Yes, it was just another long weekend for Goldman Sachs, as we're learning now in the MSM. (Or, so I thought. Heh!)
Business as usual...
(DIARIST'S NOTE: This appeared up on Bloomberg for about an hour tonight: "Goldman Sachs Set to Reap $1 Billion Payment in CIT Bankruptcy." Going back to double-check the link, roughly 90 minutes later, it was nowhere to be found! [If anyone comes across a link, I'd appreciate seeing it...again.] I did manage to copy down the entire story, however; of course, I will only post three or four graphs of it, down below. Again, if anyone finds the link to this Bloomberg story--it appears to have been deleted there but I could easily be wrong, it may have just been "archived" under a different link--please let me know! UPDATE: Meanwhile, bigtime thanks to bamabikeguy for tracking down the story link from the Financial Times, here: "Goldman to be paid $1bn if CIT fails")
...more about this in a moment...first, a little background (also from the past few days)...
JUST ANOTHER LONG WEEKEND...
Via Naked Capitalism on Saturday, from Satyajit Das, derivatives expert and author of "Traders, Guns, and Money"..."Guest Post: Still The Masters of the Universe"
Guest Post: Still The Masters of the Universe
By Satyajit Das
Naked Capitalism
Saturday, October 3, 2009
...The Masters of the Universe that survived the carnage are back to their old tricks. The `fight for talent' means that bonuses and remuneration guarantees for new employees are all back in vogue.
Government attempts to deal with the problems of the financial system, especially in the U.S.A., Great Britain and other countries, illustrate Mancur Olson's thesis - small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The resulting policies benefit the coalitions and its members but large costs borne by the rest of population.
The "finance government complex" (dubbed "Government Sachs" by its critics) and financiers have proved exquisite masters of the game of privatisation of profits and socialisation of losses. Many countries now practice Chinese socialism with Western characteristics.
A year after the collapse of Lehman, the near collapse of AIG and the grande mal seizure in financial markets, the Masters of the Universe are still firmly in charge. As Giuseppe di Lampedusa, author of The Leopard knew: "everything must change so that everything can stay the same."
Bold type is diarist's emphasis.
Then, another excellent column from Gretchen Morgenson in Sunday's New York Times: "The Cost of Saving These Whales."
There's a reason why Ms. Morgenson is widely recognized as being, albeit arguably, the very best business journalist in this country. (IMHO, I think she is.) This article is further proof of same. In it she notes economist Dean Baker's commentary regarding how the cost of money for the 18 largest, too-big-to-fail banks is substantially less than the price that almost every other bank in the U.S. pays.
The conclusion here is that, effectively, it is just one of many hidden federal subsidies that taxpayers underwrite as far as Wall Street's concerned.
...Quantifying these advantages is difficult, though. While bailouts have numbers attached to them, hidden benefits, again subsidized by the taxpayer, are harder to assess. The result is that taxpayers may mistakenly believe that when a bailout recipient repays a loan, subsidies received by the institution have stopped.
--SNIP--
...our government wouldn't dream of calculating the hidden costs associated with the bailout binge -- taxpayers might become even angrier than they already are...
Ms. Morgenson then tells us of Baker's study, provided under the auspices of the Center for Economic Policy Research...
Using data from the Federal Deposit Insurance Corporation, Mr. Baker's study found that the spread between the average cost at smaller banks and at larger institutions widened significantly after March 2008, when the United States government brokered the Bear Stearns rescue.
From the beginning of 2000 through the fourth quarter of 2007, the cost of funds for small institutions averaged 0.29 percentage point more than that of banks with $100 billion or more in assets. But from late 2008 through June 2009, when bailouts for large institutions became expected, this spread widened to an average of 0.78 percentage point.
At that level, Mr. Baker calculated, the total taxpayer subsidy for the 18 large bank holding companies was $34.1 billion a year.
But, therein, Baker tells us we can't really blame this just on the too-big-to-fail banks. The cost of money, in general, as Baker notes, has risen during other recessions. What Baker focuses upon, however, is the spread between what the top 18 banks pay for money, versus what all of the other banks are paying.
If Mr. Baker is correct about the estimated size of the subsidy, the costs of too-big-to-fail are substantial when compared with other government programs. At $34.1 billion a year, the subsidy is more than twice the grant given under Temporary Assistance to Needy Families, a $16.5 billion program that helps recipients move from welfare to work. A $6.3 billion subsidy would be roughly what the government spent in 2008 on the Global Health and Child Survival program, an initiative aimed at preventing malaria, AIDS and tuberculosis.
The subsidy also looms large when compared with bank profits. Mr. Baker's estimate of $34.1 billion would be equal to almost 50 percent of projected profits this year at the 18 largest institutions. The $6.3 billion estimate would amount to 9.1 percent of expected earnings.
--SNIP--
"This should concern policy makers," Mr. Baker noted, "since it would imply that a substantial portion of the profits of the largest banks is essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions."
Bold type is diarist's emphasis.
Morgenson notes--citing Capital One and Regions Bank as examples--that, in some specific instances, this subsidy may even exceed the bank's profits!
Now, about that "cost of money." So, we now know that most banks, except for those too-big-to-fail, pay a bit more for their funds--more than those Masters of the Universe that Das references above. But, what about a lender like CIT, that provides credit to roughly 1,000,000 small businesses? What do they do when they're forestalling bankruptcy and their back's against a wall; and hundreds of thousands of Main Street businesses, like most Dunkin' Donuts' franchisees, rely on them just for day-to-day operations?
Hmmm...let's see...how about $1 billion in interest to Goldman Sachs for a $3 billion dollar, 15-month loan?
Isn't that special?
Goldman Sachs Set to Reap $1 Billion Payment in CIT Bankruptcy
By Dakin Campbell
11:31PM EDT
Oct. 4 (Bloomberg) -- Goldman Sachs Group Inc. is set to earn about $1 billion in the event CIT Group Inc. enters bankruptcy or otherwise ends a $3 billion financing agreement, according to a person familiar with the matter who declined to be identified because the payout hasn't been disclosed.
The payout would cover fees from a 20-year agreement signed June 6, 2008, according to regulatory filings. Under the deal, CIT agreed to pay Goldman 2.85 percent of the maximum amount lended under the facility, or $85.5 million annually for the first decade and then a declining amount after that, the filings show.
"This would not be a windfall payment," Goldman Sachs said in a statement today...
--SNIP--
CIT is in talks with Goldman to amend the facility, but no agreement has been reached, according to an Oct. 2 CIT filing. The Financial Times reported the payout earlier today, without saying where it got the information.
(UPDATE: huge thanks to bamabikeguy for tracking this down from the FT, "Goldman to be paid $1bn if CIT fails")
So, what is going to happen to CIT this week? Well, this should just surprise the hell out of us, right? I'm shocked! Shocked, I say! From BloggingStocks.com, on Thursday, October 1st, 2009: "CIT is on the brink of collapse. Will it survive?"
CIT is on the brink of collapse. Will it survive?
Posted Oct 1st 2009 9:30AM by Connie Madon
CIT Group is one of the largest lenders to small- and medium-sized businesses in the U.S. But it has been plagued with financial troubles for nearly a year now. Last year the firm received $2.3 billion in federal bailout money. That helped them stave off bankruptcy for a while. Then this past July it received another $3 billion loan from some of its largest bondholders.
Apparently these stimulus packages are not enough to keep CIT Group Inc. (NYSE: CIT) afloat. The root of the problem is $30 billion dollars of outstanding debt. The latest maneuver would be to offer bondholders a stake in the company. This move would eliminate 40% of its outstanding debt, according to a Wall Street Journal report.
The key sticking point here is that by turning over control to bondholders, common shareholders would be wiped out. In addition, the $2.3 billion in federal stimulus money would go up in smoke.
Bold type is diarist's emphasis.
So, there you have it. Goldman is lining up to reap $4 billion, including a tidy and downright usurious $1 billion profit, and/or a piece of CIT's $30 billion loan portfolio (I've seen this number reported as high as $75 billion, by the way); and the taxpayers lose $2.3 billion; and, we're not even talking about the stockholders, now are we?
I could ramble on about how the ongoing existence of these still-insolvent (if you're a GS lawyer reading this, that's my opinion), too-big-to-fail entities are the epitome of everything that's wrong with America, today. But, why bother when the facts do all the talking for me quite nicely on their own?
Then again, here are the thoughts on many other Goldman acts of Hall-of-Fame hubris over the past few days, as noted this weekend from a couple of other pundits on our economy whose opinions are held in much higher regard than yours truly...
# # #
From Simon Johnson at Baseline Scenario, on Saturday: "A Short Question For Senior Officials Of The New York Fed."
A Short Question For Senior Officials Of The New York Fed
Simon Johnson
Baseline Scenario
October 3, 2009
At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) - hence the brouhaha over Steven Friedman's shareholdings.
Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People's Daily; CNBC). US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.
Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)
Increasingly, the issue of "too big to regulate" in the public interest is being brought up - an issue that has historically attracted the interest of the Department of Justice's Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?
(Story continues...)
And, then there's this, from Zero Hedge, last Tuesday: "Goldman's "Naked Short Selling" Strawman. But, I told you all about that in my diary the next day: "Taibbi's Naked-Shorting Rage: Goldman's Lobbying, SEC's Fail."
And, what about the Securities and Exchange Commission, the folks that were responsible for overseeing Goldman up until they morphed into a bank late in 2008? Ooops! "Ex-SEC chief reincarnated as Goldman Sachs policy adviser."
Not to worry, we've got everything under control! "This won't happen again." Heh.
Yes, restating that great quote from the top of this diary, from Giuseppe di Lampedusa:
"...everything must change so that everything can stay the same."
# # #
SUGGESTED READING REGARDING THE REGULATORY REFORM FAIL THAT'S NOW PLAYING OUT BEFORE US IN WASHINGTON:
It's pretty much a total sellout as far as regulatory reform's concerned, from Damian Paletta and Kara Scannell at the Wall Street Journal: "Democrats Soften Financial Bill"
Liam Halligan, at the London Telegraph, a few days ago: "No reform, just a cosmetic patch for a discredited, flawed regime."
With plenty more to say on the matter, here's the NYT's Gretchen Morgenson from 9/13/09: "But Who Is Watching Regulators?"
From Edward Harrison, publisher of Credit Writedowns, and frequent guest host of Naked Capitalism: "Financial Reform: Not happening but the need is clear."
From Yves Smith, the publisher of Naked Capitalism, on the over-arching problem in D.C. as far as regulation's concerned: "The Real Regulatory Revolving Door"