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How You Finance Goldman Sachs

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July 30, 2009 – Comments (2) | RELATED TICKERS: GS , JPM

Well this is nice from Nomi Prins via Mother Jones (The Left).

I wuld like to note that GS as a bank holding company also has permission to transfer your (up to $250K) Federally Guaranteed savings accounts to its investment branches

 Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks'. That's the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.

Goldman didn't like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what's called the Market Risk Rules that bank holding companies adhere to when computing their risk.

Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG's spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG's free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there's the $29.7 billion it's used so far out of the $35 billion it has available, backed by the FDIC's Temporary Liquidity Guarantee Program, and finally, there's the $11 billion available under the Fed's Commercial Paper Funding Facility.

Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.

On February 5, 2009, the Fed granted Goldman's request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money.

Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That's the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It's also the division that would stand to gain the most if Waxman's cap-and-trade bill passes.)

2 Comments – Post Your Own

#1) On July 30, 2009 at 12:14 PM, devoish (96.28) wrote:

I forgot the link.

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#2) On July 30, 2009 at 1:31 PM, rofgile (99.41) wrote:

So basically, GS got out of TARP, by getting an even bigger non-TARP loan.

Because they got out of TARP they can now pay $5 billion worth of bonuses.

Where did that bonus money come from? Sounds like a lot of it is from taxpayer loans to GS.

 

I hate GS.  The way things are going, I would expect that 15-30 years from now, GS will be the next Lehman Bros, and the cycle will happen again, even worse.

In the matter of large banks, the government should be stepping in to divide all large banks into small holdings limited by state boundaries and independently regulated within each state.  There should be no super-banks that play by whatever rules they need to win - which is our current setup (at the cost of EVERYONE else).

I really don't understand why regulatory bills are not the big event on the hill now, rather than a stupid bill just to declare, ONCE FRICKEN AGAIN, that Obama is a US citizen.

As an Alabama constituent, what my senators have made of their jobs in the last year has been utterly sad.  What a party of NO success, NO hope, NO to change. 

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