Wednesday, April 7, 2010

Goldman Sachs Continues to Receive Enormous Assistance from Taxpayers

by Janet Tavakoli

Goldman Sachs claims great risk management skills, while it shirks responsibility for its role in the near collapse of the U.S. economy. The former is a myth, and the latter is a dodge. [1] As taxpayer wealth was destroyed, Goldman exploited the financial crisis it helped cause, while the U.S. was (and remains) at war.

Goldman Sachs released its 2009 annual report today showing it made net revenues of $45.17 billion with net earnings of $13.39 billion. In its shareholder letter, Goldman says it repaid TARP money, but did not mention the massive new taxpayer subsidies it continues to enjoy.

"Goldman did not and does not operate or manage our risk with any expectation of outside assistance."

Yet due to the influence of highly placed Goldman Sachs former officers, Goldman received--and continues to receive--enormous assistance from taxpayers.

Goldman cleaned up at the expense of average citizens. For example, hard-working U.S. taxpayers bailed out Goldman Sachs, Goldman's trading partners, and AIG. Goldman grabbed new status as a financial holding company, FDIC debt guarantees, access to near zero-cost taxpayer-subsidized borrowing, new lax accounting standards, and more. Now Goldman is making a killing as the Federal Reserve keeps interest rates near zero. Goldman reaped windfall profits to replenish its capital, and paid bonuses of over $16 billion to its employees.

Goldman's Cover Story

Goldman claims it did nothing wrong. ("Goldman Sachs: Don't Blame Us," Business Week cover story, April 14, 2010.) There is a lot to discuss about Goldman's actions prior to the financial meltdown, but this commentary will focus only on the largest part of the U.S. economy, the housing market.

When Goldman created collateralized debt obligations (CDOs), it was obliged to perform thorough due diligence. Previous securities frauds (unrelated to Goldman) were public knowledge, and there were multiple multi-year reports of predatory lending and fraudulent loans (Ameriquest, FAMCO, and many more). Despite self-serving denials by former Fed Chairman Alan Greenspan, there were many studies in the public domain that showed that even new non-fraudulent loans had a higher likelihood of default when zero or slim down payments were made, including a March 2005 report from the St. Louis Fed. Separate from this, lending standards slid, which made the problem even worse. In addition to that, newly created loan products posed greater risk to borrowers, even when other factors such as lower lending standards and fraud were absent.

Goldman failed in its duties as a creator (underwriter) of these CDOs. Goldman's excuses that others were doing it or that Goldman was only providing a "customer" service do not relieve Goldman of its own responsibility.

Goldman tries an evasive maneuver when it says it sold CDOs to "sophisticated," investors. The damage was so pervasive that retail investors were caught in the web. Moreover, taxpayer money bailed out the financial system and bailed out investors in Goldman's CDOs. Caveat Emptor no longer apples. The unsophisticated public ended up being an unwilling investor.

Read the rest here.

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