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Public Citizen ~ November 19, 2009:
Since the beginning of 2009, organizations in the financial services sector – including banks, investment firms, insurance companies and real estate companies – have commissioned 940 former federal employees as federal lobbyists, Public Citizen’s analysis of data provided by the Center for Responsive Politics (www.opensecrets.org) shows.
OpenSecrets Revolving Door search engine
ABA Washington Perspective is a weekly update offering in-depth information and analysis on Washington legislative and regulatory activities important to bankers.
After the government bailout of A.I.G., in order to end the collateral calls on the insurance giant, the New York Federal Reserve—whose chairman at the time was former Goldman chairman Steve Friedman—decided to purchase a slew of the securities that A.I.G. had insured, including $14 billion of those on which Goldman had purchased insurance. The government—meaning taxpayers—did so at full price, although according to a recent Bloomberg story, there had been negotiations with A.I.G. to do so at a 40 percent discount. Goldman says that the New York Fed broached the topic of a discount only once. The firm’s response: a flat no. While no one will ever know what would have happened had A.I.G. gone under, the essence of what did happen is perfectly clear. As a recent report by the Office of the Special Inspector General for tarp put it, the decision to pay full price “effectively transferred tens of billions of dollars of cash from the Government to A.I.G.’s counterparties.” Or to put it another way: because Goldman felt it was owed its billions by A.I.G., the firm took it from taxpayers instead.
The more interesting question may be the role that Goldman played in A.I.G.’s near destruction. Goldman says that it was largely an intermediary between A.I.G. and clients it won’t name. So when, after the government bailout and the Fed’s decision to pay full price, it received $8 billion from A.I.G., Goldman used that money, plus the billions in collateral it already held, to purchase A.I.G.-insured securities from their owners and deliver them to A.I.G., which had wanted to take them in exchange for canceling the insurance.
[..]
But outsiders say Goldman’s dealings with A.I.G. look more complicated than that. A memo written by Joseph Cassano, the former head of the A.I.G. financial-products division, shows that some of the securities Goldman insured with A.I.G. were created by none other than Goldman itself. Janet Tavakoli, a structured-finance expert who runs her own consulting firm in Chicago and wrote a book on C.D.O.’s in 2003, notes that Goldman’s deals also figure prominently in the list of C.D.O.’s upon which other firms bought insurance. Which is why, she says, “Goldman was responsible for huge systemic risk, and now they’re trying to pretend they weren’t.” Finally, on November 17, as criticism mounted, Blankfein issued a public apology: “We participated in things that were clearly wrong and have reason to regret."
The more interesting question may be the role that Goldman played in A.I.G.’s near destruction. Goldman says that it was largely an intermediary between A.I.G. and clients it won’t name. So when, after the government bailout and the Fed’s decision to pay full price, it received $8 billion from A.I.G., Goldman used that money, plus the billions in collateral it already held, to purchase A.I.G.-insured securities from their owners and deliver them to A.I.G., which had wanted to take them in exchange for canceling the insurance.
[..]
But outsiders say Goldman’s dealings with A.I.G. look more complicated than that. A memo written by Joseph Cassano, the former head of the A.I.G. financial-products division, shows that some of the securities Goldman insured with A.I.G. were created by none other than Goldman itself. Janet Tavakoli, a structured-finance expert who runs her own consulting firm in Chicago and wrote a book on C.D.O.’s in 2003, notes that Goldman’s deals also figure prominently in the list of C.D.O.’s upon which other firms bought insurance. Which is why, she says, “Goldman was responsible for huge systemic risk, and now they’re trying to pretend they weren’t.” Finally, on November 17, as criticism mounted, Blankfein issued a public apology: “We participated in things that were clearly wrong and have reason to regret."
The other reason for Goldman’s profits is that the government has flooded the system with money, not just the money it used to rescue the financial system but hundreds of billions more in stimulus, in support of the housing market, and in the Federal Reserve’s purchases of securities. Analyst Meredith Whitney calls “government manipulation” the “strongest, most important theme of the capital markets in 2009.” You cannot fault Goldman for taking advantage of that, but it’s also true that, as National Economic Council director Larry Summers said, “there is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.”
As it currently stands, the billions of dollars in profit in the derivatives business are basically controlled by the biggest dealers, including J. P. Morgan and Goldman. Critics say that those profits are protected by the opacity of the market, because no one can see the pricing. It’s as if your only source for the price of a share of IBM were whatever the dealer told you it was. Today, everyone, but everyone, advocates more transparency in the name of preventing the hidden tangle of risk that almost destroyed the financial system. As Blankfein says, transparency is “motherhood and apple pie.”
But the devil is in the details. In what one person describes as “hand-to-hand combat” in the dark alleys of D.C., Goldman and the other big dealers are seeking exemptions to some proposed new requirements that would help shine a big spotlight on derivatives trading—thereby hoping to keep the market murky. “Every time we go into a member of Congress’s office, they already have a Goldman Sachs white paper on this,” marvels another person who is active in Washington. The dealers, including Goldman, argue that they are trying to preserve their clients’ profits, not their own.
All in all, Goldman executives seem to be gambling that the current mood, in which the rest of us are rethinking the system that brought us to the very edge, and maybe into the depths, of a vast black pit, will blow over. And they may be right.
But the devil is in the details. In what one person describes as “hand-to-hand combat” in the dark alleys of D.C., Goldman and the other big dealers are seeking exemptions to some proposed new requirements that would help shine a big spotlight on derivatives trading—thereby hoping to keep the market murky. “Every time we go into a member of Congress’s office, they already have a Goldman Sachs white paper on this,” marvels another person who is active in Washington. The dealers, including Goldman, argue that they are trying to preserve their clients’ profits, not their own.
All in all, Goldman executives seem to be gambling that the current mood, in which the rest of us are rethinking the system that brought us to the very edge, and maybe into the depths, of a vast black pit, will blow over. And they may be right.
resources:
Public Citizen ~ November 19, 2009:
Since the beginning of 2009, organizations in the financial services sector – including banks, investment firms, insurance companies and real estate companies – have commissioned 940 former federal employees as federal lobbyists, Public Citizen’s analysis of data provided by the Center for Responsive Politics (www.opensecrets.org) shows.
OpenSecrets Revolving Door search engine
ABA Washington Perspective is a weekly update offering in-depth information and analysis on Washington legislative and regulatory activities important to bankers.