Category Archives: Goldman Sachs

New Era of Wall Street Wealth; Goldman says ‘Chill Out’

The New York Times featured a story on how bailouts and other government actions such as monetary policy have helped fuel a new era of Wall Street wealth. This, just months after former Goldman chief and then Treasury Secretary Hank Paulson was literally on his knees begging Nancy Pelosi for a taxpayer bailout of our financial sector.

Paulson spun TARP as an investment; I wonder if he meant an investment in our unemployed citizens, or an investment to benefit shareholders of investment banks, er, ‘bank holding companies’ such as Goldman Sachs and Morgan Stanley? As the Times article points out, these days it is great to be a titan of finance:


Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money. They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder — a benefit of less competition after the failure of some investment firms last year.

So even as big banks fight efforts in Congress to subject their industry to greater regulation — and to impose some restrictions on executive pay — Wall Street has Washington to thank in part for its latest bonanza.

“All of this is facilitated by the Federal Reserve and the government, who really want financial institutions to get back to lending,” said Gary Richardson, a research fellow at the National Bureau of Economic Research. “But we have just shown them that they can have the most frightening things happen to them, and we will throw trillions of dollars to protect them. I have big concerns about that.”

Not all banks are doing so well. Giants like Citigroup and Bank of America, whose fortunes are tied to the ups-and-downs of ordinary consumers, are struggling to turn themselves around, as are many regional banks.

From across the pond, Goldman’s chief economist Jim O’Neill tells the United Kingdom to ‘chill out’ over the fiscal cost of the government’s fiscal situation:


“The fiscal costs of this crisis around the world, including the U.K., in my judgment are not as severe as people keep talking about,” he said, speaking on a panel with Prime Minister Gordon Brown and economists in London today. “To be obsessively focused on getting the deficit down as quickly as possible is not the right thing to do…There’s a ridiculous stigma with the whole thing in this country,” O’Neill said. “There’s lots of other countries doing unconventional monetary policy things and people should chill out a bit about it.”

Easy for him to say. Hmmm…does anyone else see the irony here?


Meanwhile, Jim Jubak (admirably) brings to our attention a measure of Gross National Happiness (GNH) used in Bhutan as opposed, or in conjunction, with GDP. This is what life has come to for ordinary Americans – as our taxpayer dollars are doled out to Wall Street, we are left to ponder our inner happiness because much of our material wealth has evaporated. I support pondering what truly makes us happy, but it would be nice for Americans to have the luxury to do that while driving home from the job they still have.
I wonder what GNH stands for in the upper realms of Goldman, Morgan, Washington, et al. these days?

Gross National Handout?

Sunday Night Reads

Don’t forget to get your 10 trading lessons FREE Click Here

Matt Taibbi – An Inside Look at How Goldman Sachs Lobbies the Senate which includes a Goldman Sachs lobby sheet here (pdf)

Blackstar Funds on the need for a sell discipline

Meredith Whitney – The Credit Crunch Continues (what is Jon Markman thinking?!)

Robert Shiller sees 5 Years of Stagnant Home Prices

Banks Have Us Flying Blind on Depth of Losses: Jonathan Weil

Weekend Reading

Last post before the weekend – if you have not visited The Baseline Scenario, I recommend it. It is focused more on economics and policy then investing. Two recent posts caught my interest, the first being The Problem That Won’t Go Away [foreclosures] and the second which I will paste below, How To Blow A Bubble, by Simon Johnson, former International Monetary Fund’s Economic Counsellor (chief economist):

Matt Taibbi has rightly directed our attention towards the talent, organization, and power that together produce damaging (for us) yet profitable (for a few) bubbles. Most of Taibbi’s best points are about market microstructure – not the technological variety usually studied in mainstream finance, but more the politics of how you construct a multi-billion dollar opportunity so that you can get in, pull others after you, and then get out before it all collapses. (This is also, by the way, how things work in Pakistan.)

In addition, of course, all good bubble-blowing needs ideology. Someone needs to persuade policymakers and the investing public that we are looking at a change in fundamentals, rather than an unsustainable and dangerous surge in the price of some assets.

It used to be that the Federal Reserve was the bubble-maker-in-chief. In the Big Housing Boom/Bust, Alan Greenspan was ably assisted by Ben Bernanke – culminating in the latter’s argument to cut interest rates to zero in August 2003 and to state that interest rates would be held low for “a considerable period”. (David Wessel’s new book is very good on this period and the Bernanke-Greenspan relationship.)

Now it seems the ideological initiative may be shifting towards Goldman Sachs.

As Bloomberg reported on August 5th, “Goldman economists, led by Jan Hatzius in New York, now see a 3 percent increase in gross domestic product at an annual rate in the last six months of this year, versus a previous estimate of 1 percent. The new projections were included in a research note e-mailed to clients.”

Goldman’s public thinking, of course, has been that we face such slow growth that interest rates should be kept low indefinitely. There is, in their view, no risk of inflation – and no such thing as potentially new bubbles (e.g., in emerging markets). The adjustment process will go well, as long as monetary policy stays very loose – it’s back to Bernanke’s 2003 line of thinking.

This line of reasoning has been very influential – reinforcing Bernanke’s commitment not to tighten monetary policy in the foreseeable future and fitting in very much with the Summers model of crisis recovery. Just a couple of weeks ago, in his July 14 report, Jan Hatzius argued, “further stimulus remains appropriate” and “the appropriate debate is not whether fiscal and monetary expansion is appropriate in principle but whether it has been sufficiently aggressive.” I don’t know if he has revised this line in the light of the big upward revision in his growth forecast or whether he is still saying, “Ultimately, we do expect further stimulus, but it may take significant disappointments in the economic data and the financial markets before policymakers move further in this direction.”

Much faster growth than expected is, of course, in today’s context a good thing. But it also brings complications. If you keep monetary policy this loose for much longer, you will feed bubbles. And if you encourage even looser monetary and fiscal policy, there will be a costly reckoning not too far down the road.

Monetary policy orthodoxy under Greenspan did not care about bubbles in the least. Now we (led by Greenspan) have massively damaged our financial system, our real economy, and our job prospects, this view is under revision.

Of course, in principle you should tighten regulation around lending but, just like 2003-2007, who is really going to do that: the US, China, the G20? On this point, all our economic leadership is letting us down – although they are getting a powerful assist from people like Goldman (and Citi and JP Morgan and almost everyone else on Wall Street.)

Next time, our big banks will take another massive hit – quite possibly bigger than what we saw in 2008. Goldman and its insiders are ready for this. Are you?

By Simon Johnson

Weekend Reading

Mike “Mish” Shedlock has some harsh words (to say the least) for Paulson, Ken Lewis, and Bernanke:

“I propose Bernanke, Lewis, and Paulson all share the same prison cell for the next 10 years or so. I will even throw in a ball and a bat so they can continue playing their games.” Full article here.

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From the Congressional Budget Office’s Director’s Blog we get a long term budget outlook, an excerpt (emphasis mine):

“In CBO’s estimates, the increase in spending for Medicare and Medicaid will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080. Thus, reducing overall government spending relative to what would occur under current fiscal policy would require fundamental changes in the trajectory of federal health spending. Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy.”

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Jon Stewart takes on Goldman Sachs

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ECRI: The recession is over!! Now what?…

More on this topic (What's this?) Read more on Federal Reserve, Medicaid at Wikinvest

Andrew Horowitz on the Goldman Theft

The Goldman Sachs prop trading theft is a high finance soap opera. Andrew Horowitz breaks it down nicely on his blog, The Discplined Investor. Horowitz is no cheerleader for GS and it’s fair to say this theft raises some interesting questions about what exactly GS was doing (manipulating) with their own code. I wonder if anyone on CNBC , FoxNews, CNN, or the SEC will have the courage to do some serious investigative work on Goldman’s mysterious prop trading activities.

Is Goldman Sachs Running the World?

According to Matt Taibbi of Rolling Stone, Goldman Sachs has had a hand in every bubble since the 1920s. And he calls the next bubble the cap and trade system:

“[T]he new game in town, the next bubble, is in carbon credits — a booming trillion- dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an ‘environmental plan,’ called cap-and-trade. The new carbon-credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.”

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Weekend Reading

Some of my reading for this week -

From The Big Picture, a couple of articles which are sure to make your blood boil. The AIG bailout is looking for and more like a de facto Goldman Sachs bailout:

Backdoor Bailouts for Goldman Sachs?

iBanks Grabbed $50 Billion in AIG Bailout Cash

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And from Nouriel Roubini, an article in Forbes saying we’re on the precipice of a Depression and/or L shaped depression: The U.S. Financial System is Effectively Insolvent Some excerpts:

With economic activity contracting in 2009’s first quarter at the same rate as in 2008’s fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe…

…In the meanwhile the Dow Jones industrial average is down today below 7,000, and U.S. equity indexes are 20% down from the beginning of the year. I argued in early January that the 25% stock market rally from late November to the year’s end was another bear market suckers’ rally that would fizzle out completely once an onslaught of worse than expected macro and earnings news, and worse than expected financial shocks, occurs. And the same factors will put further downward pressures on U.S. and global equities for the rest of the year, as the recession will continue into 2010, if not longer (a rising risk of an L-shaped near-depression).

Of course, you cannot rule out another bear market suckers’ rally in 2009, most likely in the second or third quarters. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in the U.S. and China that the policy stimulus will provide on a temporary basis. But after the effects of a tax cut fizzle out in late summer, and after the shovel-ready infrastructure projects are done, the policy stimulus will slacken by the fourth quarter, as most infrastructure projects take years to be started, let alone finished.

Similarly in China, the fiscal stimulus will provide a fake boost to non-tradable productive activities while the traded sector and manufacturing continue to contract. But given the severity of macro, household, financial-firm and corporate imbalances in the U.S. and around the world, this second- or third-quarter suckers’ market rally will fizzle out later in the year, like the previous five ones in the last 12 months…

[on the AIG bailout]…So for the Treasury to hide behind the “systemic risk” excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.

And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate–given the macro outlook–that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.

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A great video discussion of the time bomb that is Eastern Europe from Investment Postcards involving Jim Rogers, Max Keiser and others.

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Finally, an interesting chart from the Big Picture on the historical PE ratio for the S&P:


More on this topic (What's this?)
QE Is Dead, Now You Tell Me What You Know
Why Cutting Down Losses Is Important
Read more on 2008 Financial Crisis at Wikinvest