Okay, This Time Matt Taibbi Nails Goldman And The Bailout

“Goldman will surely deny that its risk-taking is subsidized by the taxpayer — but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it’s not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs — or should we say Goldie Mac? — enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.”

“So what’s wrong with Goldman posting $3.44 billion in second-quarter profits, what’s wrong with the company so far earmarking $11.4 billion in compensation for its employees? What’s wrong is that this is not free-market earnings but an almost pure state subsidy.”

Pop quiz: which one of the above quotes comes from Rolling Stone’s Matt Taibbi and which comes from the editorial page at the Wall Street Journal.

We’ll get to the answer in a bit. What fascinating is that it’s so hard to tell which is the long-standing voice of capitalism and which is the writer for the one time icon of the counter-culture. To put it differently: what could have brought us to the point where both are aiming their scornful analysis at the most successful firm on Wall Street?
 
In a word: Bailout.

It’s taken some time but finally people from all over the political spectrum are looking up and noticing that the banner waving on the flagpole stands for Bailout Nation rather than the land of the free. And they’re pissed.

Not everyone understands why they are pissed off. For instance, the Congressmen grilling Hank Paulson today are thoroughly confused. Some want to know why Paulson didn’t fire Bank of America CEO Ken Lewis. Others want to know where Paulson got the temerity to threaten Lewis’s job. Still others just seem to want a chance to vent.

But Matt Taibbi, whose famous Rolling Stone article proposed a somewhat absurd conspiracy theory that described Goldman as a bubble machine, has finally figured it out. What’s wrong with Goldman isn’t that is evil or even uniquely evil. What’s wrong is that it is pocketing money that it is making, in part, because it isn’t subject to market discipline. It is close to a pure play government arbitrage firm these days.

Taibbi ticks off the ways Goldman enjoys government support.

The TARP Exit Subsidy. Under the relevant law, banks wanting to exit the TARP program were supposed to not face any obstacles. They could just sent the money in, consult with their regulator and they’d be out. This was intentionally included in the law, changing an earlier agreement that the original TARP banks made to not exit TARP until they got permission.

But Tim Geithner didn’t like this new deal so he ignored it. He decided to require that the TARP recipients had to issue new equity and new debt in order to exit. (Later, he eliminated the equity requirement but it was too late—banks were already issuing the equity.)

As it turns out, this was a major boon to Goldman, since it got to underwrite many of the new issues.

Taibbi really nails this one:

So say International Reckless Dickwad Bank needs to issue $100 million in new stock to pay off TARP; they hire Goldman to do the deal, and since the fee for equity underwriting is 7%, Goldman gets, in essence, a state-mandated $7 million fee. Because so much money was lent out under TARP, the underwriters on Wall Street made a massive bonanza on all the new bank stock. As noted above, Goldman’s equity underwriting department hauled in $736 million this quarter. Does this happen without the bailouts? No. Do the bailouts happen if banks like Goldman hadn’t blown up the universe in the first place? No. You do the math; this is another subsidy.

Explicit Debt Guarantees. Under the Temporary Liquidity Guarantee Program, Goldman is basically able to piggy back on the credit of the United States taxpayers. Goldman issued $28 billion in FDIC-backed debt under this program. “Exactly how hard is it for a bank to make a profit when it has unlimited access to virtually free money? It is almost impossible for banks to not make money when their cost of capital sinks this low,” Taibbi writes.

The Discount Window.  It’s not well understood by the broader public how important access to the discount window is, and how it lowers Goldman’s borrowing costs. Basically, anyone who lends money to Goldman knows that if there’s ever a short term liquidity crunch, Goldman can turn around and borrow from the Fed. This means that lenders face a lot less risk that Goldman will run into the kind of liquidity crisis that ruined Bear Stearns, which means they lend to Goldman at cheaper rates.

The Implicit Guarantee. This is one that Taibbi misses. (We forgive you Matt.) Goldman is now the equivalent of Fannie Mae, protected by a market-wide assumption that there is no way it can ever fail. Its creditors can count on Goldman’s debt being almost as good as government paper.  Except Goldie Mac is even worse than Fannie, which was at least subject to supervision by a dedicated federal regulator. (for all the good that did.)  We still haven’t figured out how to regulate these systemically important, too big to fail monsters. So we’re just letting them run rampant across America hoping that someday we’ll discover the financial equivalent of Saint George to slay the dragon.

The Government Carry Trade. To sum up, Goldman Sachs is taken advantage of a new trade that was invented in the midst of the crisis. It’s similar to the old fashioned carry trade where banks borrowed money in low interest rate currencies and lent where they could get higher yield. Only these days, the carry traders don’t have to go abroad to find the low interest rate. We’ve brought it home to them. They borrow cheap thanks to this conglomeration of explicit and implicit guarantees, and lend out at higher rates. If your cost of capital is artificially cheap, all sorts of trades that would never be profitable in a free market suddenly become profitable. 

As Taibbi points out, this isn’t how it was supposed to work. The bailout was supposed to be an emergency measure that wouldn’t permanently warp the market. Main Street was going to benefit as much as Wall Street. Everyone from Hank Paulson to the talking-heads on CNBC told us all it was irresponsible populism to describe this as a giant gift to Wall Street.

You want some good news? Here it is. We’re making progress in getting people to see the bailout more clearly. As Anna Schwartz warned us way back in October,the bailout was structured to save banks and bankers rather than the banking system, much less revitalize the economy. As Taibbi writes:

“This is the final evidence that the bailouts were a political decision to use the power of the state to redirect society’s resources upward, on a grand scale. It was a selective rescue of a small group of chortling jerks who must be laughing all the way to the Hamptons every weekend about how they fleeced all of us at the very moment the game should have been up for all of them.”

None of this, of course, is confined to Goldman. It’s now a systemic risk for which we are all paying the price.

Oh, and as promised, here’s the answer to the quiz. The first quote, with the mention of ‘Goldie Mac’ is from the Journal. The other, more sober sounding one, that’s Taibbi. Go figure.