Matt Taibi and others have written about how Goldman Sachs, as an extremely well-connected investment bank (they have now become a commercial bank although with the deregulation of banking, the lines between the two have blurred and it remains to be seen whether Goldman's recent conversion to a Commercial bank will mean that they face a reinstatement of the Glass Steagall regulations that were done away with under the Clinton Administration) has been making billions of dollars on financial trades that profit from Goldman's unique position at the nexus of where financial legislation and financial opportunity converge.
As John Bogle, the founder of Vanguard securities and political writer, Kevin Phillips, have been saying - Wall Street does not create wealth but profits from taking a piece out of the wealth created by others. Recently, the push for deregulation of the financial markets starting with Reagan, continuing under Clinton and the free-for all under George W Bush, the huge piece taken out of real wealth has threatened the stability of the whole economy.
See John Bogle's new book "Enough". Check out Kevin Phillips's books some of which he referred to in this Huffington Post piece:
One reason that Goldman Sachs has a front row seat to policy and is able to wring so much money out of the economy is that they are a very influential member of a very powerful group that is a key part of monetary policy. They are a Primary Dealer.
A Primary Dealer is a designated bank or investment bank that is used by the Treasury to execute monetary policy and to bid on Government bonds and make a market in those bonds. Thus a Primary Dealer has special responsibilities but also has special advantages as a key player in the financial markets.
The Federal Reserve controls money supply through financial operations through the banking system. The total money supply is a function of the reserve requirements on the deposits of banks or the percent of deposits that they cannot lend out but must keep to protect those government insured deposits. (The percent used to be 20%...it may still be, but please correct me if 20% is wrong.) This reserve requirement creates a "multiplier effect" http://en.wikipedia.org/...
The 80% of the deposits that banks can lend out are then deposited by the borrower in another bank which also must keeps 20% on hand lending out 80% and so on until the full expansion or multiplier effect has been reached. The Fed can control money supply in a few different ways. One way is to change the reserve requirement. That is not used very often. Another way is to make short term collateralized loans to Primary Dealers which puts more money into the system or a reverse transaction to temporarily shrink the money supply. Those are called repos and reverse repos.
The US Treasury needs primary Dealers to bid on the trillions of dollars of Treasury notes and bonds in the public auctions they hold to finance the public debt. Anyone can put a tender in for a treasury bill or note or bond. This can be done through a broker dealer and if one puts a noncompetitive bid in through say Fidelity or Vanguard, you will pay no commission and you will get the best yield that results from the auction.
My argument in this diary is that with the US debt at huge levels, 11 1/2 trillion dollars at the moment http://www.brillig.com/... the federal government needs the primary dealers including the big banks to support their auctions and to help peddle them more than ever. In other words, even in tough markets, the Primary Dealers are obligated to place large orders for the public treasury debt and if the market continues under pressure, to sell these securities at a loss. If the Primary Dealers didn't exist these multi-billion dollar auctions could be very disorderly, especially if the treasury could not get enough bids for their (our) bonds. Of course yields would start rising dramatically to temp buyers to place an order but treasury auctions are usually very orderly affairs with yields changing pre-auction by only a few basis points (a basis point is 1/100th of a per cent.) It would be much harder to manage the public debt with wild auctions.
I don't know what this means in terms of the negotiations that may be taking place between the US Government and the Primary Dealers who help smooth the sale of the treasury debt, but it's something I've wondered about lately.