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Jul. 27 2009 - 9:59 am | 152 views | 5 recommendations | 27 comments

New Info: Goldman Really Was In Trouble

Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill. “Goldman was desperate for it,” says a prominent Goldman alumnus. “Everybody knows it. Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.”

via Is Goldman Sachs Evil? Or Just Too Good? — New York Magazine.

Joe Hagan’s new piece in New York magazine brings out a lot of excellent new information, but the most interesting from my point of view is his insight about the period after the AIG bailout and before the announcement of the new FDIC lending program. It seems things were worse than even I thought at the bank, with then-COO John Winkelreid putting up his Nantucket house for sale in order to raise quick cash and management discussing taking the company private to avoid catastrophe. Hagan describes a bank that was in crisis, its share price plummeting to $47, one that was really rescued by the FDIC program, which made bank holding companies (which Goldman had just become, thanks to a hurried conversion) eligible for billions in government-backed lending.

Hagan also includes this detail, about what’s happening with recruitment at Goldman:

Now that the firm is viewed as a virtual rogue state with interests contrary to the greater good, Goldman might attract a different breed of recruit—less Robert Rubin, more Gordon Gekko. Or fewer recruits in general: A human-resources executive at Goldman Sachs, Edith Cooper, says she counted about 20 percent fewer people at recent on-campus recruitment seminars.

I should have something to add to that end of the story later this week. In the meantime, Hagan’s piece undermines a lot of the arguments Goldman has been offering in its defense of late. Of particular interest is his reporting about Goldman’s financial health at the time of the bailouts.

I was on a radio show a few weeks back with a hedge-fund manager, a Goldman apologist, who insisted on the air that Goldman would actually have made more money if AIG hadn’t been rescued, because the bank was properly hedged against AIG’s collapse. My argument in return was a weak one — all I said was something like, “Then why take the money?” — and it wasn’t until the show was over that I realized the proper response to that argument was just, “Bullshit!” Goldman has been making that argument ever since the AIG bailout, but it has never come out and identified that magical counterparty or counterparties who’d have been able to come up with $20 billion after a system-wide financial collapse.

No, the reason Goldman needed state money via the AIG bailout is that in the midst of that financial hurricane, the government was the only entity anyone could bank on being liquid enough after the storm to cover Goldman’s losses. As Hagan put it:

Not a single Wall Street executive I spoke with, including several Goldman Sachs alumni, believe those hedges would have survived an overall collapse of the financial system. A large loss would have been inevitable as lending evaporated, and Goldman Sachs would have struggled to shrink the company to a fraction of its size overnight. But the most glaring argument against Goldman is Goldman’s own: If AIG’s biggest and most important bank customer was hedged against losses in AIG, as it claims, why did the government need to pay Goldman Sachs the full $13 billion?

All of this is fodder, specifically, for the debate about the profits Goldman and other banks have just reported. If these organizations really were on the brink of collapse last year, and would have died without massive government intervention, what does that say about the giant bonuses they’re paying themselves now? I think for one it says that the state rolled over when it should have either imposed long-term compensation restrictions or simply taken these banks over temporarily (as the U.S. would have recommended in any third-world country facing similar problems). It also says that these bankers are, well, nuts. Saved from disaster, they turned the ship around and headed right back for the iceberg.


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  1. collapse expand

    I appreciate your stick-to-it-tiveness on this issue, Matt. And kudos to the growing numbers of independent media that are pushing the story forward.

    Saw you on Bill Maher this weekend and I have to say, Bill totally dissed you. I generally like Bill, but he pissed me off this time. He has you on, mentions your RS feature “has people talking” then offers two critiques: It was too long (which makes me think he didn’t really read it) and that you present a far-flung conspiracy that’s “not true.” Then, without allowing you to respond, he goes off allowing you to respond, he goes off on some weird rant about the moon landing being less important than Edward Kennedy killing someone in a car crash.

    Keep up the fight, Matt! And screw Bill Maher!

    • collapse expand

      Maher disappointed me too! But that’s what happens when you’re a walk-on guest, as opposed to being on the panel. It’s hard to discuss this stuff in the 2 minutes he gives to walk-ons. He should have had Matt on a few weeks ago when Klein and Scahill were on the panel. Klein, Skahill, Taibbi – Now that’s a panel!!!

      In response to another comment. See in context »
    • collapse expand

      Concur with the observations and impressions of Maher. Characterizing the bailout as a necessity that benefited Americans left my jaw on the floor. And this from a guy who claims his big priority is public health care. When billions are going into the pockets of Wall Street crooks, no questions asked, Maher needs to give his head a shake or maybe stop toking up just before the show.

      In response to another comment. See in context »
    • collapse expand

      I mentioned the same thing in another post, and it’s worth agreeing with you here…Bill Maher totally sucked on the latest interview with Matt. I am waiting to hear Matt discuss “Bubble #6″ and Al Gore’s ties to Goldman Sachs execs with the carbon credit scheme further. All the left-wing shows I have seen Matt on recently (search YouTube) are too chicken-shit to even mention it…disgusting. Geeezus, a simpel question like, “What’s next, Matt?”…is that so hard? Great courage on Matt’s part. Maher’s show is mostly disappointing when it could be very good. Interesting people who try to be too funny, and Maher loving to just interview himself. The show with Ron Howard was good, and his interview with David Walker was good, I will give him those two.

      In response to another comment. See in context »
    • collapse expand

      Bill Miller and most of Goldman Sachs executives should be treated the way the Romans treated traitors: Tie them face to face with a recent corpse and throw them all in a ditch. The maggets will do the rest. Start with Greenspan and let the list grow. “It doesn’t really matter who is on the list, none of them would be missed. They all should be on the list.”

      In response to another comment. See in context »
  2. collapse expand

    Goldman Sachs: We didn’t need the government’s money.
    Matt Taibbi: Then why did you take the money?
    GS: Bacause we needed it.
    MT: I thought you just said you didn’t.
    GS: We didn’t.
    MT: Didn’t need it? Or didn’t say you didn’t need it?
    GS: Yeah.
    MT: Excuse me?
    GS: Look, you! We didn’t say we didn’t need the money. What we didn’t say was that we didn’t need to say that we didn’t need the money, because we didn’t need to say that we didn’t need the money we said we didn’t need to say we didn’t need! Got it!
    MT: BULLSHIT!
    GS: We’re tellin’ President Obama that you’re picking on us!
    MT: Fuck you, and the President who rode in on ya”!

  3. collapse expand

    Go Matt! don’t let up on the face of Evil! Incidentally, was a little confused with this week’s Bill Maher. i didn’t expect a stroke session or anything, but the guy spent most of his time talking about Cabridge cops and wise latinas and very little supporting this important Times-Changing issue?? It’s a first for me: Maher has always been my bullshit-barometer, but has he been hitting a little too much chronic??

  4. collapse expand

    Keep it up, keep digging. I am a big fan. As corny as this sounds… you are a patriot doing a great service to your country. You have already have been partially responsible for saving the American taxpayer $600 million from the price GS negotiated with the gov’t for those outstanding warrants. In my mind the construct of our financial system is the most important domestic issue of the day. How all of this pans out is important for everyone’s future. If these Wallstreet types are so smart, perhaps they could join us to improve the world through tangible endeavors instead of using their talents for manipulation, deceit, and stealing from the productive sector of the economy.

    • collapse expand

      I agree completely, keep it up Matt. Without people like you the stupid ones like me wouldn’t even know how stupid we’d been. People like GS screwing the country over all the time is most of the reason we’re in this mess, but most of us simply aren’t capable of digging up the facts and putting them out there in a readable way. Without a few like you we don’t have a chance…

      In response to another comment. See in context »
  5. collapse expand

    “Out of political necessity, all of Washington appears to be turning a cold shoulder toward Goldman. A senior Obama-administration official close to Tim Geithner declares that “Goldman has left the building.” ”

    “Appears” being the operative term. I don’t buy it, but then what the hell do i know.

  6. collapse expand

    What will you write at the end of the week, oh tantalizing one? Can’t wait.
    I guess part of this sorry story is the lack of talent in the government agencies that are supposed to audit/oversee/police these entities. Having worked at the Fed, there is a dearth of talent there. One can’t think strategically if one doesn’t even understand these complex instruments (until after the fact).

    • collapse expand

      @ika1,
      Are you surprised there’s a lack of talent in the government agencies? They get gov’t salaries and the people they are supposed to be monitoring are getting billions.
      As a society, we are choosing to value 1 GS employee more than 100 government employees. I think there’s something wrong with that.

      In response to another comment. See in context »
  7. collapse expand

    Oh lookie here.
    ———————-
    Buffett makes $4.1 billion in 10 months -New York Times News Service

    Warren E. Buffett showed again why he is known as one of the world’s best investors, thanks in part to another prominent investor, Goldman Sachs.

    Buffett’s stake in Goldman is now worth $9.1 billion US, or about $4.1 billion more than what he paid 10 months ago, according to an analysis by Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette.

    According to Wilson’s calculations, Buffett would realize an annualized return of 111 per cent, if he sold his Goldman stake, which is held by his conglomerate Berkshire Hathaway.

    In comparison, the United States government received a 23 per cent annualized return for its Goldman investment.

    Goldman turned to Buffett in September, seeking a cash injection.

    Wilson’s analysis was based on Goldman’s closing share price of $160.46 on Wednesday.

    ————————–

  8. collapse expand

    Some official or entity, governmental or other, should file for an injunction, in federal court, seeking to prevent the payment of the unwarranted, unearned bonuses expected to be paid by GS and others? Instead of going into the pockets of those economy-wreckers, that money should be directed into the rebuilding of the American economy and such other just causes as the repair and rebuilding required because of the federally instigated destruction of New Orleans. Whatever these companies have “earned” during this first quarter following the most gigantic state subsidy of private enterprise – really “earned” is not the proper term for this – Americans have at least an equitable interest in this money, such as a constructive trust, so that once the law traces the true source of the windfall profits and the cause of the economic collapse, it should be clear that these extraordinary profits are owed back to the taxpayers – the law is supposed to prevent windfall payments to those who committed the acts that caused the very destruction in the first place. Maybe someone could throw in a few other legal theories such as courts are reluctant to provide relief to those who come into court with unclean hands and, therefore, the courts ought not to ratify GS’s greed. And, instead, the courts, when considering the injunctive relief, should grant the injunction and require a full investigation, thereafter, into the crash to determine what brought about this cataclysmic failure of our financial system and, further, who has lost from it and who has gained from it, to what extent and why. We are entitled to more than only Mr. Madoff’s prosecution. Others should follow.

  9. collapse expand

    I hope you cover the hearings this week being held at the CFTC regarding manipulation in the commodity futures market. Particularly as Goldman is one of the biggest players AND the new head is *sigh* a goldmanite…

    Anyway, keep the floodlights on those cockroaches – great work!

  10. collapse expand

    >a Goldman apologist, who insisted on the air that Goldman would actually have made more money if AIG hadn’t been rescued, because the bank was properly hedged against AIG’s collapse. My argument in return was a weak one — all I said was something like, “Then why take the money?” — and it wasn’t until the show was over that I realized the proper response to that argument was just, “Bullshit!”

    Now your response could just be “well, well, well,” possibly adding the rest of the cliche “what have we here?”

    But will Goliath fall? stumble?

    stay tuned for “later.”

  11. collapse expand

    Matt,

    Your RS article on Goldman Sachs turned my head all the way around like in the “exorcist”.
    The two years of reading financial news suddently made sense. We are all freaking doomed.

    Please get the story out to WSJ, Financial Times, 60 Minutes and the other media whimps.

    This is the most important news of the year for us dumb citizens struggling to keep this nation from becoming another Bangladesh.

    As for Goldman Sacks, The Romans had a great way to serve justice to traitors: They tied the traitor face to face with a recent corpse, usually another criminal, then threw them both in a ditch and let the maggots do the rest.

  12. collapse expand

    I agree, Maher came across as schizo on Goldman during Matt’s interview. The remark about how long the article was came across as juvenile, and Maher seemed unsure if he wanted to agree with Matt or try to bash his work on Goldman, and ended up doing some of both. Maher didn’t seem to have a good grasp of the issue and this was a very weak moment for him,
    as instead of letting Matt talk, he insisted on hogging most of the time himself, though he had little of value to say. He ended up looking like an arrogant asshole.

  13. collapse expand

    Saved from disaster, they turned the ship around and headed right back for the iceberg.

    Yes but isn’t this what so many women in abusive relationships do? They stay with what they know, believing that the ‘unknown’ is much more frightening than the disaster that’s staring them in the face. Does this make the ‘powers-that-be’ at Goldman Sachs frightened women afraid to do what is best?

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