I watched the hearings of the Financial Crisis Inquiry Commission, and I have to admit that I found it more entertaining than most public whipping sessions on Capitol Hill.
The main reason is that the contest of wits was closer than usual. Angelides and the other members of the Commission aren’t at parity, but at least they knew something about what happened, and why. They also aren’t nearly as easy to fool with jargon as the usual panel of elected officials.
Ron Paul, Maxine Waters or Jim Bunning provide their own brand of entertainment, but that’s because they have some crazy ideas that don’t intersect with reality, and no compunction about spinning off into ideological rants based on those ideas. I really have to wonder what Bernanke et. al. do to keep from bursting into laughter listening to that crew lambaste them.
On the other hand, Blankfein had a much more worthy opponent yesterday than anyone in Congress (Barney Frank as a possible exception). By zeroing in on the highly levered, hidden CDS bets against their own customers’ interests in the bond market, the panel showed that they understand that the losses from subprime mortgages just don’t come close to explaining the depths of the crisis we faced.
Blankfein did slip away from most of the punches with his assertion that Goldman wasn’t a broker but a market maker (when it came to taking opposite positions from customers), but also claimed to have simply been a broker satisfying sophisticated customer demand when they aggregated $40 billion in loans and issued bonds under names like “Goldman Sachs Alternative Mortgage Products” (GSAMP).
So which was it? Were they principals profiting from manufacturing private label MBS with loans they specified themselves and sold onward as bundles? Or were they market makers expected to risk their own capital and hedge themselves when demand from customers weighed too heavily on their own positions?
The reality is that those MBS deals were sold based on the averages, and even investors that insisted on seeing more details never saw the loan files, but typically saw smaller groupings, again expressed as averages. That always makes me think of the fact that most lake drownings happen in lakes that average less than two feet of depth.
I even saw him squirm a bit when questioned about how much those sophisticated pension fund managers actually were pemitted to know about the individual mortgage loans Goldman was selling into those Goldman deals.
Nailing him down was tough, though. It was as if he was covered with Vaseline, and his opponents were forced to stand up and take their shots following the Marquess of Queensbury Rules.
There was one truly excellent “punch” that landed, and it seems to have been completely ignored by everyone commenting on today’s trial balloon for a fee to repay taxpayers for bailout funds lost on the likes of AIG, Fannie and Freddie.
That point made by a member of the Commission was summarized nicely in an article by Jody Shenn over at Bloomberg this afternoon:
“If one of your three counterparts messed up and that firm failed tomorrow, do you believe that policymakers would step in and prevent that firm from failing?” Keith Hennessey, a member of the U.S. Financial Crisis Inquiry Commission, asked Blankfein in a hearing yesterday with JPMorgan’s James Dimon, Morgan Stanley’s John Mack and Bank of America’s Brian Moynihan. “In the context of this environment, at some level, the government would intervene,” Blankfein said. “I don’t think the equity holders, the shareholders, or the employees who own shares would find any relief from that, but there would be something done because of the fragility of the system today.”
The obvious question regarding taxpayer support is: who got made whole by the support for Fannie and Freddie paper, and the payout on AIG CDS margin calls? It sure wasn’t Joe Sixpack.
The posturing politicos that pass for reporters in the financial press seem to be stuck on the idea that “paying back TARP” is all that is owed.
They should get a clue from the fact that taking TARP funds is not the only qualifying event for the proposed fee, but other forms of direct taxpayer bailout apply, such as getting their private corporate debt guaranteed via the Temporary Liquidity Guarantee Program.
By the way, all those firms that supposedly paid in full are still enjoying that guarantee by the taxpayers, and they haven’t bothered to refinance that debt without taxpayer guarantee, have they?
And then there was the Fed lending to and guaranteeing private debt for non-banks like GE, GMAC and Wall Street dealers at the height of the crisis, accepting almost anything they owned as collateral. Should that be ignored too?
Maybe, just maybe, Wall Street is still making most of its “profits” off the back of taxpayer guarantees right now, along with the fact that they all know they can do business with each other comfortable in the faith that the taxpayer will step in rather than leaving them holding another Lehman bag. Both Blankfein and Mack confirmed that fact yesterday.
I wish the taxpayer had had a good vulture investment manager handling their deals during the crisis instead of a former Goldman CEO who thought Wall Street was a national treasure.
Every single bit of credit, implied or actual guarantee, or loan, or collateralized borrowing, would have had its associated pound of flesh, including serious long-term rewards for the providers of the relief (the taxpayers). None of this “you made 5% in three months, so that’s like making 20%” BS ….
Try “now that you’ve come to us to ensure your survival, we’re going to own a piece of you for the next twenty years.” Those are the kind of terms we’d see even for a simple letter of credit supporting a failing business in private capitalism (after a million dollar upfront fee) – even if there was never a dime borrowed under the facility!
Wall Street is going to set aside approximately 1% of our national GDP to pay bonuses to its employees for their spectacular ability to pick up free money when Ben Bernanke, Hank Paulson and Tim Giethner scattered it all around them.
A lot of this will be in tax-advantaged and tax-deferred form for the recipients. That’s right, folks, more money THIS YEAR than the estimated total of this “too-big-to-fail” fees for the next ten years.
Having seen it up close, I can tell you that most of those people wouldn’t have had salaries, much less bonuses, this year if the various forms of rescue hadn’t been implemented.
For the simpering overpaid TV reporters to blithely repeat the faux capitalist catch phrases without at least looking at all the ways they were handed these “profits” on a silver platter is just a shame.
By the way, kudos to Mark Haines for at least pointing out that the banks that paid back TARP are making their huge profits using free money from the taxpayer. For his co-anchor, not so much. I’d settle for calling her a mindless twit, except she seemed too snidely aware of what Barney Frank was saying to claim ignorance, so dishonesty and open partisan bias are the only options to explain her constant editorializing.
In case you’re wondering how this 1% of GDP tax called Wall Street bonuses is being paid (equal to 12% of the total income tax to put it in perspective), here’s the answer: It comes from everyone who now gets less than 1% on their savings rather than a return they might be able to live on.
I pity anyone who, like my Grandmother, only trusted bank CDs with her savings. Your drop in income last year and this went directly into the poor starving investment banker relief fund the similarly-paid TV reporters are so sure we need to protect.
I can’t wait for the late-night TV ads….
“For just $50,000 a month, less than the cost of a luxury automobile, you can pay the bonus for one mid-level banker and keep them from having to take a new job working for German or French banks. And every year you’ll get a personal message from your banker, with copies of their hotel spa receipts to show how well they are relaxing after a hard year of holding 4% government-guaranteed mortgage bonds financed with 0.5% government-guaranteed loans.”
Color me underwhelmed at the importance of protecting the $700,000 per person average compensation at one of our leading National Treasures. It’s hard not to make a fortune in a year when the taxpayer covers every eventuality, and locks in 20% returns.