Pearlstein: 'Profitable Goldman Better for Taxpayers'

Post's Pearlstein Gets It Very Wrong

Much of [yesterday's Senate] hearing focused on how Goldman went from having billions of dollars of exposure to the subprime mortgage market in the first half of 2006 to posting big profits from the implosion in that same market by the second half of 2007.

The more benign way to look at this dramatic rebound is that it speaks to Goldman's knack for anticipating the market and its willingness to break from the Wall Street herd. Many of us may be jealous of Goldman's success or suspicious of exactly how it came, but surely we are all better off than if Goldman had remained long on mortgages, tumbled into insolvency and required a big taxpayer bailout.

--Steven Pearlstein, "Two planets collide for three hearings on Goldman"; The Washington Post(4/28/2010)

Of all the myths and misconceptions about Goldman Sachs' role in today's financial crisis, the one perpetuated (above) by the normally astute Mr. Pearlstein is the most infuriating and pernicious.

That's because society is patently NOT better off because Goldman Sachs profited from the housing bust.

By figuring out how to make money off of "shit" -- Goldman Sachs' word for their mortgage-backed securities, not mine -- Goldman stoked demand for . . . . more shit.

That assured that even more oceans of capital would flood into the housing market, driving prices even higher -- and making any crash harder.

Ironically, the higher the housing market went, the more potential to "short," or bet against it, which sucked in even more capital.

Doomsday machine, indeed.

Instead of viewing Goldman's obscene profits as averting another taxpayer bailout, as Pearlstein does, they need to be viewed in the larger context of causing trillions of dollars of (additional) carnage in the housing market and broader economy.

And Pearlstein is dead wrong that Goldman didn't get bailed out.

What else do you call pumping $185 billion(!) into AIG; allowing Goldman Sachs to become a bank holding company virtually overnight and borrow for free from The Fed; beggaring savers with zero percent interest rates to resuscitate the banks; using The Fed's balance sheet as a dumping ground for Goldman (and other banks') toxic assets.

And on and on . . . .

"Shitty" doesn't begin to describe it.

"Perfectly Legal": AIG Redux

Goldman Sachs & the 4 Not-So-Little PIIG's

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal.

--"Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis"; The New York Times(2/14/2010)

We all know the basic story line by now.

Some systemically-important entity is left, hemorrhaging and in financial shock, on the side of the road, the victim of (yet another) financial hit-and-run.

Yesterday, it was AIG; now, it's Greece.

Tomorrow, it will be one or more of the other "PIIGS" (Portugal, Italy, Ireland, Spain).

The license plate of the well-appointed, luxury car just disappearing over the crest clearly reads "Goldman Sachs." The forensic evidence at the crime scene (make that "non-crime scene") further implicates it.

Yet when the cops pull over the speeding, inexplicably damaged vehicle, the driver explains, quite calmly and rationally, that "no laws were broken."

And the cops -- and the rest of us -- are left scratching our collective heads.

(Actually, that last part about the financial cops is wishful thinking -- it turns out that they work for Goldman Sachs, used to . . . or want to).

"Non-Crime Scene"

As always, Goldman Sachs' defense is a bit more subtle and multi-layered (see the "It's Not My Dog Defense.")

Appearances notwithstanding, Goldman Sachs was actually speeding to get help.

Oh, and the injured pedestrian was carelessly walking in the road.

Or they suddenly ran in front of the car, deer-like, and there wasn't time to stop.

Because, after all, driving conditions were terrible.

Which brings up the possibility (likelihood?) that other cars may have been involved.

Which doesn't really matter, anyways, because the patient, now lying near death, was already suffering from terminal cancer.

And even that doesn't matter, because Goldman Sachs had Greek law changed to make committing financial hit-and-run . . . perfectly legal (Oops! That would be U.S. law).

And so on.

A-r-g-g-h-h!! Enough already!!

Chapter 2: Different this Time?

What's different this time is that apparently it's up to ordinary Germans to decide whether to front Greece the money it foolishly promised to re-pay its Wall Street loan sharks, led by Goldman Sachs.

Of course, when the prey was AIG, Goldman Sachs merely had to pick up the phone (walk down the hall?) to make sure that it's predatory bets were made good by the U.S. government (and the taxpayers standing behind it).

But what sway does Goldman Sachs have over 80 million German taxpayers?

Perhaps more to the point, what leverage does Goldman Sachs have over the German government?

Here's a guess: its best instrument and lever is none other than the very same, bought-and-sold U.S. government that delivered Goldman Sachs -- rather amply -- from the fallout resulting from its disastrous AIG hit-and-run.

How much more of this does anyone possibly need before revoking Goldman Sachs' driver's license, for good??

How and whether to save the PIIG's remains to be seen.

This time, however, the entity that should be presented with the clean-up bill -- whether it's for the funeral or the hospital -- is Goldman Sachs.

AIG: Liquidate it Already

Hoist by Our Own Petard (Bailout Money)

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.

--Depression-era Treasury Secretary Andrew Mellon

Andrew Mellon, President Herbert Hoover's Treasury Secretary, would have known what to do about AIG: liquidate it.

Doing so a year ago would have spared taxpayers the spectacle (obscenity, really) of bailed-out TARP companies spending millions lobbying Kenneth Feinberg, the so-called Wall Street Pay Czar charged with setting their executives' pay:

A.I.G. alone spent $3 million on two compensation consultants and two Wall Street law firms. (Of course, most of that money ultimately came from taxpayers, who now own 80 percent of A.I.G.)

Not only did the high-priced talent hired by the [TARP] companies typically ignore one or more of Feinberg’s basic guidelines, but many also failed to answer questions and complete various templates. A.I.G. tried to make up for its failings by tossing in an additional 167-page PowerPoint presentation, which was drafted by one consulting firm as part of its $500,000 fee to “provide a full picture.”

--Steven Brill, "What's a Bailed-Out Banker Really Worth?"; The New York Times (1/3/10)

On what planet does a company supported by taxpayers get to spend millions of that money lobbying to receive even more millions in pay?? Really!?!

Deconstructing AIG: define, 'Almost'

"It Depends on What the Definition of 'Is,' Is"

Too much risk is just as bad [as too little]. Just ask the financial wizards at American International Group who ended up on the wrong side of tens of billions of dollars in financial contracts, almost bringing down the world’s biggest insurer.

--Andrew Ross Sorkin, "Taking a Chance on Risk, Again"; The NY Times (9/17/09)

Here's a thought: when a rogue subsidiary blows a hole the size of Singapore's economy -- $175 billion, to be exact -- in your company's balance sheet, you're way past "almost" bringing down the company.

You're not "almost down." You're very down.

In fact, in the history of capitalism, it really doesn't get much "downer" than that, at least for an individual company.

AIG exists today only because it received a $175 billion infusion (so far).

It got that money from the U.S. government -- which means us, which means our kids -- for exactly one reason: it owed it to so-called Too Big to Fail institutions like Goldman Sachs.

(Im)plausible Deniability

Wall Street Who-Dunnit: No One??

Victory has a thousand fathers, but defeat is an orphan.

--John F. Kennedy

Hurricane Katrina was an act of nature. The economy's Wall Street-triggered financial collapse is not. If and when anyone is actually held accountable for that, you can expect to hear variants (combinations?) of the following defenses.

(Im)plausible Deniability, or, "The Enron Defense"

Ken Lay, Enron Chairman, famously argued that he was out of the loop at the company he ran.

If you don't recall, Enron was a financially engineered house of cards -- complete with opaque, off-balance sheet entities -- that spectacularly imploded (sound familiar?). The resulting mess cost investors, creditors, and company employees about $100 billion -- a number that seems positively quaint by today's standards.

At trial, Lay argued that he was above it all, and didn't really understand all the complex transactions that led to the company's undoing.

Unfortunately, that stance was contradicted by multiple pieces of evidence, including the testimony of Lay's own lieutenants, incriminating email's, and Lay's conveniently-timed sale of millions in company stock (even as he was exhorting employees to buy).

Because Lay's claims of ignorance were so roundly refuted, the jury never really got to the far more legally relevant question: whether Lay should have known what was going on at his own company. After all, under corporate law, that's the board chairman's duty. And Lay certainly was paid -- munificently -- to know what was going on.

Knew . . . or Should Have

Fast forward to today.

In an instantly infamous letter run in last week's New York Times, Jake DeSantis, a senior executive at AIG Financial Products ("AIGFP"), argued -- amongst other things -- that he had nothing to do with the toxic credit instruments at the heart of the company's (and financial system's) melt-down.

If Lay's argument was that he was too high in the pecking order to have been in the loop, DeSantis' argument is that he was too low. DeSantis wanted the world to know that he refused to be a scapegoat and a fall guy. Plus, he had other (unspecified) job opportunities -- or did.

So, in a tone reminiscent of Richard Nixon's 1962 valedictory ("you won't have Nixon to kick around anymore"), DeSantis announced that he was resigning -- and donating his $750k after-tax bonus to charity.

Here is Matt Taibbi's take on DeSantis' claim of ignorance (or at least the printable part):

AIGFP only had 377 employees. Those 400-odd folks received almost $3.5 billion in compensation in the last seven years, a very large part of that money coming from the sale of credit default protection. Doing the math, that averages out to over $9 million of compensation per person. Ask yourself this question: If your company made that much money, and the boss of the unit made almost $280 million in just a few years, exactly how likely is it that you wouldn't know where that money was coming from?

Are we supposed to believe that Jake DeSantis knew nothing about Joe Cassano's CDS deals? If your boss and the top guys in your firm were all making a killing selling anything at all -- whether it was rubber kayaks, generic Levitra or credit default swaps -- you really wouldn't bother to find out what that thing they were selling was? You'd really just mind your own business, sit at your cubicle and put your faith in the guys up top to fill you in if there was something you needed to know?

--Matt Taibbi, The Smoking Chimp

Taibbi goes on to make the point that if, however inexplicably, DeSantis is actually clueless about credit default swaps . . . what expertise does he have that would justify taxpayers paying him millions to unwind them?

"I was just following orders" (or, The Eichmann Defense). If Wall Street firms were all headed by Ken Lay's, their subordinates are likely to claim that they were all Adolph Eichmann's.
Sometimes referred to as "the architect of the Holocaust" (and the subject of Hannah Arendt's chilling "The Banality of Evil"), Eichmann argued in his defense that he was merely a subordinate following Hitler's orders.

So, too, one might expect that all but the senior-most Wall Street executives will argue that they were merely implementing directives from higher-up's. To prevail, however, they will likely have to disavow thousands of incriminating email's, eyewitnesses' testimony, and their own extravagant compensation -- often in the hundreds of millions. Unlike Eichmann, who plausibly might have feared for his safety had he opted out, Wall Street's various accomplices -- er, underlings -- faced no such coercion.

Postscript: Eichmann's arguments were rejected, and he was hung.

"Everyone Did It." When you can't deny that you did something, or blame it on others, or otherwise excuse the conduct in question, then what? The predicament reminds me of one of my favorite lawyer jokes:

When a neighbor charges that the lawyer's dog bit him, the lawyer first denies it. When he's shown photos of the bite and the emergency room bill for the neighbor's stitches, the lawyer then argues that the dog attacked in self-defense. When numerous witnesses come forward to testify that the attack was unprovoked, the lawyer says . . . it's not his dog.

Unfortunately, millions in foreclosed homes, trillions in evaporated wealth, 10% unemployment, etc., are not a laughing matter.

A functioning legal system will manage to parse the foregoing defenses, lay blame, and hold somebody accountable. Recovery depends on it.

AIG Explained

Hollywood Couldn't Come Up With This Stuff

"The AIG bailout, in effect, was Goldman [Sachs] bailing out Goldman [Sachs]."

--Matt Taibbi, "The Big Takeover"; Rolling Stone (3/19/09)

"Here's the dirty little secret . . . most of the stuff that got us into trouble was perfectly legal. And that is a sign of how much we've got to change our laws."

--President Barack Obama

Taibbi's article is apparently the buzz of the blogosphere this weekend. Warning: it makes dark, corporate conspiracy movies like Michael Clayton seem like Snow White.

My advice: read it on an empty stomach. It would be a shame to waste a nice meal as you see how all the pieces fit together (at least according to Taibbi).

Quick summary: the dollars are bigger (much) than you think, the process worse and more opaque.

On the Blogs: Reaction to the AIG Reaction

If you've been out of the loop the last 48 hours or so, the big finance-related news is the political firestorm precipitated by AIG's bonuses, and the Fed's decision to create $1 trillion in new money (by buying mortgages and mortgage-backed securities).

On the blogosphere, there is a quick consensus emerging that the the public, led(?) by Congress, is missing the point (or more accurately, the forest for the trees).

In this case, the $165 million in bonuses are the trees; the $170 billion -- immediately paid out to the likes of Goldman Sachs and Merrill Lynch -- is the forest.

Michael Lewis puts it this way: 'the complexity of the issues at the heart of the crisis paralyzes the political processes’ ability to deal with them intelligently. I have no doubt that, by the time this saga ends, we will all know what happened to every penny of that $165 million in bonuses and each have our opinion of the morality of it. I doubt seriously we will ever understand the morality of the $173 billion payment that is the far more serious issue.'

While the AIG bonuses are the latest political lightning rod, the real scandal is where all the money given to AIG ended up -- and why.

P.S.: thanks to Barry Ritholtz's The Big Picture blog for the cartoon at the top.

"All Legal Means"??

Dealing with AIG: More Ideas

One day after [the President's] economic advisers insisted that their hands had been tied by contracts requiring the payments, Mr. Obama ordered the Treasury Department to “pursue every single legal avenue to block these bonuses” and make the American taxpayers whole.

--"Obama in Effort to Undo Bonuses at AIG"; The New York Times (3/16/09)

Warren Buffett has called the ongoing financial melt-down an "economic Pearl Harbor." Government officials, to rally support for various bailouts to date, have warned of economic collapse if their measures were rejected.

It sure seems like a national (if not global) emergency, albeit the financial kind.

And doesn't the President have extraordinary powers in such crises, like suspension of habeas corpus?

"Economic Treason"

In times of war and other crises, the Constitution contemplates that the President may arrest and indefinitely hold those who pose a threat to the country.

What AIG executives have done -- and are continuing to do -- arguably constitutes such a threat, on many levels (appropriating taxpayer money, destroying public confidence in government and the markets, etc.).

If there was such a thing as "economic treason" -- and there should be -- executives at AIG and several other companies have committed it.

AIG, cont.

AIG Creditors' Hold on U.S. Treasury

"I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody."

--James Carville

If Carville were to update his answer today, he'd no doubt substitute "AIG creditor" for the bond market.

In a world where equity investors have been chopped in half and and Lehman Bros. creditors were fed to the (bankruptcy) lions, AIG's creditors are being made whole. By the U.S. Treasury -- in other words . . . us.

So far, the amount paid out to AIG's creditors is approaching $200 billion.

The two questions dominating the "blogosphere" at the moment are: 1) exactly why are AIG's creditors being bailed out -- at 100 cents on the dollar, no less?; and 2) who are they?

AIG Bonuses: How Big?

AIG Tries to Bury (the latest) Bad News

Anyone reading the *Sunday papers is likely to notice the blaring headlines: AIG senior executives are being paid millions in bonuses. That, notwithstanding the almost $200 billion of taxpayer money already injected into the company.

What's interesting, though, is how the news first broke online, then changed rapidly.

Around 6 p.m. tonight, both The New York Times and The Wall Street Journal web sites broke stories saying that AIG is paying out $100 million in bonuses (amazingly, largely to the executives who worked in the unit responsible for most of the company's losses).

However, by later evening, the number in the Times story had morphed into $165 million, while the Journal article backed off on the number altogether, only reporting that AIG was to pay "millions in bonuses." Then, just before midnight, the Journal reported a dramatically higher bonus amount: $450 million.

Do I hear $700 million??

What on earth is going on?

Obviously, there's some confusion about the amount.

One possibility is that the news got buried -- or at least there was an attempt to bury it -- on a late Sat. afternoon, and the media are still digesting it. Not having seen the news release, one might further guess that it was not exactly a model of clarity.

This most recent, sordid episode involving AIG is eerily reminiscent of the Sept. weekend last fall, just before the government "rescued" the company, and just after Lehman Bros. collapsed.

Anyone who was glued to the financial news that weekend, as I was, recalls the "SOS" AIG put out, accompanied by its ever-rising estimates of its total losses.

First the number was pegged at $20 billion, then $40 billion. By the end of the weekend, the loss estimate had ballooned to $80 billion -- and then the government stepped in.

Since then, of course, the number has grown to almost $200 billion . . .

*I get practically all my news online, so don't usually know what the print headlines are.

Proposal: Financial "Son of Sam" Law

Look Who's Cashing in on the Mortgage Mess

Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering. So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess. Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.

--Eric Lipton, "Ex-Leaders of Countrywide Profit From Bad Loans"; The New York Times (3/3/09)

Let me see if I've got this right.

Bank executives at subprime lenders made hundreds of millions originating toxic loans that helped blow up the housing market. In turn, that helped blow up the banking system, which -- surprise! -- is now tanking the general economy.

Nothing has happened to them.

On the contrary, they are now using their toxic loan wealth and banking connections to make money a second time on toxic loans -- this time, by buying them for pennies on the dollar.

To paraphrase the government attorney who admonished Joseph McCarthy: "Have you no sense of decency sir(s), at long last? Have you left no sense of decency?"

And what kind of financial and legal system stands by and watches this happen??

Proposal: Financial "Son of Sam" Law

After serial killer David Berkowitz reportedly received lucrative offers to sell his story to publishers, New York state passed a law preventing such a travesty.

Known as the Son of Sam law, it authorizes the state to seize money earned from such a deal and use it to compensate the criminal's victims. The rationale, which hardly seems to require explanation, is that no one should financially profit from crimes that they've committed. Since then, 39 states have passed similar laws.

Such an approach seems tailor-made for today's housing and financial crisis, and the "economy killers" at the root of it.

The best thing for public confidence would be a healthy economy generating lots of well-paying jobs.

In the meantime, the next best thing would be sending the people most responsible for the financial crisis to prison -- or at least pulling them away from the trough ("A-I-G" is starting to look and smell a lot like P-I-G).

Enron: Just Ahead of its Time

[Note to Readers: I originally published the following post in mid-December. At that time, the cumulative federal bailout bill was about $2 trillion. Including guarantees of dubious bank assets, that number now is closer to $4 trillion -- $173 billion of which has been pumped into just one company, AIG.

Given these developments, I thought this post was even more topical now. The only other new information is the size of the '08 bonuses Wall Street exec's paid themselves (not known in December). Suffice to say, they didn't go with "the low end of the range."]

Is it Too Late to Bail Out Enron??

"Supreme Court Overturns Bush v. Gore"--Headline; The Onion (12/9/2008)

Watching what's going on in Washington and on Wall Street, the Enron guys must be turning over in their . . jail bunk beds.

Consider the following:

--The audited financial statements of AIG, Citigroup, Bear Stearns, etc. obscured or omitted billions in company liabilities.
--Enron's audited financial statements obscured or omitted billions in company liabilities.

--Senior management at AIG, Citigroup, Bear Stearns, etc. reaped hundreds of millions in compensation and bonuses based on (dubious) asset values they determined.
--Enron senior management reaped hundreds of millions in compensation and bonuses based on (dubious) asset values they determined.

--Senior management at AIG, Citigroup, Bear Stearns, etc. publicly reassured investors, creditors, and employees that all was well, and exhorted them to buy "cheap" company stock, even as they dumped their own holdings.
--Enron senior management publicly reassured investors, creditors, and employees that all was well, and exhorted them to buy "cheap" company stock, even as they dumped their own holdings.

Enron's leadership is in jail (or in CEO Ken Lay's case, dead). Wall Street's senior management is . . . deciding what their 2008 bonuses should be. (My advice: go with the low end of the range, guys.)

Enron wasn't corrupt -- it just had the misfortune of being ahead of its time.