Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Jon Stewart on Goldman SachsI can't figure out how to embed it here, but the folks at Seeking Alpha did--a great segment from Jon Stewart taking on Goldman Sachs, in the vein of Matt Taibbi (whose Rolling Stone article about Goldman Sachs we've reported here). Watch the video here.Speaking of Matt Taibbi, he was interviewed last week on Here and Now, a program on Boston's WBUR. Right after that was an interview with TARP-watchdog, Harvard Law professor, and bankruptcy expert Elizabeth Warren. Both were great interviews; listen to them here. Robert Zevin made similar points about Goldman in the talk he wrote for a D&S house party back in May: All that Glitters Is Goldman Sachs. Labels: Daily Show, Elizabeth Warren, Goldman Sachs, Jon Stewart, Matt Taibbi, Robert Zevin Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Goldman good but not that bad (Julian Delasantellis)Julian Delasantellis has a piece at Asia Times Online taking issue with Matt Taibbi's Rolling Stone article about Goldman Sachs. Hat-tip to LP for this.(Delasantellis is right that Taibbi's understanding of 1929, and Goldman's role in it, comes from Galbraith's The Great Crash (the chapter entitled "In Goldman Sachs We Trust"). But he is wrong not to care who is the best Bond—it is so clearly Connery that it is painful to watch the others, imho.) For related D&S reading, see this Ask Dr. Dollar column about the supposed "international banking conspiracy," and also Robert Zevin's piece, All that Glitters is Goldman Sachs. Goldman good but not that bad By Julian Delasantellis I've seen every single James Bond movie, a few on their opening morning in the theatres, but as for the eternal debate as to who—Connery, Lazenby, Moore, Dalton, Brosnan or Craig—was the best Bond, I couldn't care less. I watch for the villains. What a glorious gang they are. Suave, sophisticated, well spoken, all-powerful, all-seeing and all-knowing in their incredibly dastardly and ambitious plots, they seem quite the contrast with actors in today's world, Peter Principle incompetents who couldn't bomb the water even if they fell out of a boat. My favorites are Thunderball's Emilio Largo (Adolfo Celi), a man so evil that he seemed to have an offscreen orchestra follow him around continually playing ominously threatening sounding overtures (also, I liked the part that he was called the "guardian" of Domino, Claudine Auger-yeah, right), and Alex Trevelyan (Sean Bean) of Goldeneye. Putting a rare bit of actual history in the plot lines, Trevelyan's story was that he was a descendent of the so-called Liensk Cossacks, nationalist, anti-communist Russians who fought for Hitler during World War II. This group was betrayed back to Stalin's most untender mercies by the West after the war, and Trevelyan, a former MI-6 agent, still burns for horrible revenge against a British society that gave him its class, manners and refinement in exchange for the murder of his parents. After September 11, I wondered if we had, in Osama Bin Laden, a real live Bond-type villain, as he had managed to pull off, with not one of his henchmen getting lost or being prevented from getting to the airport by a dead battery or parking enforcement boot, a plot of truly Bond-scale perfidy and ambition. It was only later that we learned, by discovering that all Saudi pilots had to train in the United States to receive their commercial licenses, that all Bin Laden had done was to find a seam in American security big enough to fly jumbo jets through. Indeed, the belief that shadowy, all-powerful and all-secret conspiracies are forever working behind the scenes to thwart the American people's express will is a fairly common theme in American political and social life. Back before World War I it was the mysterious Colonel House who whispered in President Woodrow Wilson's ear to support the establishment of both the progressive income tax and the Federal Reserve; he is also said to be the one who, in contravention of George Washington's sacred advice to the nation 120 years previously to avoid "foreign entanglements", convinced Wilson to get the United States involved in the war. Prior to the Japanese attack on Pearl Harbor, it was said that the elite Council of Foreign Relations (CFR), the secretive society for all those Harvard and Yale scion not desirous to give the nation up to the new political reality of the New Deal, "arranged" for the attack by assuring that the US Pacific Fleet's aircraft carriers would be out of their Hawaiian homeport on December 7. Then, all during the Cold War, and the 20 years of New World Disorder that has followed it, the shadowy underworlds of both the extreme left and right have been continually striking from out of the darkness against the popular will. Taking Middle Europe's Crusades-era fantasies about mysterious Masonic orders to America animated much suspicion about the nation's Boston/Washington power axis in the still mostly uninhabited sunbelt. The conspiracies from the left were drawn more from current events than ancient history, with suspicions about plots ever being hatched by arms contractors, oil companies and multinationals such as Bechtel and ITT; neither right nor left had much use for the CFR. President George HW Bush's phrase that he intended should describe the post cold war era of peace and prosperity, the "New World Order", became a sort of nefarious conspiracy in and of itself, with NWO's silent black helicopters ever said to be prowling the dark skies of American suburbia by night, just itching to pluck a gun-rights activist out of his bed for eventual deposit at UN concentration camps in Montana. As a general rule, to be considered for the part of a nefarious worldwide conspirator, you have to be public and known, but not too much public and not that well known. Many conspiracy theorists posit that the strings of the world are being pulled by something called the Bilderberg group, but that sounds more like a fast-food drive through than a perverted cult of the super rich. Similarly, when it is said that the world is ruled by the Masons, care is made to specify that "the Masons" here refers to a super-elite and secret band called the "Secret Rite 33rd degree Masons", not ordinary, everyday Masons like your neighbor, who apparently isn't even powerful enough to return your lawnmower. Public, but not too public? If that's the central operating criteria to be accused of operating a secret world conspiracy, then it's no wonder that Rolling Stone writer Matt Taibbi chose Goldman Sachs to anoint upon the dark throne of current evil ruling conspiracies. In his long piece in the July 9-23 edition, "The Great American Bubble Machine—how Goldman Sachs has engineered every major market manipulation since the Great Depression." Taibbi says your empty wallet or pitiful ATM receipt slip are just about all Goldman's fault. Taibbi certainly cannot be accused of burying his lead, for in his second sentence he makes this comparison, probably more fitting to the monsters in the Sigourney Weaver Alien franchise than how you would commonly assume an investment bank would be described. "The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." After calling John Thain, the former Goldman employee who was Merrill Lynch CEO at the time of its buyout by Bank of America, a pejorative applicable to the exit terminus of the alimentary canal, Taibbi lifts Goldman's magician's curtain just a little bit higher. "What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain—an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased." Taibbi proves his point in two ways. First, he seems to have taken a comprehensive census of everybody working in the finance business around the world. Of course, he finds many, many former Goldman alumni in this manner; as the annual visit from the Goldman Sachs recruiter is the most important day in business schools around the world, this should not be that surprising. Among these are Thain, Bush, former Treasury secretary Henry Paulson and Clinton Treasury secretary Robert Rubin, along with Robert Steel from Wachovia, Bush-era White House chief of staff Josh Bolton, New Jersey governor Jon Corzine, Ed Liddy of AIG, Ebay CEO Meg Whitman , and "chattering television—( that orifice word again) Jim Cramer". It's certainly an impressive list; if you added on a bunch of foreign economic mandarins and central bankers it would be even longer. But does it mean anything? Taibbi seems to be implying that, for all these officials, employment at Goldman is like being in a mafia family—once you're in you're never out. Once you start doing Goldman's bidding, you will continue to do so forever—you've totally lost your ability to execute your individual desires in favor of those being broadcast to your head from Goldman Sachs' World Headquarters on Broad Street. Even more surprising is the fact that, for the overwhelming majority of these ex-Goldmans, the view that money is the central operating factor in economic decisions illuminates how they deal with their careers as well as the companies of which they are employed. Goldman could have kept their wayward staff until they took their secrets to the grave, but not when other institutions start offering better deals. That caused the alumni to go out from Goldman and conquer; the alumni are still working hard, hoping that some other future prospective employer will see their work and hire them away once more. In short, would it be rational for all of the Goldman competitors and other institutions who have hired Goldman alumni away for premium prices to accept a situation where their new employees are still known and accepted to be working to advance Goldman's interests? If the answer to that question is no, much of Taibbi's argument falls away almost immediately. The second part of Taibbi's argument is to look back on five previous economic calamities, and one possible one in the future, to dig out Goldman's previously hidden secret duplicities. Taibbi goes back 80 years for his first example of Goldman perfidy, back to the heady days of 1929 before the great Wall Street Crash. Excessive employment of leverage was as much a cause of that crash as it was the current one, but back then, leverage was effected not through exotic debt securities, but through mutual fund like vehicles called "investment trusts". Most of Taibbi's 1929 analysis comes from John Kenneth Galbraith's masterpiece on the subject, The Great Crash. Taibbi notes that: Beginning a pattern that would repeat itself over and over again, Goldman got into the investment trust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90% of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenanndoah Corporation, issuing millions more in shares in that fund—which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. But what Taibbi does not mention was that Goldman's investment trusts were hardly the biggest on the street; United Founders and State Street's trusts bested Goldman's. Also, how does one mesh Taibbi's conception of an all-powerful Goldman eternally directing efforts behind the scenes with the fact that the bank lost, in current value, $475 billion during the period, with its stock dropping from $102 to $3? If that's what's happened to the chiefs, just imagine the world of hurt of the Indians. Read the rest of the article. Labels: Arthur MacEwan, Goldman Sachs, James Bond, Julian delasantellis, Matt Taibbi, Robert Zevin Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bailed Out or Outfoxed? (Robert Zevin)This is an Investment Policy Memo from Robert Brooke Zevin Associates, Inc., a socially responsible investment advisor. It is from Sept. 26th, but still salient. Hat-tip to Arthur MacEwan.Secretary of the Treasury Paulson has offered a dramatic new rescue plan. Most Americans hate it. Stock markets love it. When the plan was carefully leaked last Thursday, it produced what was probably the biggest two day advance ever in global stock market prices. Since then stocks have soared or swooned at each indication that the plan might or might not be approved. Meanwhile outside the world of angry citizens and perpetually optimistic stock market investors, events have unfolded at a frightening pace. On Wednesday, while Congress was debating whether to advance $250 billion to the Paulson plan, the Federal Reserve had lent over $400 billion to banks, investment banks and money market funds in an effort to prevent the collapse of any of these institutions. This was more than double the troubled week before and about 20 times the average amount in the first half of last year and before. And this does not count the money the Fed and other central banks have poured into the monetary system with temporary or permanent purchases of securities. Banks have stopped lending to each other or to anyone else. Businesses with existing lines of bank credit are taking all the cash now before the bank can change its mind, led by General Motors which took down all of its $3.5 billion line of credit. Bank deposits are stagnant and banks have been unable to refund their short term borrowings which have been shrinking at the rate of $50 billion per week. The true value of the mortgages and other loans owned by the banks has been declining as default rates rise, buyers of risky assets disappear and foreclosure sales drive down the price of homes and other collateral, sometimes, as in California last month, at a rate already steeper than in the Great Depression. Many banks find it nearly impossible to raise more capital and are hoping to avoid writing down their loans to true values, which would seriously reduce, sometimes eliminate, their capital safety cushion. The real economy has entered a serious recession. It seems too late, it may have been all along, to avoid an extended period of slow or negative growth with an on going process of paying down debts and driving down the prices of assets to do so. It may even be too late to avoid a credit system melt down, similar to the Great Depression. Economists from Milton Friedman to Ben Bernanke have employed a device economic historians call a counter-factual. In other words they ask what would have happened in the early 1930’s if the Federal Reserve had not allowed banks to fail. And they purport to prove that the Great Depression would have been only another brief recession. Now the counter factual is the fact: so far central bankers and other government agencies have avoided failures in which depositors, or now also money market fund investors, have lost any money. But so far this real world experiment is not conforming to the theory. The force of debt reductions, lending reductions and forced sales of assets that drive down their prices, has been more than enough to cripple the money markets and send the U.S., Europe and Japan into recessions. There is still no doubt that governments have the power to avoid a general collapse of banks or destruction people’s money. This is what the Paulson plan was supposed to accomplish. But, it is seriously flawed and not just by its instant unpopularity. The sad truth is that banks have far more than $700 billion of bad loans on their books not only in mortgages but also credit card debt, car loans, and various exotic instruments invented in collaboration with coporate America, hedge funds and private equity. The only way the Paulson plan could deal with this magnitude would be to sell the first $700 billion of bad loans that it bought and use the money to buy as much again, and again and probably again at least once more. If the Treasury could sell the loans that easily then clearly the banks could do it themselves and the problem would not exist. Worse still, if the Paulson plan buys troubled mortgages at their fair value, this will trigger a wave of write downs for the selling banks and all other banks holding similar assets, thus adding to the stress on banks instead of alleviating it. If the Treasury paid more than the loans were worth, it would be stuck with them and the taxpayers would be stuck with a loss, all for an exercise that would not seriously reduce the current danger. Like his earlier plan to have the banks get together and form a new entity to which they would contribute money and then sell their bad loans, the Paulson plan clearly contains more Wall Street hype than genuine hope as befits a former head of Goldman Sachs. If it is adopted and fails, it will be even more difficult to get additional money from Congress to finance a better alternative. The best way to solve this problem would be for the Treasury to buy a special preferred stock in all troubled banks that would be designed to be liquidated at a profit after the crisis has past. This could give the banks another $700 billion of capital, which would add about seventy percent to their current capital. This might enable them to write down their bad assets by about 25% and then go on to make new loans to households, businesses and each other. Unlike the Paulson plan this is an approach that has been used successfully in the U.S. in the 1930’s and in Sweden and Japan in the 1990’s. Why won’t Bush, Obama or McCain embrace this efficient and effective solution, sure to get better results at far less cost to taxpayers? Government ownership of the banks is Socialism. And being soft on Socialism is the political equivalent of being soft on Iran or North Korea. Another solution which also has a far better chance of succeeding is for the government to deal directly with distressed home owners, offering them new mortgages at lower rates or for longer terms in an amount sufficient to pay down much of the existing mortgage or perhaps to liquidate it at a fraction of face value. This would solve another problem in the Paulson plan in which the government would end up owning mostly mortgage backed securities which usually represent only partial ownership of the underlying mortgages. This in turn would prevent the government from actively promoting renegotiation of mortgages rather than foreclosures. In addition, this plan would directly support the prices of homes by cutting off the flood of foreclosures and forced sales, thus eliminating the principal force that is causing higher defaults and lower values for the banks’ mortgage portfolios. It has been endorsed by the registered anti-Socialist conservatives including several economists at the American Enterprise Institute and the distinguished Martin Feldstein, chairman of Ronald Reagan’s Council of Economic Advisers. So why isn’t this alternative on the Washington radar screen? It is clearly a political winner. Perhaps it has to do with election year calculations in the close and high-stakes presidential race. Perhaps bankers still think they can escape from this mess without recognizing the full losses on their mortgage portfolios. Perhaps the genial Washington bi-partisan approbation of wealth and distrust of the poor, stays the hand that might provide succor directly to the poor borrower at the expense of the campaign contributor’s bank. The bottom line is that we are at a sorry and dangerous pass. The momentum of debt contraction and price declines for houses and commodities seems to have a self-perpetuating momentum. The implosion of credit markets and financial institutions is accelerating. Recession is underway. And political deadlock has re-emerged in strength, caused in part by narrow political interests and in part by the stand off between an angry electorate and a rich donor base, each snarling from opposite sides at a very frightened Congress and executive branch. This is unquestionably a very bad and dangerous environment for common stocks. We have reduced common stock holdings in all of our accounts to much less than half of a normal position, except where tax considerations were too large. In most of the portfolios we manage cash is now the largest portion. We have invested in money market funds and short-term notes with careful attention to safety issues. We also maintain our favorable view of high-quality bonds. Inflation is likely to extend its recent decline which is good for bonds. While the U.S. government will be increasing its borrowing, the amount of private debt will decrease at an even greater rate. As always, our first commitment is to avoid losses rather than take risks for big gains. Our performance in the current quarter has not lived up to this standard. But we think our clients are now well positioned to most of any future losses in global stock markets or low quality securities. Labels: bailout, financial crisis, Henry Paulson, Robert Zevin Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
