Wednesday, December 15, 2010

Totally Busted: The Truth About Goldman's Bailout by the Fed

Eric Fry has put together the pieces, searched the articles and has done the timeline that show's how the Fed shoveled money into the coffers of Goldman Sachs. Even to help Goldman pay off its TARP debt.

This investigative report from Eric Fry is must reading. It should also be kept in mind that this is separate from the Goldman/AIG antics that Janet Tavakoli has been reporting on. Here's Fry :

Recent disclosures from the Federal Reserve reveal that honesty was one of the earliest casualties of the 2008 financial crisis. These disclosures contain a number of juicy tidbits, like the fact that Goldman Sachs received tens of billions of dollars in direct and indirect succor from the Fed.

Thanks to these spectacularly large taxpayer-funded bailouts, Goldman was able to continue “doing God’s Work” – as CEO Lloyd Blankfein infamously remarked – like the work of producing billion-dollar trading profits without ever suffering a single day of losses.

Thanks to the Fed’s massive, undisclosed assistance, Goldman Sachs managed to project an image of financial well-being, even while accessing tens of billions of dollars of direct assistance from the Federal Reserve.

By repaying its TARP loan, for example, Goldman wriggled out from under the nettlesome compensation limits imposed by TARP, while also conveying an image of financial strength. But this “strength” was illusory. Goldman repaid the TARP loans with funds it procured days earlier from the Federal Reserve. Then, over the ensuing months, Goldman recapitalized its balance sheet by selling tens of billions of dollars of mortgage-backed securities to the Fed.

And the public never knew anything about these activities until two weeks ago, when the Fed was forced to reveal them....

Secret bailouts do not merely benefit recipients; they also deceive investors into mistaking fantasy for fact. Such deceptions often punish honest investors, like the honest investors who sold short the shares of insolvent financial institutions early in 2009.

Some of these investors had done enough homework to understand that no private-market remedy could ride to the rescue of certain financial firms. Therefore, these investors sold short the shares of certain ailing institutions and waited for nature to take its course. But the course that nature would take would be shockingly unnatural. We now know why. The Federal Reserve altered the course of nature, and did so without telling anyone.

Many of the investors who sold short ailing financial firms in 2009 were alert to the possibility that bailouts by the Federal Reserve could change the calculus. In other words, the Fed could make the bearish case less least temporarily. Therefore, many of these investors studied the Federal Reserve’s disclosures, as well as corporate press releases, in order to quantify the Fed’s influence.

Based on all available public disclosures, the story remained fairly grim into the spring of 2009. Accordingly, the short interest – i.e., number of shares sold short – on Goldman Sachs common stock hit a record 16.3 million shares on May 15, 2009 – about 3.3% of the public float. But over the ensuing six months, Goldman’s stock soared more than 30% – producing roughly $500 million in losses for those investors who had sold short its stock. Not surprisingly, the total short interest during that timeframe plummeted to less than 6 million shares, as short-sellers closed out their losing positions.

Was it just bad luck? Or was something more nefarious at work here?

Let the reader decide. But before deciding, let the reader carefully examine the chart below, while also carefully considering a selection of public announcements from Goldman Sachs during this timeframe.

Based upon contemporaneous public disclosures, Goldman Sachs was “forced” by the Federal Reserve to accept a $10 billion loan from the TARP facility in October 2008. But Goldman’s top officers repeatedly – and very publicly – bristled under the compensation limits the TARP loan imposed.
Therefore, as early as February 5, 2009, Goldman’s chief financial officer, David Viniar, remarked, “Operating our business without the government capital would be an easier thing to do. We’d be under less scrutiny...” And on February 11, 2009, CEO Blankfein magnanimously remarked, “We look forward to paying back the government’s investment so that money can be used elsewhere to support our economy.”

But at that exact moment, we now know, Goldman was operating its business with at least $25 billion of undisclosed “government capital.”

In April, 2009, The Wall Street Journal observed, “Goldman Sachs group Inc., frustrated at federally mandated pay caps, has been plotting for months to get out from under the government’s thumb... Goldman’s managers have a big incentive to escape the state’s clutches. Last year, 953 Goldman employees – nearly one in 30 – were paid in excess of $1 million apiece... But tight federal restrictions connected to the financial-sector bailout have severely crimp the Wall Street firm’s ability to offer such lavish pay this year.”

On May 7, 2009, a Goldman press release states: “We are pleased that the Federal Reserve’s Supervisory Capital Assessment Program has been completed... With respect to Goldman Sachs, the tests determined that the firm does not require further capital... We will soon repay the government’s investment from the TARP’s Capital Purchase Program.”

On June 17, 2009, Goldman finally got its wish, thanks to some timely, undisclosed assistance from the Federal Reserve. Goldman repaid its $10 billion TARP loan. But just six days before this announcement, Goldman sold $11 billion of MBS to the Fed. In other words, Goldman “repaid” the Treasury by secretly selling illiquid assets to the Fed.

One month later, Goldman’s CEO Lloyd Blankfein beamed, “We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake.”

As it turns out, the government continued to “revitalize” that small sliver of the economy known as Goldman Sachs. During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment.

Did private investors not have the right to know that the Federal Reserve was secretly recapitalizing Goldman’s balance sheet during this period? Did they not deserve to know that the Fed’s MBS buying was producing Goldman’s “perfect” trading record during this timeframe?

Yes, would seem to be the obvious answer.

“There’s a saying in poker: If you don’t know who the patsy is at the table, it’s you,” observes Henry Blodget, the once and again stock market analyst, “Next time you feel like bellying up to the Wall Street poker table, therefore, ask yourself again who the sucker is.”

To be continued...

The above originally appeared in a slightly lnger version as Outing Ben Bernanke at the Daily Reckoning. To learn more about the Daily Reckoning visit here.


  1. We may huff and puff about the FED and GS, the bottom line is nobody will be able to touch them. Just cringe and accept the inevitable!

  2. "accept the inevitable"
    you sound like Clayton Williams

  3. Bullgescheidt. All government obtains its just powers from the consent of the governed. That's not an idea, it's simply a statement of reality. When you quit giving your consenting to these people, they will no longer have any "just powers" over you. Will that be costly? You bet - freedom isn't free.

  4. Can we get a link to the "recent disclosures"?

  5. For millennia, slaves, too, were encouraged to "cringe and accept the inevitable!" Knowledge is power. Ideas have consequences.

    Hats off to Robert Wenzel for exposing the machinations of our fascio-socialist supervisors! Eventually, a critical mass of people will come to recognize that the State exists to preserve the disorder. Reflective humanity succeeded in abolishing freelance slavery; some day we will shrug off the State-enforced version as well.

  6. As control of real wealth (real estate) accumulates at several GSEs (Fed,Fred,Fan); all eyes are on the pretty pieces paper. Pavlov would be proud.

  7. And as a result of this transfer of printing press "wealth", all Americans will take a paycut by the effects of the inflation of that money supply.
    Al Sledge

  8. This proves to the world how corrupt the Ben Bernank, the William Dudley and the Goldman Sack really are.

  9. "We may huff and puff about the FED and GS, the bottom line is nobody will be able to touch them. Just cringe and accept the inevitable1"

    Yeah, that's what they said about the British East India Company.....

  10. If you are looking for a concrete way to remove your consent from the current governments-by-coercion, consider creating a canton in your home town.

  11. "No one can touch them" YOU BETTER READ
    UNINTENDED CONSEQUENCES by John Ross, this is
    a potential path

  12. I never thought about the fact the Fed cost short sellers of bank stocks big money....

    That is really anti-market and corrupt through and through.

    Thanks for the article, insighful and well written as usual.

  13. It is a reflection of the times that so many Americans are still out of the loop as to how our government is behaving - the latest being how they could not of funded health care benefits for the 911 responders.

    When are we, the people, going to "wise" up- I believe it is going to take a grass roots movement and a lot of prayer

    As far as cringe and accept the inevitable - it sounds like the person who wrote that has no financial worries and does not appreciate the harm and suffering this policy is causing millions of our fellow Americans

  14. At what point do we get rid of these sleazy business people and their System and move humanity forward. Kill Goldman Sachs and another one will appear. The REAL culprit is that we have not followed Adam Smith's prescription.
    Here's the bit my colleagues in the Economics Dept. like to omit from Wealth of Nations.... In order for a market to work, everyone who utilizes it must first enjoy perfect liberty. I'll let you guess which part the Economics professors leave out....

  15. Guillotine time...............

  16. I say they must prosecute all of Goldman as well as the Bernanke and the Fed....Go get them Ron Paul....

  17. steal a candy bar and you go to prison.

  18. What this is missing is the list of stock owners of the private company called the Fed. Perhaps this all makes perfect logic when one considers that Goldman is a Fed shareholder - owner and the two organization are actually just names for the public to talk about - which we are.

    We must find out who we have been sending interest money to and then we must ask them for the money back - because we don't find paying interest to elite billionairs in our interest...

    We The People should be called we the children...

  19. Is Geitner still getting his stones looked at?

  20. I'd like to know what the "ceo"s do with all this money? How do they spend all that? Seriously, if I had 400K I would retire and be happy. I wouldn't need 10's of millions. JESUS. How do those boys sleep at night? Guess once one's conscience is seared, it no longer discerns right from wrong. Selling one's soul to satan, past the point of no return.

  21. Congress will get into this eventually. They will have to when the whole house of cards comes tumbling down. They will do it in an attempt to save their own skin / deflect blame.

  22. This is one of the best articles I have read regarding the chicanery and corruption of the money masters. I never really believed that GS or any of it's partners-in-crime were hurting so much that they had to be forced to take a government bailout. Real people are hurting, yet we are not being offered a bailout. We are not being forced to take a bailout--we are just being required to support the monkeys and trained apes who control the economy, while being pushed further and further into debt slavery.

  23. We can not lose hope. They need to be brought to justice. They will. The price of freedom is the constant alertness and willingness to fight back. There is no other price. This right here threatens our very freedom as a nation. We need to fight back. Do not lose hope. We can prevail. What "they" want is for you to do just that: take it lying down. Don't give in.

  24. George Carlin once said:

    "A businessman can't hold a candle to a clergyman. 'Cause I gotta tell you the truth, folks. When it comes to bullsh*t, big-time, major league bullsh*t, you have to stand in awe of the all-time champion of false promises and exaggerated claims: religion. No contest."

    If Carlin were alive today, he would probably say much the same thing, just wind down the "awe" part.

    Because the more that comes out about the shady dealings between government and the banking establishment, it makes me stand in awe the American people haven't demanded resignations across the board.

    Then again, we have the NFL, American Idol and Facebook to assuage our bitterness and find pleasure within our nightly escapisms.