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The United States of Goldman Sachs
POSTED: Friday, August 7, 2009 at 04:20 PM CDT
BY: William Rutherford
If you are like millions of other Americans, your investments didn’t do so well last year.
Now it has been revealed that you are in good company. In recent filings, Federal Reserve Chairman Ben Bernanke reported that his net worth fell by more than a quarter in 2008, somewhere between $850,000 and $2.5 million, according to the broad categories used. This is scant solace to other investors, however.
Not so, Goldman Sachs. The company has been in the news a lot lately. You may recall that last year as investment banking firms crumbled, it was Goldman that emerged at the top of the heap. Only a weakened Morgan Stanley remained as a competitor with similar heft. Gone were Bear Stearns, Lehman Brothers, Merrill Lynch and others.
Goldman Sachs might have failed too were it not for some last-minute legerdemain by the firm’s friends at the U.S. Treasury. Goldman is famous for moving its senior executives, associates and friends into high-level government positions. It’s not only a captain of the world of finance, but also a captain of the ship of state.
It should be noted, before I go further, that some of our portfolios at Rutherford Investment Management hold Goldman stock. Also, I have made many friends and acquaintances at Goldman over the years, and all were pleasant.
As U.S. Treasury Secretary Henry Paulson, a Goldman alum, picked the winners and losers of last year, Goldman Sachs emerged more powerful than ever from the debacle.
Not only that, but the firm has since returned to pre-crash levels of revenues, profits and most notably bonuses, all while it still has $5 billion in TALF (Term Asset-Backed Securities Loan Facility) money at its disposal. Granted, Goldman did pay back $10 million in TARP funds, but each story has a story within the story.
Bear Stearns was allowed to fail on a Friday because of a classic run on the bank. Over the weekend the discount window was opened to investment banks for the first time in history, allowing direct borrowing from the government – on dubious assets in this case.
Yet if the discount window had been available to Bear Stearns, it might well have survived. Other investment banks, including Goldman, availed themselves of this new capacity to borrow, and the waters were calmed, for a while.
But then Lehman Brothers likewise was allowed to fail, and like the Ten Little Indians, there was one less investment banking firm. The next drama involved AIG, an insurance company that was thought to be too big and too important to the system to fail.
Specifically, AIG owed Goldman $13 billion under an arrangement agreed to when Paulson was CEO of Goldman. Paulson, wearing his new hat as Treasury Secretary, replaced AIG’s CEO with Edward Liddy, a former Goldman board member. AIG got an $85 billion bailout funded by taxpayers. Goldman was repaid in full, while other investment banks had to settle for 13 cents on the dollar.
Meanwhile, Goldman itself fell under the knife. With its stock price hitting all-time lows, and partners getting margin calls, the firm faced scary days. Then Goldman was allowed to become a conventional bank holding company (as was Morgan Stanley) and gain all the benefits befitting a bank.
Goldman suddenly had access to incredibly cheap money. It became eligible for FDIC insurance and $10 billion in taxpayer-paid TARP funds from a program drafted by an ex-Goldman division head and managed by a former Goldman executive.
Goldman also received $5 billion in taxpayer-paid TALF funds, and got the juicy job of underwriting $5 billion of government-backed FDIC bonds, earning hefty underwriting commissions.
Even after repaying the TARP funds, Goldman has the use of free taxpayer money to carry out its various profit-making activities. Of course, Goldman has never done any of things normally associated with a bank. It has never owned a bank branch, never made consumer loans and never will.
It is interesting to note that when Goldman paid back the TARP money, it paid back its 5-percent government loans rather than its 10-percent loan from Warren Buffett. But the government had limitations on the bonuses that Goldman could pay while Buffett did not.
If a company had its shareholders at heart, wouldn’t it pay the more expensive debt first? Well, it wouldn’t if bonuses were at stake. This year, a very tough year, Goldman will reportedly pay its executives more than $11 billion in compensation.
Now it turns out that a former Goldman employee has made off with some highly secret proprietary computer codes. According to FBI special agent Michael McSwain’s sworn deposition, the codes gave an unnamed financial institution (presumably Goldman) a competitive advantage over other firms, and the ability of that firm to profit would be severely limited without them.
Unfortunately for Goldman, this theft brought to light a little-known practice called high-frequency trading. This practice was subsequently detailed in the New York Times; in summary, it allowed Goldman, through an arrangement with some stock exchanges, including the NYSE, to preview all orders headed for the floor and to trade ahead of them. It is akin to playing cards and knowing what is in everyone else’s hand.
Before the theft Goldman was ranked No. 1 (or was it?) in high-frequency trading, also known as program trading. The week following the disclosure of the theft, Goldman’s name disappeared entirely from the list of program traders on the NYSE. In one week, Goldman went from numero uno to nada.
This story is not over, but Goldman may well need all of its well-placed friends to put this genie back into the bottle.
For more details about what’s happening with Goldman Sachs and high-frequency
trading, look at articles by Charles Duhigg of the New York Times and Joe Hagan of New York Magazine.
William Rutherford is the founder and president of the Portland company Rutherford Investment Management, listed in Barron’s as one of the nation’s leading separate account managers. He is also the author of a critical appraisal of Alan Greenspan’s term as Fed chief, “Who Shot Goldilocks?” Contact him at 888-755-6546 or [email protected].
http://djcoregon.com/news/2009/08/07/the-united-states-of-goldman-sachs/
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