Shut Up, Paul Monica!

Congrats Paul La Monica. Your editorial,  “Shut up, Lloyd Blankfein!” is spreading like wildfire. It’s ‘gone viral’ as they say. However, it is clear that your knowledge of the issues involved is limited, at best.

It draws in populists with the provocative “Shut Up” headline, then morphs into stealth Goldman ass-kissing. It essentially tells Goldman-critics to man up and stop whining.

It starts out with a bit of promise:

The public relations gurus who are advising Goldman Sachs Chief Executive Officer Lloyd Blankfein might want to give him some new advice. Shut up!

Blankfein made a startling confession Tuesday. He apologized for Goldman’s role in the financial crisis, saying that the bank ‘participated in things that were clearly wrong and have reason to regret.’

But any redeeming qualities end there. He goes on to display ignorance in the subjects of finance and banking. He essentially argues that Goldman should be allowed to do as it pleases. This part particularly rankled me:

The notion that Goldman’s good fortune is a problem is silly. Even though many average Americans are still struggling financially, it’s misguided to suggest that everybody should be suffering and that the nation would have been better off if Wall Street went under. . .

Goldman Sachs is a bank. It’s supposed to make money. It’s supposed to take risks. Lloyd isn’t exactly running the March of Dimes.

Where to begin? Monica’s statement that banks are “supposed” to take risks is interesting. Because I thought a bank was supposed to safeguard people’s money, while making responsible loans to others. That’s how fractional-reserve banking works.

Goldman Sachs is an investment bank/hedge-fund with government guarantees. They’re not a “bank” in the traditional sense of the word.

When the U.S. converted GS and other “systemically important” firms to bank holding companies, it flat-out saved their asses. Ongoing perks include cheap Fed funds and the ability to issue government-guaranteed debt (Goldman still has around $20b in gov-backed debt).

And Monica says they are supposed to take risk, with explicit government-backing? That, my friends, is 100% pure garbage.

His statement that we should get off Goldman’s back, since they already paid back government assistance is also hopelessly flawed:

And let’s not forget that Goldman has paid back taxpayers not just for the warrants but the full $10 billion in TARP money. There’s a big difference between Goldman and Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500), which still don’t seem to be healthy enough to return bailout funds.

As I pointed out above, they are still and always will be HUGE beneficiaries of government support.

M-o-r-a-l  H-a-z-a-r-d

Allow me to introduce Mr. Monica to a concept known as moral hazard. Apparently the idea has escaped him and other Goldman apologists. Moral hazard occurs when banks are implicitly backed by governments. Although it isn’t really implicit these days. They’ve made it clear – they will bail out any TBTF institution.

One huge benefit of government-backing is cheaper private rates. Lenders don’t need to consult their inaccurate loan-models to recognize that government-guaranteed loans are safer than those tainted by unsavory free market “risk”.

Financial firms have long-benefited from an implicit bailout guarantee known as the Greenspan Put. If things get bad due to reckless activities, emergency funds will be made available at record-low rates. Everyone knew it, and acted accordingly. Hence one cause of the bubbles.

This is why people don’t like TBTF institutions. Profit is subsidized, and losses absorbed by the public.

Under Bernanke/Geithner these actors should feel more secure than ever. Think of post-2007 bankers as naughty teenagers caught vandalizing a neighbor’s house. In front of his neighbor, their Dad [Bernanke] scolds them, “You’re in deep deep trouble boys *wags finger at boys, then looks neighbor in eye* I am so sorry, Mrs. Krabapple [the public]. I promise it will never happen again.”

When the door shuts, Dad grins proudly at his sons, “Not bad, boys. You coulda make a dozen omelets from that mess on Krabapple’s bay window. Try not to get caught [bring the global economy to its knees] next time. OK?”

A little thing called… Glass Steagall

I would also remind Mr. Monica (or introduce, if that’s the case) that Glass-Steagall was enacted in 1933 for a reason. It separated bank-holding companies from risky financial firms ( like those with huge trading desks).

Glass-Steagall was enacted to prevent banks from gambling with other people’s money. Throughout history banks have always gotten greedy and put customer funds at risk. Unless they are outlawed from doing so, as Glass-Steagall largely did. And please don’t blame “free markets” for bank schemes. This is an issue of decriminalization, not deregulation.

Opacity Rules

On top of all this, we are not allowed to view collateral pledged by banks for these Fed “loans”. Why? Many suspect the collateral is garbage — sub-prime securities and the like. All valued at “mark to imagination” valuations.

Hypothetically, a bank with a sub-prime bond worth $.30 (according to an antiquated measure of value known as ‘what people will pay’) might get $.80 or $.90 from their friendly Fed rep. I’d love to be proven wrong on that, and learn that our banks have been handing over pure gold to the Fed as collateral.

In August 2009 Bloomberg won a Freedom of Information Act (FOIA) case on the bank-collateral issue. The judge ruled that the Fed has 30 days to turn over the requested documents, but the Fed is stonewalling. Goldman could be a big beneficiary of this support as well, but we don’t know.

They protest that member-banks should not be forced to acknowledge their dependence on emergency funds. The lengths they are going to in order to stop this information getting out should be a huge hint. Whatever is hiding behind this curtain looks more like Freddy Krueger than the Wizard of Oz.

This new, and more explicit government backing, should have subjected firms like Goldman to further regulation. It didn’t. They still don’t file a full balance-sheet report like other banks. They’re allowed to own hedge funds and take as much risk as they please.

In short, GS has not shed taxpayer support. Doing so is impossible now that the government has made it clear it is too big and important to fail. So it’s time to break them, and a lot of other firms, up.