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The Goldman put

October 17th, 2009

From the NYT on the remarkable profitability of Goldman Sachs

A big reason for Goldman Sachs’s blowout profits this year has been the willingness of its traders to take big risks — they have put more money on the line while other banks that suffered last year have reined in such moves. Executives say there are big strategic gaps opening up between banks on Wall Street that are taking on more risks, and those that are treading a safer path.

Hmm. I’d be willing to take big risks if I knew the Fed and the US Treasury were standing by, ready to pick up all my losing bets. In the circumstances, the guys at GS doubtless stand amazed at their own moderation in creaming off a mere $20 billion for the year.

Looking at this more seriously, the effect of the crisis has been to drastically weaken US financial regulation. In place of the Greenspan put, a generalized commitment to protect the financial sector from the consequences of its own bad behavior, we have the Goldman put, where a single firm runs the show, in the general manner of the United Fruit Company. This kind of situation is ideally suited to the rhetorical and forensic talents of Glenn Greenwald, and he doesn’t disappoint.

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  1. Ikonoclast
    October 18th, 2009 at 06:00 | #1

    The US is in a very parlous state. Protected parasites in the financial system get a free ride while the real economy tanks. The fact that the US cannot reform itself after this crisis indicates that as a nation and a power it is in terminal decline.

    If any particular company or general enterprise is “too big to fail” this means it has a strategic impact on the economy and the national interest. Such a position will be the outcome of either a natural monopoly or a monopoly generated by failure of regulation and competition.

    If the enterprise constitutes a national strategic asset or a natural monopoly then it should be run by the state. If the enterprise has become an “unnatural” monopoly then the state needs to intervene to correct the situation.

    The US is governed by the financial oligarchs and thus democratically paralysed. It cannot take the action necessary to restore itself. As I said, the US is in terminal decline. It is a very sick country in every sense of the phrase.

  2. gerard
  3. Jill Rush
    October 18th, 2009 at 09:32 | #3

    As a result, explained the NYT: “A year after the crisis struck, many of the industry’s behemoths — those institutions deemed too big to fail — are, in fact, getting bigger, not smaller.” from Glen Greenwald.

    What confounds me is that this is exactly what has been happening in Australia and it appears like it is business as usual at the big four banks as if the GFC had never occurred and that greedy individuals had not enriched themselves at the expense of the population. Why isn’t our government taking better action to minimise the ability of financial organisations enriching those at the top to the detriment of everyone else? We have little influence on events in USA but appear to be in the thrall of the same ideas which created the crisis in the first place as if nothing has been learned.

  4. gerard
    October 18th, 2009 at 09:33 | #4

    strange bedfellows, liberal Alan Grayson and “austrian” Ron Paul on a campaign to find out where Ben Bernanke’s Fed (or should I say Goldman Sachs’ Fed) sent the $2 trillion.

    Last week, Congressmen Ron Paul and Alan Grayson sent an open letter to the Senate Banking Committee about the Chairman of the Federal Reserve, Ben Bernanke. I agree with their sentiments that, before he is reconfirmed for a second term, the Senate should know who got the $2 trillion the Federal Reserve has lent out over the last two years. Only then will the Senate be able to judge whether he should keep his job. Specifically, the Fed must disclose:

    (1) Information that Bloomberg reporter Mark Pittman has requested via a Freedom of Information Act Request on the Bear Stearns rescue and that the Federal Reserve is contesting in the courts.

    (2) Information I requested in February on which institutions received the additional $1.2 trillion, how much each institution received, and what was promised in return.

    (3) All Federal Reserve documents that went to Attorney General Andrew Cuomo’s office relating to the Bank of America/Merrill Lynch merger in which potentially illegal and coercive activity might have occurred, as well as all Federal Reserve documents relating to the lawsuit pursued by Merrill Lynch shareholders in the US District court for the Southern District of New York.

    (4) Transcripts of all Open Market Meeting Minutes up to and including that of September, 2009.

    (5) Full disclosure of all terms and conditions of all off-balance sheet Fed transactions in the past three years.

    Please vote NO on Ben Bernanke’s confirmation until the Federal Reserve comes clean on what it has done with OUR money and answers these inquiries.

    http://www.unmaskthefed.com/

  5. SeanG
    October 18th, 2009 at 09:37 | #5

    @Jill Rush

    Absolutely. Wall Street had five big investment banks and now there are only two. I think that in the US you will see in the investment banking industry a lot of smaller players with hedge funds, boutique investment banks, advisory firms taking a lot of talent but it will be two very large fish and some medium and many small fish in the ocean.

    However, Australia suffers because of the high barriers of entry (this is probably a good thing in some ways) so the Big 4 can enrich themselves in a uncompetitve environment at the expense of consumers.

  6. Alice
    October 18th, 2009 at 12:22 | #6

    Interestingly Ive just finished a book where a finance mogul in the US predicts that eventually Wall street will ultimately destroy itself. It wouldnt surprise me at all. Between 1960 and 1981 the US economy grew five fold but the Dow Jones index did nothing (874 to 875). After that it started its bull run through 10000 and beyond (silicon valley hype, the internet stocks hype) but the real economy wasnt growing at the same rate as it did between 60 and 81. That says one thing to me. Wall street became totally disconnected from the real values of businesses decades ago. It became a Wall St of hype and gambling. The only thing that will correct this is people walking away from shares (which they likely will after being badly burnt perhaps more than once). I suspect the only thing stopping mass rejection of shares now is legislation compelling super flows into it. After the tech wreck and 9/11 Greenspan fuelled the “already” bubble bigger by keeping interest rates low for too long and refusing to regulate the market abuses occurring in the subprime market despite being warned in 2000 by Gramlich (in fact further de-regulating it). To those of here who still buy into the free markets garbage Greenspan should be your hero. To the sane he was a one man walking train wreck waiting to happen.
    Australian banks are now still slavishly following the US example..handing hundreds of thousands of dollars to people with no deposit, dropping the requirements for guarantors, offering teaser rates. Perhaps we are the last unpopped housing bubble.

  7. October 18th, 2009 at 19:30 | #7

    MSNBC’s Dylan Ratigan yesterday had a somewhat melodramatic and oversimplified though still effective depiction of the gigantic “legalized theft” that has taken place, but because both parties are so heavily involved in all of this, are such beneficiaries of it, there is no organized outlet for what ought to be the explosive public rage, other than some GOP-exploited “tea parties”:

    It does seem that the election of Obama is rapidly degenerating into a sham and a subterfuge, one that is meant to disguise the extent to which the US government has been corrupted. The timing of a radical restructuring of wealth with a presidential election and popular concern with the environment smacks of orchestration and collusion but of course conspiracies are out of fashion. Its all just convenient circumstances.

  8. Alice
    October 18th, 2009 at 21:13 | #8

    Does this mean, just like Putin, Obama has strings attached?? Does this mean we will soon see Saks 5th Avenue closed on the unnanounced arrival of a fleet of black tinted window mercedes with private armed guards, and the people herded out on to the streets, so the oligarchs of Goldmans can shop with their families without crowds??

    The sooner Wall street cannibalises itself, the better.

  9. observa
    October 19th, 2009 at 15:33 | #9

    ‘strange bedfellows, liberal Alan Grayson and “austrian” Ron Paul’ Not so strange when you think about their like beliefs that all men were created equal and as such should face the same level playing field. That’s the quintessential Austrian message for me but somehow the left/Keynesian/green quants just don’t get it. They always want their quantitative controls and whimsical subsidies and then complain about the unintended consequences. Who was it that happily shouldered responsibility for overseeing the quantity of money? Then when they got it wrong targetting that pet 2-3% inflation of theirs for years, while their fiat money poured into one unholy Madoff scheme, they couldn’t face the bust so cranked up the printing press again. Exactly as Austrians predict it’s the first cab off the rank that gets the cream off all this milk of human kindness and that’s exactly what’s being observed now. More asset bubbles and malinvestments as their funny money roars back into the eager hands of the finance sector all over again, while the required adjustment to the requisite myriad of individual real savings and investment goes begging. Don’t worry about the fat cats and all that free fractional reserve cream at the top folks. Just nick off and sip your hapeworth of souring stimulus milk. The quants have everything under control but don’t look too closely at their furrowed brows.

    It’s like this really. You could put this committed Austrian in charge of the printing press in his lounge room and London to a brick he’d slowly but surely become a committed Keynesian stimulus man, convincing himself that printing off a few extra $100 bills a day for he and his, was all for the good of ‘our’ economy. Might eventually challenge Mugabe for the role of top dog.

  10. observa
    October 19th, 2009 at 22:53 | #10

    I should say if the left leaners think many of those running SMEs are not shaking their heads in despair and disbelief at what’s continually going on between inflationists in govt and the top end of town, in particular the finance sector, you’re sadly mistaken. We generally share the left’s distaste for much of the accounting/finance/legalese sector as necessary evils, always to be kept to a bare minimum. True we have a loftier, more purist attitude by adding in govt to that general pile we label ‘admin’, to be hammered down at all costs while engaging in real productive pursuits. In that sense (if you can make any out of over 40% of a nation’s profitability coming from finance at one stage) many of us realise exactly what’s going down with these cosy inflationists and their ‘too big to fail’ mates, albeit Australia’s exemplars are relatively benign compared to Nobel winners in the field. Nevertheless we recognise the policy trickle down from head office in deputy sherriff land when we see it. In that regard I’d have to say Glenn Stevens has gone as close as any central banker can to fessing up past shortcomings and knows what’s required, but any moves he makes to correct our new bubble economy emerging will be swamped by the printing presses rolling elsewhere. Like price and quantity he can command either interest rates or exchange rates, but not both. When all else fails trot out the ‘moral suasion’ joker eh Glenn?

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