To be an economist these days is a rare privilege and especially; it is a privilege to be a blogging economist since there is just so much good material to write about at the moment. On the one hand, there is the unfolding unravelling of Goldman Sachs (loads of material out there already, but just read Felix and you will be fine) and on the other there is the increasingly ominous signs that the Eurozone as we know it is about to become a thing of the past .
I hope that I will get to deal with these specific topics at a later time, but for now I would like to point, in the most obscure of all directions, to chapter 4 of the IMF’s part released Global Financial Stability Report which deals with the transmission of global monetary supply to international capital flows and global asset prices as well as inflation (hat tip: Tracy Alloway at FT Alphaville). Essentially the IMF report takes up the baton of some fundamental issues of global capital markets and issues which I have discussed on numerous occasions. The issue can be summarize through the two following questions;
1 – Can increasing nominal interest rates to quell domestic inflationary pressures be counterproductive and actually lead to overheating?
2 – What is the global effect of near ZIRP policies in a number of big developed economies and what will the effect be if this persists?
My own answer to the questions above is yes to the first with the qualifying remark that this implies a relative loss over the domestic monetary transmission mechanism both from the point of view of receiving (high interest rate) as well as sending (low interest rate) economies. And as for the second question I tend to see it as an externality to the global economy and crucially so, an externality which adds considerable volatility to global asset prices  since implied risk aversion in the market will determine whether the open taps by the G4 are used (or not) to build carry trade positions .
In their recent analysis on global capital flows (see link above), the IMF produces quantitative results and a well tailored methodology to boot to support these claims:
The global liquidity cycle started in 2003 and accelerated from the second half of 2007 when country authorities began to undertake unprecedented liquidity-easing measures to mitigate the effects of the crisis (Figure 4.1). While helping stabilize the financial system and support the return to growth, current easy global liquidity conditions and the accompanying surge in capital flows pose policy challenges to a number of countries where the crisis did not originate, with the primary challenge being an upside risk of inflation expectations in goods and asset markets. Such “liquidity-receiving” countries have had to ease domestic monetary conditions in response to both the slowdown in global demand and the acceleration in global liquidity, adding further pressure to asset prices. The policy challenge posed by easy monetary conditions is greater in economies—primarily emerging markets—that, in addition to strong growth prospects, have fixed or managed exchange rate regimes.1 The associated surges in capital inflows also raise early concerns about vulnerabilities to sudden stops once the global liquidity is unwound, with implications for financial stability.
Thus, what the IMF coins as liquidity receives are those economies subject to carry trade inflows (e.g. Brazil, Australia, New Zealand, South Africa etc) and liquidity senders on the other are developed economies with low interest rates. Recently, these were confined to Switzerland and Japan, but in the context of the financial crisis the UK, Europe (to some extent), and the US have also move short term interest rates to the floor and flooded their banking systems with cheap money for the wholesale market. This has even led some to dub it as the mother of all carry trades.
Now, I am tinkering at the moment with a model of international capital flows and global liquidity transmission which exactly seeks to incorporate this effect. In this sense, I think IMF’s results are very welcome. I am of course including demographics which I see as the missing link here since while I suspect the US (and the UK) may ultimately succeed in creating inflation which would force them to pull back liquidity provision others will not. Japan is the famous example here, but as the world ages there will be more and more.
In the jargon of the IMF; old age makes economies structurally prone to being a liquidity sender  and as the world ages we will have relatively more liquidity senders than receivers. This poses an externality to the global system and also adds to volatility of asset returns and growth over time.
 – Please note that I am in no way favor of this as I am personally a big believer in the European project but Germany has neither the capacity nor willingness to keep paying for others regardless of the fact that Germany’s economy is also, itself, an integral part of the problem.
 – See a web cast of the conclusions here
 – Which, by the way, is why I see great risks from the policy advice that central banks should target asset prices since there is a hidden volatility multiplier in the works here from tinkering too much with short term nominal interest rates.
 – I have even made my own humble contribution to a growing body of literature on this.
 – C.f. My master’s thesis I think this can be explained through intertemporal preference, but I am open to other interpretations.
Operating a website requires monitoring to make sure there are no problems but doing so can uncover very interesting nuggets of information. For example, on 24 February 2010 at 11:15 EST in the evening someone at Goldman Sachs Company in the main NYC office found RunToGold through Google by searching for the phrase ‘buying silver‘.
Gee, I wonder who that someone was and what they are thinking. Originally, I was thinking of posting their home address, picture, resume, social security number and other websites they visited but they are not safe for work and considering the hostile feelings towards the company I decided against the personal information. But Eric Schmidt, CEO of Google, would probably not mind considering his statement to Maria Bartiromo:
I think judgment matters. If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place. If you really need that kind of privacy, the reality is that search engines — including Google — do retain this information for some time and it’s important, for example, that we are all subject in the United States to the Patriot Act and it is possible that all that information could be made available to the authorities.
BUYING SILVER INTENT
The brilliance of the Google Superbowl ad was in its ability to communicate an entire story with only a few lines of text.
Truly, one’s search patterns can reveal intentions. Now, what can be discerned by these virtual footprints from one of Goldman Sachs’ 36,000+ employees? Conclusively, probably not much and we (NSA) would need access to more transactional databases and the passage of S. 733 the Cybersecurity Act of 2009 but we can still speculate about talk around the water cooler or higher order drama. Who knows if that someone was the secretary, their boss or both. It was 11:15PM after all!
SILVER BACKWARDATION CLOSE
Lately I have not followed the SIFO rates closely so this was my initial suspicion and once again it appears that silver is nearing backwardation. While the paper silver market which has an unlimited supply of silver and the physical silver market is constrained by actual metal the fractures between the two are beginning to emerge again.
In 2009 I chronicled the silver backwardation that led to a 60% rise in silver prices over a seven month period. Additionally, the gold to silver ratio has moved over 10% in less than two months. With silver recently slipping below its 200dma it is becoming a good value. But with silver getting cheaper this move in the ratio portends a slowing of the precious metals bull. And so there are conflicting signals.
CFTC SILVER MARKET INVESTIGATION
The slide towards backwardation is particularly enthralling given the CFTC’s three investigations of the silver market in five years. Ironically, silver analyst Ted Butler who has been particularly vehement of the CFTC’s faux investigations seems to like the new Chairman Gensler and on 10 February 2010 wrote,
I have been unabashed in my praise for Chairman Gensler since the time he assumed office. I have called him the greatest chairman in CFTC history. … I understand that disagreement [with the praise]. Yes, he was a partner of Goldman Sachs, the dreaded “vampire squid” of the financial world. Yes, he was a participant in the deregulation of 2000, which added greatly to the financial crises of the past couple of years. Yes, he is an “insider,” with connections and access to those in power.
What could Goldman Sachs know about the silver market, what might be being discussed around the water cooler and how might Chairman Gensler’s influence with his old cronies play into this?
The digital world offers tremendous opportunity to covertly monitor and draw inferences. In this case, someone at Goldman Sachs was researching about buying silver and they could have easily cloaked their behavior with anonymous web surfing. Imagine the latent power Google and the NSA have and would using it constitute ‘insider trading‘?
Yet, a former Goldman Sachs employee is the CFTC chairman who is embarking on the third investigation of the market in five years while the metal drifts towards backwardation. The paper price of gold and silver may be drifting lower but the physical silver is getting cheaper and a better value.
If you do not have a core position, to protect against the Laboon of sovereign debt defaults, negative FDIC funds, quantitative easing, etc. then yesterday was when you should have acquired. If you already have a core position then it may good to wait a little while longer for even better silver prices such as 0.95x the 200dma.
Order the new Bank Privacy Report before the end of February and get 50% off.
DISCLOSURES: Long physical gold and silver with no interest in sovereign debt from Greece, Portugal, Italy, Ireland, Spain, etc., GS, or the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.
Zero Hedge (with help from the Huffington Post) has been all over the biggest fraud perpetrated by the government in economic history. While trying to avoid some of the minutiae of the transactions that took place, below are some of the highly poignant issues to come out of HuffPo’s (shockingly!) and Zero Hedge’s excellent muckraking. My commentary is in blue.
AIG did not understand what it was doing; it relied on the rating agencies.
But if Goldman was so smart, how could AIG be so dumb? There’s a short answer and a long answer. The short answer is three little letters: AAA. The long answer gets to the same result; it just takes a longer while to get there.
According to Michael Lewis’s reporting in Vanity Fair, the guys at AIGFP were clueless:
Toward the end of 2005, Cassano [the head of AIGFP] promoted Al Frost, then went looking for someone to replace him as the ambassador to Wall Street’s subprime-mortgage-bond desks. As a smart quant who understood abstruse securities, Gene Park was a likely candidate. That’s when Park decided to examine more closely the loans that A.I.G. F.P. had insured. He suspected Joe Cassano didn’t understand what he had done, but even so Park was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost, who had no clue, but then, his job was to sell, not to trade. “None of them knew,” says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing–and paying them for their talent! [Emphasis added.]
It seems less shocking if you understand how these CDOs were put together and sold. Take a few minutes and glance over the prospectus for Davis Square Funding VI, one of the dozens of CDOs structured by Goldman before the risk was laid off on AIG. You could spend all day studying the document, but you will never be able to answer the question, “What am I buying?” The document doesn’t tell you. That’s the point. It’s evident in every aspect of this document and the offering circulars for most of the other CDOs. The business purpose, the essence of the deal, can be summarized in one word: obfuscation.
Goldman argued that these CDOs were put together to meet market demand, but demand for what? These subprime CDOs were not financing anything (the underlying mortgages and mortgage securities had already been financed), nor were they promoting liquidity in the marketplace (they couldn’t be traded because nobody knew what was in them).
So just to recap, AIG was trading garbage assets. As we know, the proliferation of subprime mortgages would have never occurred without artificially low interest rates, the CRA, Fannie and Freddie subsidization and the other political forces like ACORN pushing banks to make loans to uncreditworthy borrowers. The end result? A large quantity of mortgages of very low quality, which were clumped together and sold buy banks like Goldman Sachs in CDOs, and of which CDS (basically insurance policies) were sold on to hedge the risk of the CDOs. Without the garbage mortgages enabled by government intervention, you would have never had the massive increase in the mortage-backed security market and the CDS contracts that were written on the CDOs.
The other element of course of this problem attributable to government is the Washington DC-stamped, cartelized ratings agencies, who created moral hazard in markets by taking the onus off of investors to evaluate the underlying mortgages backing things like the toxic CDOs. This isn’t to place the blame solely on S&P, Fitch and the like notwithstanding their errors in rating the securities (which of course can be held partially attributable to the inherent conflict of interest between the investment banks and the ratings agencies themselves), as the buyers of CDOs should have invested more responsibly. But nevertheless, one can see the government role herein. Incidentally, I would suggest against buying any product whose prospectus looks like this one
of a CDO structured by Goldman.
On Moral Hazard
Was AIG really too big to fail? Maybe if you worked for Goldman.
The party line, expressed in Too Big To Fail and elsewhere, is that an AIG bankruptcy posed a greater systemic risk than a Lehman bankruptcy, because AIG was so much bigger. But that analysis is highly superficial and very misleading. AIG itself was a holding company, which guaranteed the debt of its unregulated financial subsidiary, AIGFP. The lion’s share of AIG’s revenues and profits, and about 80% of its consolidated assets, were concentrated among its different insurance company subsidiaries. Those insurance companies were solvent. They did not pose any systemic risk. In fact, it’s quite likely that they would have continued to operate outside of bankruptcy.
The only subsidiary with major problems was AIGFP, whose financial obligations were guaranteed by the parent. But AIGFP was only about one-third the size of Lehman. It’s almost impossible to see how AIGFP ever posed a systemic risk, unless everyone’s intention to provide a backdoor bailout to the banks. Put another way, it seems that the only reason that the government needed to step in for AIG was to provide a backdoor bailout to its banks.
This pretty much speaks for itself. The free marketeers among us would argue that there is no such thing as TBTF – that many of these banks would not have grown to the size they did, nor taken on the risks they did without massive government intervention in the banking sector to begin with, but nevertheless that Lehman fell and the financial system didn’t die (even if credit markets froze which is what should have happened in response to the collapse of a major financial institution) is fairly good evidence that AIG’s collapse of solely one of its subsidiaries likely would not have destroyed the financial system. Granted, AIG had many institutional problems, and AIGFP was merely one of them. Next, the drama picks up:
Goldman’s scheme to create a liquidity crisis at AIG, in order to manipulate the government into paying CDO counterparties 100 cents on the dollar
Because of laws that emasculated regulatory oversight, Goldman’s trading positions in credit derivatives with AIG had escaped the scrutiny of the Fed until September 11 or 12, 2008, when AIG told the New York Fed that it would soon run out of cash. The CDOs did not trigger a liquidity crisis at AIG, at least, not directly. Rather, it was the imminent cash drain from anticipated downgrades, from AA- to A-, which would trigger $30 billion in new collateral postings on AIGFP’s trading positions. In addition, someone at the company had screwed up. They had invested billions in cash collateral, intended for someone else, in highly rated mortgage securities, for which there was suddenly no liquid market. So AIG needed to come up with the cash right away.
Simultaneously, of course, Lehman Brothers was imploring the government for support, and Paulson’s position, at least on September 12, 2008, was that the Federal government would provide no support of any kind to bail out a private company like Lehman or AIG. Private bankers must come up with a private solution on their own.
On September 15, 2008, the same morning that Lehman’s bankruptcy sent shockwaves, Geithner had convened a meeting with JPMorgan Chase and Goldman to work on an emergency bridge financing for AIG. Why include Goldman? Traditionally, the bank with the largest credit exposure to distressed borrower helps arrange the debt restructuring. Geithner opened the meeting, and left soon thereafter, leaving Paulson’s deputy, Dan Jester, in charge. Jester was a former Goldman banker whom Paulson had plucked in July 2008 to work on matters that concerned Paulson.
September 15, 2008: Paulson’s deputy sabotages efforts to negotiate a private bank deal.
Sorkin describes the opening of the Monday morning meeting:
“Look, we’d like to see if it’s possible to find a private-sector solution,” Geithner said addressing the group. “What do we need to do to make this happen?
This strikes me as incredibly interesting. That the government initially wanted to look for a private-sector solution is a good thing. Yet as the title to this section shows, and as we will soon discover, it seems as if Goldman wanted to intentionally cause a crisis so it could be bailed out for its positions with AIG. In some ways, this seems reminiscent of the Panic of 1907, where some have argued that JP Morgan intentionally tried to sink the market in order to continue building the case for the development of a central bank to cartelize the major Wall Street Banks and provide them with a backstop in the event of a banking crisis. Granted, now we already have a central bank, but that Goldman might intentionally create a liquidity crisis in order to be bailed out and made whole on its AIG exposure, while further strengthening its position as THE dominant financial institution with an implicit taxpayer backing is certainly within the realm of possibility.
For the next ten minutes the meeting turned into a cacophony of competing voices as the banks tossed out their suggestions: Can we get the rating agencies to hold off on the downgrade? Can we get other state regulators of AIG’s insurance subsidiaries to allow the firm to use those assets as collateral?
Geithner soon got up to leave, saying, “I’ll leave you with Dan,” and pointed to Jester, who was Hank Paulson’s eyes and ears on the ground. “I want a status report as soon as you come up with a plan.”
On the Conflict of Interest and Intimidation
A critical point here is that Pauslon’s deputy, not Geithner, sat at the table to lead government negotiations.
Job 1 was to persuade the rating agencies to forestall their anticipated downgrades, which would have burned up billions because of increased calls to post collateral. This task was assigned to the government’s representative, Dan Jester.
“He was as useless as tits on a bull.” [AIG CEO] Bill Willumstad, normally a calm man, was in an uncharacteristic rage as he railed about Dan Jester of Treasury, while telling Jamie Gamble[a lawyer at Simpson Thatcher] and Michael Wiseman [a lawyer at Sullivan & Cromwell] about his and Jester’s call to Moody’s to try to persuade them to hold off on downgrading AIG.
Willlumstad had hoped that Jester, using the authority of the government and his powers of persuasion as a former banker, would have been able to finesse the task easily.
Willumstad explained that the original plan “was that the Fed was going to try to intimidate these guys to buy us some time.” Instead, when Jester finally got on the phone, “he didn’t want to tell them.” Clearly uncomfortable with playing the heavy, Willumstad told them that Jester could only bring himself to say, “We’re all here, and, you know, we got a big team of people working and we need an extra day or two.”
If Jester spoke to Moody’s the way Willumstad said he did, then there is no doubt in my mind that Jester intended to sabotage the deal. No other explanation is plausible. The importance of the phone call was not unlike that of a death row lawyer seeking a last minute stay of execution. Jester had been the Deputy CFO at Goldman. It would have been his job to deal with the rating agencies regularly. There is no way that he would not have known what to say. All he would need to say is that since AIG’s last meeting with Moody’s, the situation is evolving in a way so Treasury and the Federal Reserve are feeling increasingly confident that the deal being hammered out will significantly ameliorate the company’s liquidity issues. Everyone knows that the rating agencies do not like to abruptly pull the trigger when a situation is still evolving. Everyone also knows that the rating agencies are acutely aware of their chicken/egg role they play in determining a firm’s liquidity situation. (A company has access to the capital markets because of its rating, but its rating reflects its access to the capital markets.) Also, as Janet Tavakoli once mentioned, investment banks train their analysts about how to place pressure on the rating agencies. Finally, it would not have been indelicate to allude to the agencies’ no-so-clean hands in building up the AAA pyramid scheme known as AIGP’s CDO portfolio.
Here we see the evidence that a former Goldmanite, Jester, it seems did little to persuade the ratings agencies to buy AIG time so that a private sector solution could be put in place to deal with the problems between AIG and its counterparties. There are a few important things to note. One is the conflict of interest that had to exist between Paulson and Jester dealing with AIG whose biggest counterparty was Goldman, second that the Fed according to AIG CEO Willumstad was trying to INTIMIDATE the ratings agencies (funny I didn’t see that responsibility in the Constitution) and third that Paulson and Geithner were not in the room at this time. Could this be because they wanted to be able to recuse themselves of any malfeasance in the event of a trial down the road?
September 16, 2008: Paulson installs a CEO at AIG who will favor Goldman.
And a few minutes after Goldman, JPMorgan Chase and the government tried to figure out what was next, at 9:40 a.m., September 16, Goldman CEO Lloyd Blankfein placed a call to Hank Paulson, which Paulson took, even though such communication was illegal. According to Sorkin’s sources, they discussed Lehman and not AIG. Just at the moment when the government was deciding whether to step in and save AIG, Blankfein never mentioned that an AIG collapse could have easily wiped out $15 billion in Goldman’s equity and caused everyone to scrutinize the dodgy CDOs underwritten during Paulson’s tenure. Do you think they just forgot?
As it happened, a few minutes after Paulson got done speaking with Blankfein, Geithner briefed Paulson about a tentative proposal for the government to extend AIG an $85 billion facility. The conversation with Geithner ended at 10:30 a.m.
Sorkin’s sources fabricated a tall tale about what took place afterward:
However resistant Hank Paulson had been to the idea of a bailout, after getting off the phone with Geithner, who had walked him through the latest plan, he could see where the markets were headed and that it scared him. Foreign governments had already been calling Treasury to express their anxiety about AIG’s failing.
Jim Wilkinson [Paulson's deputy, formerly of the White House Communications office] asked incredulously,” are you really going to rescue an insurance company?”
Paulson just stared at him as if to say only a madman would stand by and do nothing.
Ken Wilson, his special advisor, raised an issue they had yet to consider. “Hank, how the hell can we put $85 billion into this entity without new management?”– a euphemism for how the government could fund this amount of money without firing the current CEO and installing its own. Without a new CEO, it would seem as if the government was backing the same inept management that had created this mess.
“You’re right. You’ve got to find me a CEO. Drop every other thing you are doing,” Paulson told him. “Get me a CEO.”
Their choice: Ed Liddy, the former CEO of Allstate and Goldman board member.
Whoever bore the blame for creating the mess at AIG, it’s extraordinarily reckless, during the middle of a crisis, to immediately install a CEO with no prior experience at the company, which is a huge sprawling conglomerate. That’s especially true when that new CEO has a conflict of interest the size of the Grand Canyon.
Sorkin also makes clear that it was Jester, not Geithner, who took control in structuring AIG’s bailout facility. Before Geithner gets on a conference call with Bernanke:
Jester and [Paulson's assistant Jeremiah] Norton were poring over all the terms. They had just learned that Ed Liddy had tentatively accepted the job of AIG’s CEO and was planning to fly to New York from Chicago that night. To draft a rescue deal on such short notice, the government needed help, preferably from someone who already understood AIG and its extraordinary circumstances. Jester knew just the man: Marshall Huebner, the co-head of insolvency and restructuring at David Polk & Wardell who was already working on AIG for JP Morgan and who happened to be just downstairs.
Months later, Paulson’s spokesman told The New York Times that, “Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout.”
Again, the conflict of interest here is breathless. A former GS board member who would obviously act amenably to GS was put in charge, it seems as a puppet leader of AIG. The fact that the Fed again was maneuvering this whole program shows the significant amount of power they held over the entire financial system, and their panicked actions with massive amounts of taxpayer money are if nothing else incredibly irresponsible if not downright scary. Below, the WSJ outlines the whole bamboozle:
Gaming the System
Further, as Zero Hedge had discovered earlier, none of this intervention at all in AIG may have been necessary as GS was willing to tear up its CDS contracts with AIG:
In tonight’s Heard On The Street section, the WSJ notes:
As everybody knows, AIG got a huge government bailout in September 2008 to help make payments on derivatives contracts with banks, including Goldman. Yet in the previous month, Goldman approached AIG about “tearing up” its contracts, according to a November 2008 analysis by BlackRock, then an adviser to the New York Fed. So was Goldman prepared to offer AIG a haircut in the month before its rescue? A legitimate question, given that Goldman refused to accept such a cut when the New York Fed raised the idea after it bailed out AIG.
The implications of this discovery are huge as they essentially destroy all the arguments presented by the FRBNY about an inability to extract concession out of Goldman (which being the largest AIG CDO counterparty, was the critical negotiating factor). It also casts doubt on the veracity of any arguments presented in Congress by Goldman representatives discussing the potential to take a haircut on their AIG exposure. What this means in plain English is that, in the month before the Fed entered the scene, GOLDMAN SACHS ITSELF OFFERED TO TEAR DOWN THE CDS ON AIG’S CDO PORTFOLIO (we don’t use caps lock lightly). This is basically a smoking gun on the moral hazard issue perpetrated by the FRBNY when it got involved, and indicates that through their involvement, Tim Geithner, Sarah Dahlgren or whoever, not only did not save US taxpayers’ money, but in fact ended up costing money, when they funded the marginal difference between par (the make whole price given to all AIG counterparties after AIG was told to back off in its negotiations) and whatever discount would have been applicable to the contract tear down that had been proposed by Goldman a mere month earlier. This, more so than anything presented up to now, is the true scandal behind the New York Fed’s involvement.
If this November BlackRock report indeed exists, and if Goldman did in fact offer to tear down contracts, this is an act of near criminal implications and heads at the FRBNY must roll immediately.
Today, Zero Hedge released the November BlackRock report. The report indeed verifies the aforementioned theory:
In layman’s terms, what all this means, is that Goldman would have indeed been willing to accept tear downs due to the excess buffer (positive haircut) arrangement the firm had in place with AIG. Indeed, the firm had downside protection all the way down to at least 12% below fair value as determined by all other AIG counterparties (granted, in such an extremely illiquid market as CDOs nobody knew what price these securities would print at, especially if trades were done in the size discussed). Furthermore, according to BlackRock, Goldman was wise enough to offload the actual CDOs to clients, and was exposed merely through “back-to-back swaps on most of the positions.” This means that Goldman only was exposed purely to counterparty risk on AIG’s behalf – should AIG default, Goldman would become the client-facing entity guaranteeing “pass through” sold CDS.
Yet one wonders just how many billions of dollars Goldman had in margin variation between collateral posted to it via AIG, and how the amount of money it had paid to buyers of CDS sold by Goldman. We are certain that since no Goldman client had the same negotiating power as Goldman did with AIG, Goldman likely had a positive balance in the hundreds of millions if not billions simply on the collateral variance.
As page 10 indicates, whereas all counteparties had requested collateral at a price for the underlying CDOs of 49, Goldman was extremely aggressive, demanding collateral for a price-equivalent of 37. The latter compares to a BlackRock model price for Goldman of 44, meaning that even the Fed’s advisor in good faith could not recommend such a generous treatment of Goldman in the context of all its other counterparties. Were Goldman to receive the same collateral as everyone else, it would be due 8.1 billion: $1 billion less than the 10/24 collateral request.
Now keep in mind, that of the top 5 counterparties, SocGen, GS, Deutsche Bank, Merrill and Calyon, only Goldman had subsequently sold off its entire CDO book: once again implying that unlike the other 4 firms, who at least held the exposure on their own balance sheet, and thus one can say deserved to receive some insurance, Goldman had bought then sold its entire portfolio, in essence making Goldman nothing than an AIG conduit, which was fully hedged and, as noted above, only had counterparty risk, yet which had the benefit of up to $1 billion in excess cash on its books due to day-to-day marking of its CDS exposure and its advantage collateral arrangement.
Futhermore, as Goldman owned CDS on AIG itself (as a counterparty hedge), Goldman had absolutely no risk in its relationship with AIG whatsoever!!! Of course, It is critical to remember that Goldman not only received par between the collateral previously posted to it, and actual cash from Maiden Lane III, it also made billions by selling actual AIG CDS (which as we claimed previously was done while in possession of material non-public information). Amusingly, while Goldman bought all of its CDO protection from AIG exclusively, it definitely used a very broad seller base when it loaded up on the actual AIG protection. Therefore, Goldman’s only, ONLY risk, was that of a complete systemic collapse and the repudiation of all contracts, CDS and otherwise. Which is why Goldman’s various agents did everything they could to prevent that from happening, up to and including loading the Federal Reserve with trillions of toxic debt in the upcoming 12 months.
Note that the link in the last stanza detailing how GS may have acted on non-public information to make a significant profit on its AIG CDS is simply breathtaking in its corruptness. But further, that the system was gamed by the banks, again at the expense of the taxpayer is despicable and heads should roll for it.
The French Connection
FURTHER, as was noted in the Huffington Post piece, as of November 6, 2008:
29% of the remaining CDO exposure belonged to two French banks, whose regulator advised Geithner that it was illegal for them to settle at less than par. Challenging another country’s bank regulator would have opened up a whole can of worms at a point when the risk of global financial panic was very real.
In light of this revelation, Zero Hedge did some digging and the BlackRock document revealed that the French bank Soc Gen “has pledged much of the (CDO) portfolio to the Fed discount window for future liquidity.” As Zero Hedge puts quite well:
Aside from the fact that in October 2008 France-based Soc Gen was not a Primary Dealer (it only just applied for this position a few weeks ago), one needs to turn to page 5 of the presentation to realize that Soc Gen’s portfolio had a value of 49 cents on the dollar. What this implies is that in October of last year (and ostensibly prior) Soc Gen, a foreign, non Primary Dealer, had access to the Federal Reserve’s Discount Window, where it had pledged securities that had a value of 49 cents on the dollar, and for which the Fed would have taken arguably no haircut, thereby funding the French firm at par for securities that were worth less than half, and which the taxpayer was on the hook for. Indeed, these securities may well have been completely worthless: lower on page 3 we read:
Soc Gen and AIG are currently in dispute over existing events of default and credit events under transaction [ineligible] for 2 deals, totaling $650 million of notional exposure.
We would not be at all surprised if the defaulted securities were part of the crap that had been given to Tim Geithner, at the time head of the New York Federal Reserve. And what Soc Gen was doing by pledging reference assets to the Fed, we are certain that all the other counterparties (those which unlike Goldman still held on to the securities) were doing as well.
The fact that the Fed was willing to risk taxpayer capital with such reckless abandon, first in the form of accepting literally worthless reference securities from Soc Gen (as documented by BlackRock), and subsequently by bailing out Goldman at well over par (remember the money the firm made on its actual AIG counterparty-risk) protection, would have been sufficient to terminate Geithner’s career in any self-respecting banana republic. Too bad America is no longer even that.
To recap, we have government intervention causing imprudent financial innovation and speculation, moral hazard, major conflicts of interest, Fed intimidation, the banking cartel gaming the system, a variety of potentially illegal actions and the corrupt bailout (of US AND FRENCH(!?) institutions) itself being hoisted on the back of the taxpayer. This is all truly damning evidence that the actions taken by our government during the financial meltdown were not only incredibly destructive to any semblance of capitalism, potentially illegal but also horribly detrimental to the American people. Bernanke, Geithner, Paulson and any of the other architects of these corrupt bargains need to face the music. Let the fireworks begin!
Goldman Sachs (GS) gangbangers are engaged in public service, or more appropriately pillaging, as fast as possible even while the victims are getting increasingly shrill in their protests. No means no and the gangbangers are not being respectful. Bankers, financiers, hedge fund managers and others are being exterminated under suspicious circumstances. Even senior gangbangers have issued guidelines for Goldman Sachs (GS) employees congregations in public.
You cannot make this stuff up. So, in the culture of Goldman Sachs (GS), if their employees start getting exterminated then how will it affect the stock and how can the situation be played for profit?
TENSENESS IN THE OFFICE
The Goldman Sachs (GS) gangbanger’s public pillaging is being increasingly revealed and the hundreds of millions, even billions, of people they have stolen from and wronged are getting rightfully upset. This is bound to create some tenseness and nervousness around the gangbanger’s hideout. Bloomberg’s Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life, reports:
The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank. … Has it really come to this? Imagine what emotions must be billowing through the halls of Goldman Sachs …
The bailout was meant to keep the curtain drawn on the way the rich make money, not from the free market, but from the lack of one. Goldman Sachs blew its cover when the firm’s revenue from trading reached a record $27 billion in the first nine months of this year, and a public that was writhing in financial agony caught on that the profits earned on taxpayer capital were going to pay employee bonuses.
My the tangled web that Goldman Sachs (GS) gangbangers weave.
Lloyd Blankfein, Chief Gangbanger for Goldman Sachs (GS) and whose wife does not like to wait in line at charity events, proclaimed that Goldman Sachs (GS) was ‘doing God’s work’. Interestingly, CNBC reported, Lloyd Blankfein “added that he understood, however, that people were angry with bankers’ actions: “I know I could slit my wrists and people would cheer.”
As the Huffington Post reported:
L’Osservatore Romano is reporting that Goldman Sachs is indeed Doing God’s work, and His Former Holiness Joseph Ratzinger has confirmed the unsolicited hostile takeover. Writing under his pen name Benedict XVI, Ratzinger verified that total control of the popular religion has been transferred to Goldman Sachs and His New Holiness Lloyd Blankfein.
But seriously, the Bible has many examples from Elijah with the chariots of fire to Daniel in the lion’s den of those who did God’s work being protected. And what type of work did Jesus do? Mark records:
And they come to Jerusalem: and Jesus went into the temple, and began to cast out them that sold and bought in the temple, and overthrew the tables of the moneychangers
But instead of relying on God’s protection the Business Insider has reported, “all Goldman Sachs employees received earlier this month. They were told not to organize small [12 maximum] parties even if no firm money goes to pay for them.”
So during the holidays remember to keep that Christmas spirit.
WAGING OF WAR
During the Panic of 1873 many investment houses went bankrupt. Tensions got so heated the United States Army was deployed to New York City to protect the bankers.
When the rich wage war its the poor who die in Afghanistan but when the cake eating poor wage war its the rich who died in France. This time around the Goldman Sachs (GS) gangbangers are going to want security provided by highly trained troops, or former troops, whose parent’s pensions have been stolen and whose best friends have died in their arms in foreign lands.
A few days ago I was talking with a friend who had just returned from an overseas war deployment with the United States Navy. I jokingly recounted how the armed forces protected the bankers in 1873 and asked him ‘What would you do if ordered to protect the bankers?’ He jokingly replied to the effect, ‘I would go, stand between the angry crowd and the banker and when the time was right I would grab the bankers and throw them to the crowd.’
EXTERMINATED VAMPIRE SQUIDS
I can understand why the leading gangbangers at Goldman Sachs (GS) are getting nervous as the number of parasitic vampire squids that have been exterminated keeps growing. Andrei Kozlov, Russian central banker, was riddled with bullets. Dead hedge fund managers include Seth Tobias, Oleg Zhukovsky, Rene-Thierry Magon de la Villehuchet, Michael Klein, Peter Wuffli and Kirk Wright.
The list goes on. It includes David Kellerman, Freddie Mac CFO and even James MacDonald the CEO of the Rockefeller family offices. I suppose we should wish their famlies the best; except for New York tax attorney William Parente. Whoever he angered worked corruption of blood and his wife and two children were also murdered. There are many more examples.
Goldman Sachs (GS) is primarily a service business and dependent upon the individuals who receive an average bonus of about $700,000 from a total pot of $16.7B. When a company’s workforce is so universally hated and have wronged so many millions, even billions, of people there is a possibility that retribution will be taken. If retribution is taken then how could that affect earnings and how could the company benefit from the unfortunate circumstances?
Wall Street is full of sociopaths and you cannot grow a conscience if you do not have one. Unfortunately, for this exercise we will have to analyze like the Goldman Sachs (GS) gangbangers; with the lack of a moral compass.
Key-man insurance can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the individual specified on the policy. The policy’s term usually does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity.
Not only is there a very real threat to Goldman Sachs (GS) gangbangers from the outside, evidenced by the weapons permits and limitations on sizes of gatherings, but there is a potential conflict of interest from the inside. Sure, if Goldman Sachs (GS) gangbangers were to start targeting their own employees to benefit from key-man insurance it would be illegal and they should be prevented from receiving proceeds because of killer and slayer statutes.
But perhaps the gangbangers will get their vassal politicians to create ex-post facto legislation to provide immunity. As CNET reported:
A federal judge in San Francisco has tossed out a slew of lawsuits filed against AT&T and other telecommunications companies alleged to have illegally opened their networks to the National Security Agency.
U.S. District Judge Vaughn Walker on Wednesday ruled that, thanks to a 2008 federal law retroactively immunizing those companies, approximately 46 lawsuits brought by civil liberties groups and class action lawyers will be dismissed.
Which employees should the upper brass target? If you have spent the last 5-15 years putting in 80-100 hour weeks then how much would you sell your health for? An even better question may be how much would your boss sell your health for? Why should they share profits with you?
The Goldman Sachs gangbangers are among the largest hordes of parasitic vampire squids on the planet. The absence of their aggressive theft would increase the standard of living for millions even billions of humans. As a peacemaker who believes that force should never be used aggressively against innocent people or their legitimately acquired property I would prefer to starve the vampire squids I am opposed to and not be an instrument of extermination. It is unfortunate that the parasitic Goldman Sachs Gang has been and is so aggressive that their host victims may feel they have no other choice than to act in self defense by gunning for Goldman Sachs gangbangers.
Through the use of key-man insurance and ex post facto legislation to provide immunity for illegal behavior the Goldman Sachs Gang can tremendously increase the gang’s profitability and the bonus share for the senior partners. If the gang’s leaders do happen to find themselves in an uncomfortable situation then they will likely be bailed out, if possible. Nevertheless, I would not tamper with such a filthy instrument either way.
DISCLOSURES: Long physical gold but neither long nor short with GS and neither long nor short (except for being a US citizen) on any GS employees.
Federal taxpayers received a 23% annualized return on their investment in Goldman Sachs. On Wednesday Goldman announced that calculation by combining the interest it paid before repaying the Treasury’s $10 billion principal loan with the warrant buyback payments it made this week.
Goldman as led the way this week with surprise Q2 earnings… profits made on the back of government support for the firms.
Several analysts agree that Sachs paid fair value for the warrants. But JPMorgan Chase continues to haggle with the government over the value of its warrants. Whether or not JPMorgan ultimately settles or forces the government to auction the warrants on the open market, the TARP program is certainly turning out to be a boon for taxpayers.