or to any other firm.
- The TARP repayment bonanza. Banks that received government money had to issue new equity. Good news for major equity underwriters on Wall Street, who earned that mysteriously sticky 7% underwriting fee (Goldman earned $736 million in equity underwriting during the last quarter).
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