Zeev's Turnips Patch-No Politics (ZEEV)

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Backdoor Bailouts for Goldman Sachs?

By Barry Ritholtz -
March 6th, 2009

My recent tirade against bailing out the hedge fund half of AIG makes much more sense when you consider who is actually getting all of the taxpayer largesse: Counter-parties of AIG, especially one Goldman Sachs. Some estimates have been in excess of $25 billion to GS.

As AIG ran into the arms of the Fed for the first of 4 bailouts, Bloomberg reported:

“As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.

Without the government money, Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG and other firms could have become some of the biggest creditors in a bankruptcy filing by AIG, the world’s largest insurer, because of its billions in losses on subprime bonds and corporate debt. The firms received cash as AIG borrowed from a Federal Reserve credit line endorsed by Paulson, Goldman’s former chief executive. The insurer had borrowed $44.6 billion from the credit line as of Sept. 25, the Federal Reserve reported that day.” http://tinyurl.com/agy72u

Other rumored recipients of taxpayer dole include Morgan Stanley, Merrill Lynch, and Deutsche Bank.

Why rumored? Because of the infuriating refusal to turn over any information as to who these counter-parties are by the Fed and Treasury:

“The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.

Fed secrecy was the focus of a Senate Banking Committee hearing today in which the panel’s top two members said the central bank’s reluctance to identify companies benefiting from the American International Group bailout risks undermining public confidence in the government.

“If the American taxpayer’s money is at stake, and it is, big time, I believe the American taxpayers, the people, and this committee, we need to know who benefited, where this money went,” said Senator Richard Shelby of Alabama, the committee’s top Republican. “There is no transparency.” (emphasis added) http://tinyurl.com/ah3sjl

Who is being made whole at the taxpayer expense? The taxpayer isn’t merely getting screwed here, we are taking the royal shaft up the patootie in previously unimaginable ways.

Nouriel Roubini explains the refusal to allow the public to learn how their monies are being disbursed:

“In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on “bank nationalization” is borderline surreal, with the U.S. government having already committed–between guarantees, investment, recapitalization and liquidity provision–about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).

Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.

. . . AIG, which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.

News and banks analysts’ reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout.” http://tinyurl.com/cpsa2l

Could Goldman Sachs dig in any deeper at Treasury?

Yes they can. Over at naked capitalism, Yves has the story of yet another highly conflicted Treasury nominee, Sullivan & Cromwell chairman H. Rodgin Cohen:

Sullivan & Cromwell has long been the outside counsel for Goldman, and outside counsel is a vastly more important role for a securities firm than just about any other type of business. In the stone ages, when I worked for a few years at Goldman, certain S&C partners had so much clout at Goldman that they could get a mid-level banker fired. And even then, “Rodg”, head of the banking practice, was a very influential figure at Goldman. http://tinyurl.com/c7ycmc

All for the greater glory of Goldman . . .

http://www.ritholtz.com/blog/2009/03/backdoor-bailouts-for-goldman-sachs/