Obama's Financial Crisis Fee -- sounds SO good, but oh, SO wrong

President Obama announced plans today to levy a “Financial Crisis Responsibility Fee” on the nation’s largest banks — those with more than $50 billion in assets. Basically, it will be computed as .15% (i.e., 15/100ths of 1%) of the banks’ liabilities, excluding deposits covered by FDIC insurance (because a separate fee is assessed on them).

To a revenge-starved public, this may sound SO right and be SO overdue, but it is SO wrong. Once again, Obama has proposed a solution — as he did with health care reform — that is so lacking in nuance that it is clear that he doesn’t truly understand the problem. Either that, or it’s simply more evidence that he’s in Goldman Sachs’ hip pocket.

So, what’s wrong with this solution? Answer: it penalizes conservative, well run institutions, and once again, lets those who are the real troublemakers off the hook. The troublemakers that are left alive, that is. Keep in mind that most of the institutions that caused the crisis are now out of business or were merged into more responsible firms and are now under new management. By far, the biggest culprit still standing — and thriving, as no financial reforms have yet been implemented — is Goldman Sachs.

Although Obama and the media refer to “banks” as a homogeneous group, it is important to separate routine commercial and consumer lenders from super-large “money center banks” (e.g., Citibank, BofA, Wells Fargo, and JP Morgan Chase) and Wall Street “investment banks,” the latter of which (e.g., Goldman Sachs) were not actually banks at all until the financial bailout. Although they’re called investment banks, they never had bank charters, weren’t regulated as banks, and didn’t have FDIC-insured deposits until Treasury Secretary Hank Paulson allowed them to convert into chartered banks in order for them to qualify for TARP bailout funds. It was a slight of hand to do a solid for his friends on Wall Street, plain and simple. The investment banks are the firms that engage in the most risky trading and derivatives activities, and such activities constitute a huge percentage of their overall businesses. Money center banks also engage in risky investment banking activities — “thanks” (I say facetiously) to the Clinton administration’s successful efforts to repeal the Glass-Steagall Act — but because they are so large and diversified in their activities, such risky activities are a much smaller percentage of their overall businesses. Even among the money center banks, however, some were much less careful than others in managing their risks: Citibank was perhaps the worst, and JP Morgan Chase seems to have been the best. Indeed, despite having a diversified portfolio of low-risk businesses, Citibank was nonetheless almost brought down by its relatively few higher risk businesses. (You remember the old saying about one bad apple, right?) Long story short, banks are very different from one another, and they need to be penalized based on the risks they take, not how big they are.

To illustrate the problem, I downloaded the September 30, 2009 financial statements for Goldman Sachs and a pretty “plain vanilla” large bank, U.S. Bancorp, from the Federal Reserve’s website. The financial statements show how much of the banks’ revenues come from routine banking activities versus high-risk trading operations, which are the “casino” activities that got us into so much trouble. Goldman’s assets as of September 30 were about 3.3 times greater than U.S. Bancorp’s, so I'll need to make some adjustments in my math for that. For the first 9 months of 2009, Goldman generated $28.3 billion of trading revenues and interest on trading assets. Essentially, rolling the dice, albeit, in a casino that they seem to have pretty much rigged most of the time, except for when things go terribly wrong. In comparison, U.S. Bancorp generated a paltry $125 million from trading. This is a staggering differential. Adjusting for the difference in the sizes of the two firms, for every dollar of assets deployed in their businesses, Goldman was conducting about 68 TIMES more casino activity. This helps put the difference in the nature of these two banks into some perspective. Relatively speaking, one is like a plodding old electric utility, whereas the other is a powder keg waiting to explode if any of its risk assumptions prove to be faulty, which is exactly what happened in 2008.

Recall, however, that Obama’s proposed fee will be based on liabilities exclusive of FDIC deposits. Granted, that helps equalize things just a bit, in that such deposits make up a much larger percentage of U.S. Bancorp’s liabilities. In other words, it will get a much larger exclusion from the fee than Goldman precisely because it is a more conservative institution, which is exactly what we want. Even so, however, when looking at casino activities for every dollar of liabilities to be taxed, Goldman is still conducting 25 TIMES more casino activity than U.S. Bancorp. Yet, they will both pay exactly the same fee on each dollar of assessed liability. Not exactly fair, is it? Relative to what it makes on high-risk activities, the fee/tax Goldman will pay will be insignificant.

Granted, I’m a financial professional, but it took me all of about 15 minutes to do this work. Importantly, though, I took the time to validate what I suspected intuitively. As I said in my second paragraph, solutions can sometimes seem so obvious and so clear, and yet be entirely wrong. This is an obvious trap to anyone who has ever done any serious analytical work, so trained professionals are always on the lookout for the biggest booby trap of all: things you think you know, but really don’t. That’s why solutions should be based on real analysis, conducted by bona fide professionals who know how to maintain their objectivity. As I have stated in previous articles, important decisions should not be based on hearsay, anecdotal evidence, or preconceived notions. Popular, but erroneous, decisions may sound good, but they don’t solve anything, they’re often unfair, and they often encourage the exact opposite behaviors of those we really want.

I know I sound like a broken record, but we simply need to demand a higher quality of work from our government.

Goldman CEO Warns Employees to Keep a Low Profile

From the New York Post:

Goldman Sachs CEO Lloyd Blankfein has warned his employess to avoid making big-ticket, high-profile purchases as the gold-plated Wall Street firm hunkers down amid a firestorm of public and political anger over outsize bonus payments.

According to sources at the bank, Blankfein has told Goldman staff that spending should be toned down in light of the billions in bailout money that banks, including Goldman, have gotten from Uncle Sam.

A source within the bank said Blankfein first began calling for an end to the conspicuous consumption late last year, but has stepped up his campaign in recent weeks as the White House has sought to rein in compensation and as the firm has gotten dinged by a pair of high-profile magazine articles.

"This is a sensitive time for us, and [Blankfein] wants to make sure that we're not being seen living high on the hog," said one Goldman exec.

Indeed, the exec said that senior managers were ordered to tell their staffs that just because Goldman made a record second-quarter profit of $2.3 billion, they shouldn't bank on getting a fat bonus just yet. Blankfein was quoted as reminding staff that bonuses are based on full-year results, and that the year is far from over.

Blankfein's admonishing of workers about profligate spending comes as the firm has been hit with a barrage of negative press lately over its uncanny ability to make money not only in the best of times -- but also the worst.

A Rolling Stone article referred to the firm as "a great vampire squid wrapped around the face of humanity," while a recent New York magazine piece floated the idea that Goldman benefited from the rescue of troubled insurance giant American International Group.

A spokeswoman declined to comment.

Goldman's speedy recovery in the wake of the global recession and the demise of many of its rivals has drawn more outrage than awe.

Observers question everything from the bank's massive pay to its uncanny ability to serve as a incubator for Washington policymakers. Goldman alumni include former Treasury Secretaries Henry Paulson and Robert Rubin, and Jon Corzine, the current New Jersey governor and former US senator.

Goldman accepted $10 billion in rescue funds from Uncle Sam to help it stay afloat last year amid a crisis of confidence on Wall Street but quickly repaid the money thanks to record revenues.

The Goldman exec said that while Blankfein was cajoling workers to cut back on their spending to avoid negative publicity, he was also playing cheerleader.

In a company-wide voice mail left last week, the CEO assured employees that management is "focused on addressing the negative news and that [Goldman] remains committed to integrity and excellence."

"I know you're all working hard," he added.

If this seems familiar, perhaps you're recalling the scene from Goodfellas in which Robert De Niro admonishes his crew members for going on spending sprees following their big Lufthansa heist. For your enjoyment:

Finally! Congress is Waking Up to Wall St. Market Manipulation

Everyone knows that Wall Street firms are using high frequency trading platforms to frontrun their own clients, yet no one is speaking out against it...until now. Thank you, Senator Schumer.



Click here for related article.

Goldman Sachs Goes Green... In More Ways than One

Hmm... Are we seeing a pattern yet?

1) Goldman Sachs conspires with our government officials to create a panic over a real or imagined problem.

2) Current or former senior officers of Goldman are put in charge of the problem.

3) It is determined that only Goldman Sachs is qualified to handle whatever the fix is for the problem, and it is given a preferential role in all related money-making opportunities.


Related article:

Goldman Sachs to be carbon regulator?

July 8, 2009

Sens. Dianne Feinstein (D-CA) and Olympia Snow (RINO-ME) have introduced a bill to make the Commodity Futures Trading Commission the sole regulator of the carbon market created by cap-and-trade legislation.

So does this mean that freebooting Goldman Sachs could be the de facto regulator of the carbon market?

Consider that:

• The current chairman of the CFTC is Gary Gensler, formerly of Goldman Sachs.
• Goldman Sachs is a part owner of the exchanges where carbon allowances would be traded.
• Goldman Sachs has spent millions of dollars lobbying for cap-and-trade legislation in anticipation of making billions of dollars at the expense taxpayers and consumers.
• Goldman has a special exemption from the CFTC to exceed the trading limits normally placed on commodity speculators. Not only was this exemption secret for 17 years, the CFTC recently had to ask Goldman for permission to release the letter to Congress!
• Goldman Sachs employees are heavy contributors to the Democratic Party giving it over $4.4. million in the last election. Barack Obama received more than $997,000, Feinstein received $24,250, and Snowe received $17,000 from Goldman. All-in-all, this could result in a pretty decent return-on-investment for Goldman.

As the global warming bubble inflates and then bursts, will Goldman Sachs self-regulate all the way to the bank… making record profits at the expense and misery of taxpayers and consumers?

Can you tell the difference between the CFTC and Goldman Sachs?

Gary Gensler, CFTC Chairman

Lloyd Blankfein, Goldman Sachs Chairman

Rolling Stone's Matt Taibbi Speaks About Goldman Bonuses

More on the corruption surrounding Goldman Sachs. Matt Taibbi of Rolling Stone has been doing a good job following all of this. Here's a link to the article referenced in the video.

Is Obama on Goldman's Payroll?

I've spent most of my career working in the financial services industry, and I have never seen the kind of corrupt shenanigans that are going on today. Washington is absolutely in Wall Street's hip pocket. Yes, today, on the heels of a near collapse in the economy. The gentleman in this video provides a very lucid analysis of what's going on.

Goldman Sachs' Tentacles Reaching into Government

Here's a very clear presentation on how Goldman Sachs has woven its way into the fabric of our government. Is it any surprise that they are able to virtually print money?

Inside the Great American Bubble Machine

This is a must-read article about Goldman Sachs' abuses from Matt Taibbi at Rolling Stone.

Click here for related article.

Goldman Sachs' Trading Profits: the more things change, the more they remain the same.

That's Lloyd Blankfein, CEO of Goldman Sachs. You'd be smiling too if you'd just gotten away with one of the biggest heists of all time. Here's why he's so happy:

1. In 2008, Goldman loses billions trading in mortgage-backed securities and related derivatives.
   
2. To qualify for bailout funds, Goldman's application to convert to a bank holding company is expedited, even though it doesn't engage in any common banking activities. (Have you ever seen a Goldman Sachs ATM, credit card, or TV commercial?)
   
3. Their former CEO, then-Treasury Secretary Hank Paulson, gives them $10 billion of TARP money...well, they are a bank now, after all.
   
4. News surfaces that Goldman had been hedging its exposure to losses in mortgage securities by buying credit default swaps from AIG. (Oh, so you mean they have insurance to cover their losses? Why didn't they tell us that before we gave them the TARP money?)
   
5. The Fed and Treasury think a calamity will ensue if AIG fails and its counterparties, like Goldman, are not paid off. So, an additional $80 billion of taxpayer money is given to AIG, who promptly pays off its counterparties, including several foreign banks. Goldman Sachs gets $13.9 billion. (But wait! Didn't we already cover Goldman's losses with TARP money?)
   
6. Goldman loves the volatility in the markets--it makes for great trading--and racks up $5.7 billion in trading revenues in the first three months of this year. In short, they're right back to doing the same things that got them into trouble in the first place.
   
7. Goldman says it doesn't like that the TARP funds came with strings attached, so they want to pay the money back early. Things are going pretty well for them these days, so they sell $5 billion in stock to raise additional money to pay back the TARP funds.

Happy days are here again!

I would like for Obama to ask his people how the public was supposed to be helped by providing Goldman with the risk capital to run its trading desk. TARP money was intended to fund loans to businesses and consumers, not high-risk trading operations.

Good grief.

Here's more on the whole debacle from Time:

Click here for Time article.

We need to say goodbye to Goldman Sachs

I have a real bee in my bonnet these days about Goldman Sachs. Yes, they are good at what they do, and technically speaking, I can’t say that I’m aware of them having done anything illegal during the buildup to our current crisis. However, in my book, they are the poster child for all that should be purged from the financial markets. Having Goldman running amok in our financial system is like having wild pigs in your back yard. No one really dislikes wild pigs, but there's absolutely no upside to having them in your back yard. Even worse, they can do a fair amount of damage. Ditto for having Goldman in our financial system.

Goldman’s bread and butter is trading and investment banking, the latter of which is on hiatus for who knows how long. So, its shareholders essentially just own an interest in a big trading desk. Goldman takes shareholder capital and speculatively trades in stocks, options, bonds, foreign currencies, interest rates, credit default swaps, etc. Name a derivative, and they probably trade it. As I said, it’s all speculative. They do nothing to create value. They just trade. However, what they do is different from just going to Vegas and rolling the dice. How so? Because their very act of placing a bet can actually have an influence on the outcome of that bet; for example, when they choose to short a stock. They can relentlessly drive a stock into the ground, and those on the losing side of the trade are the public, who were lulled into believing that buy-and-hold is a viable investment strategy, and that the SEC is ready and able to protect their interests.

I’d like someone in government who is allowing this to happen to explain why it’s in the public’s interest to let Goldman ride roughshod over the financial markets. How do we benefit? Clearly, we don’t, and that’s precisely why the realm in which Goldman plays—what some people call the shadow market—needs to be regulated into oblivion. Simply put, we need to purge the financial system of the casino activities that have done so much harm in recent years, and we need to make an example of Goldman, precisely because it is the much-envied “gold standard” among firms that engage in these activities. The financial markets need to be returned to long-term investors, and made safe with rules that are clear and enforced.

It is a tragedy that the public has been denied the right to participate in the capitalist system without it being corrupted and manipulated. Investors with good intentions have been completely thwarted by the likes of Goldman and countless other hedge funds and institutional trading desks for too many years now. Enough is enough. The stock market wasn’t created with the intention of using the public as pawns in trading schemes that only benefit the rich. Goldman and other market manipulators must be shown the door if we are to ever restore trust in the financial markets.

I thought "contracts were made to be broken"

Riddle me this: why is it that for years and years businesspeople used to say that "contracts were made to be broken," but as soon as the government steps in to financially back a company, they're all of a sudden saying that we have to "protect the sanctity of contracts?" I guess we can all afford to take the high road when we don't have to pay the bill.

When companies don't have unlimited funds at their disposal, it's amazing how creative and cooperative they can be with each other in renegotiating their obligations. If AIG had told its counterparties that they could either have their insurance premiums back or get nothing in a bankruptcy, wouldn't those counterparties have been willing to work something out? Instead, the government raced in with billions of dollars and made good on 40-to-one bets. Goodbye $170 billion of taxpayer money. How smart was that?

Businesses restructure deals and renegotiate contracts with employees, vendors, customers, and business partners all the time. The likes of Goldman Sachs are probably laughing their asses off at how naïve the government was for making good on their bets. If the government can't learn how to do business the way businesses do, then maybe it shouldn't be rushing into the corporate sector with billions of dollars in taxpayer money.