Is There a Loophole for Goldman Sachs in Obama's New Bank Regulations Proposal?

President Obama's ban on proprietary trading applies to trading unrelated to client business. Many of Goldman's clients are its own current and former employees. And, much of its trading takes place within internal funds that allow participation by those clients. So is this a loophole Goldman will be able to use to skirt the rules banning proprietary trading?

A strict reading of Obama's proposal would suggest this is a stretch, but Goldman's middle name is "Stretch". Stay tuned.

Insiders at the Asian Financial Forum

The Asian Financial Forum, a two day event, begins tomorrow in Hong Kong.

As would be expected, the list of confirmed speakers are mostly Asian, including Norman T L Chan,CEO of the Hong Kong Monetary Authority and many Asian finance ministers. But, of particular note, are the very few non-Asian confirmed speakers.

They include:

Gerald Corrigan, the former president of the New York Fed (pre-Geithner) and current (surprise) managing director at Goldman Sachs.

Richard Sandor, Chairman and founder, of the Chicago Climate Exchange. The CCE trades all six greenhouse gasses. If you want to identify one man who is going to benefit the most from global warming regulations, this is the man. I saw him last at the 2007 Michael Milken Conference. He was on a panel with Milken that was attended by about 30 of us. The comment I recall most clearly from the panel discussion was made by Sandor: "In Chicago we say, if you are not at the table, you are on the menu."

Nouriel Roubini. Roubini really gets around. In many ways, I think he is probably one of the most connected guys globally. He's clearly connected in the states with Geithner, Summers (He had Summers on his payroll) and Bernanke. But he also seems to be pretty tight in China. And, it is not unusual for him to pop up in Europe.

The Latest List of Goldman Player's Now in (or recently in) Government

Treasury Secretary under Bill Clinton (Robert Rubin)

Treasury Secretary under George Bush (Hank Paulson)

Current president and former chairman of the New York Federal Reserve (William Dudley and Stephen Friedman)

Chief of Staff to current Treasury Secretary Timothy Geithner (Mark Patterson)

Chief of Staff under President Bush (Joshua Bolten)

Economic adviser to the Secretary of State, Hillary Clinton (Robert Hormats)

Chairman of the US Commodity Futures Trading Commission (Gary Gensler)

Under-Secretary of State for Economic, Business, and Agricultural affairs under President Bush (Reuben Jeffery)

The past and current heads of the New York Stock Exchange (John Thain and Duncan Niederauer)

The chief operating officer of the Securities and Exchange Commission’s enforcement division (Adam Storch)

Goldman’s new top lobbyist in Washington, Michael Paese, used to work for Barney Frank, the congressman who chairs the House Financial Services Committee.

In London, Goldman's former chief economist and partner, Gavyn Davies, is married to Prime Minister Gordon Brown’s special adviser Sue Nye. Under Tony Blair, Davies became chairman of the BBC.

His successor as chief economist at Goldman, the late David Walton, was handed a seat on the Bank of England’s interest-rate setting Monetary Policy Committee.

Paul Deighton, who is running the London Olympic Games organising committee, used to be Goldman’s chief operating officer.

Obama’s top economic adviser Larry Summers never worked directly for Goldman, but served in Clinton’s government under his mentor, Goldmanite Robert Rubin, and Goldman paid Summers $135,000 to appear at a one-day speaking event in 2008 before Barack Obama came to power

Goldmanite Mark Carney is governor of the Bank of Canada.

Robert Zoellick, head of the World Bank, was a managing director and chairman of the Goldman's International Advisors department.

Neel Kashkari Treasury Interim Assistant Secretary for Financial Stability, during the Hank Paulson period at Treasury, is a former Goldman Sachs man.

The ultimate global inside operator is Mario Draghi From 2002 to 2005, he was vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee. He is governor of the Bank of Italy. In this capacity, he is a member of the Governing and General Councils of the European Central Bank and a member of the Board of Directors of the Bank for International Settlements.

He is also governor for Italy on the Boards of Governors of the International Bank for Reconstruction and Development and the Asian Development Bank. In April 2006 he was elected Chairman of the very powerful Financial Stability Forum, which became Financial Stability Board in spring 2009.

List complied via data from Goldman, EPJ and TimesOnline and various government press releases.

AIG Bailout Not Only Bailed Out Goldman, But Goldman's International Bank Client List

A much clearer picture is developing of what went on during the middle of the financial crisis, when AIG was bailed out by the government and Goldman Sachs ended up receiving 100 cents on the dollar from AIG on various instruments.

The clearer picture is the result of Janet Tavakoli's provocative article, Goldman’s Lies of Omission. In the article, she claims that GS CFO David Viniar lied when he said GS's exposure to AIG would be insignificant.

A anonymous Goldman apologist who writes at Economics of Contempt responded to Tavakoli's article, calling the article part of a, "ridiculous conspiracy about Goldman and AIG [that] just won't die."

As you will see by the end of this post, the GS apologist does not only not prove his point, but he sets up the opportunity for an observer to point out that the conspiracy was much grander. The commenter points out that not only was GS bailed out, but so was GS's international bank client list.

The GS apologist essentially says that GS had insurance with AIG that cost $10 billion, but that GS had collateral against that cost of $7.5 billion (and it hedged away the other $2.5 billion in risk by buying CDS insurance against an AIG failure). Thus, the GS apologist says they would have gotten their $10 billion back to buy insurance somewhere else. Of course, at such time the markets would have been in a panic and there is no way GS would have been able to get the same insurance for $10 billion, if at all. As a number of commenters to the post point out, it would be like trying to buy fire insurance for your house while the house is on fire. So this pretty much blows the "Goldman is a saint" anonymous blogger out of the water.

But there is a comment at the Economics of Contempt post that I find fascinating:

GS sold a product to the European commercial banks, that enabled them to meet BASELII reserve requirements. It was, is essence, a piece of US mortgage paper, supported by an AIG insurance policy wrapped with a AAA-rating. At AIG's failure, French banks would have become severely capital constrained. Christine Legarde personally called Paulson to ask that AIG be saved. The reputational risk to GS of near-bankrupting all of Europe's major banks would have been devastating. Read the list of banks who received $ 10s of billions from the FED. Its the GS client list.

I'm not sure that anyone else has put this piece of the puzzle together in such a clear fashion:

European banks would have been destroyed by an AIG bankruptcy because of a product sold by Goldman Sachs. The Fed money that went to European banks, through the AIG bailout, was Goldman's international banker client list!

In other words, the AIG bailout that benefited Goldman was much greater than the billions that went directly to Goldman. A large chunk of the rest of the tens of billions went to Goldman's international bank clients. Here's WSJ initial report on who received government AIG bailout money, indeed a huge chunk went to European banks:

Goldman Sachs

Deutsche Bank

Merrill Lynch

Société Générale

Calyon

Barclays

Rabobank

Danske

HSBC

Royal Bank of Scotland

Banco Santander

Morgan Stanley

Wachovia

A quick call to a friend, who is in a position to know such things ,tells me that, off the top of his head, the international banks do all sound like important GS clients.

So here is the new expanded conspiracy theory: Without a bailout of Goldman international bank clients that were sold the drek by Goldman, Goldman would have lost all international credibility and business. The bailout, on the other hand, has strengthened Goldman's hand internationally. International banks dealing with Goldman know that when push comes to shove Goldman can get them all bailed out.

In other words, the Goldman bailout was even of much greater benefit to Goldman than most have already suspected.

How Far Are You From Lloyd Blankfein's Desk?

The recovery in the economy has been pretty much a Goldman Sachs recovery. The farther you are from Goldman CEO Lloyd Blankfein's desk, the tougher things are. Southern California is far from Blankefein's desk.

Almost 51 million square feet of office space in Los Angeles County, Orange County and the Inland Empire is now empty -- more than 17% of the total.

The exodus from office buildings that started in late 2007 accelerated during the third quarter as the anemic business climate took its toll on the real estate rental industry, according to the Cushman & Wakefield real estate brokerage.

"These vacancies are a direct reflection on unemployment," said Joe Vargas, an executive vice president at Cushman & Wakefield. "Companies continue to reduce their workforce, or they are not hiring."

"There was a dramatic drop-off in leasing velocity last quarter," said John McAniff, managing director of brokerage Jones Lang LaSalle. "Apparently the rebound on Wall Street did not translate to a rebound in tenant commitments. That tells me there is a lot of uncertainty out there."

Is the Federal Reserve Still Shoveling Money to Goldman Sachs?

It is a very strong possibility.

There is a lot of mystery surrounding Goldman's high velocity trading. When Goldman's 3Q earnings were announced, I wrote:

So what is this "velocity" all about? Who knows? Max Kaiser seems to think it is front running, it may very well be. You really need someone at Goldman or the NYSE to explain the high flying black box that Goldman is using. That's the only way to understand it, for sure. Goldman has captured the NYSE, so they are as likely not to tell you as Goldman itself.

But maybe it isn't even exchange traded activity. Rolfe Winkler points to an interesting exchange between bank analyst Meredith Whitney and David Viniar - Goldman Sachs- EVP, CFO, during Goldman's investor conference call following the release of 3Q results.

Whitney asks:

I have a few questions. The government purchase program was supposed to end this quarter. They’ve extended it to next quarter. How much of that is a driver of velocity of flows? And how are you positioned when they exit, if they exit, for any type of principal risk? And what do you think that impact is going to be in the larger market? That is my first question. Start off with an easy one.

Whitney clearly suspects that some of Goldman's black box high velocity trading may be tied in with Fed purchases. Winkler notes Viniar's answer is a non-answer:

Viniar: Not a problem. Look, I think, as you know and I think the Fed knows this, exiting their support of various markets is a very tricky thing. I think that they are going to do it carefully. They are going to do it slowly and over time. I think they are signaling the market. I think they are doing a very good job of letting people know they are going to continue for a while, but they aren’t not going to continue forever. As far as our positioning, I don’t think it really matters at all. As you know, as I said, most of what has happened has been the velocity, not the positioning. And I think that they are going to slowly extricate themselves for that as the markets get healthier and can pick up slack.

Whitney tries again:

Okay, but in terms of the flow volume, right — so you have been the greatest beneficiary of increased flow volumes. How are the flow volumes going to be influenced as they exit?

Viniar:

I think that they will try to time their exits for the market being healthy enough to pick up that flow. And so I think the flow will continue.

Whitney tries another direction to get at the same answer:

And then who would you imagine would be the substitute buyers?

Viniar:

The various market participants. I think it will be the various financial institutions, funds. I think the whole variety of buyers. And there is a lot of cash out there to buy.

Then another biggie from Whitney:

Okay. And then just a last one. I was teasing when I said it’s the easiest one. But it was easy for you. The last one, of the principal revenues, almost $1 billion, how much of that was cash sales, and how much were markups?

Viniar:

Oh, I would say that it was much more markups than sales…I don’t have the exact number, but it would be much more markups than sales.

Got that? Of the reported $1 billion in principal revenues, it wasn't cash sales but just markups. There is something very fishy going on here.

Goldman's high velocity black box may be even more suspicious than even I first suspected. It may be the Fed propping up certain markets by buying assets from Goldman, and then, on top of this, Goldman marking up the remaining like assets. When Whitney asks who is going to step in to buy these assets once the Fed stops propping them up, that's one helluva question. Just who would prop up a market to shovel money to Goldman?

This Whitney-Viniar exchange is reason enough to demand an audit of the Fed.

I issue another Bleg to anyone who knows what Goldman/the Fed might really be up to, please contact me at rw@economicpolicyjournal.com Confidentiality is guaranteed.

Goldman Sachs Is Not Capitalism: On a Very Confused Michael Moore

Michael Moore is one confused theorist. In his latest movie, Capitalism: A Love Story, he tells us at the end the end of his two hour movie that "Capitalism is an evil, and you cannot regulate evil."

He wants to replace capitalism with, get this, "You have to eliminate it and replace it with something that is good for all people and that something is democracy."

Last I looked, democracy was a political system, and capitalism was an economic system. There is no reason you can't have a democratic socialist system, or for that matter, a democratic capitalist system. There is no reason you can't have a socialist dictatorship or capitalistic dictatorship. There's no mutually exclusivity between political systems and economic systems. In other words, Moore doesn't know what the hell he is talking about.

As for capitalism itself, Moore seems to think it is Goldman Sachs and other banking institutions that are the beginning and end of capitalism. He completely ignores, or is not aware, that the Goldman Sachs rip off of the masses was done in cahoots, and here is the key, with the GOVERNMENT. No government influence over the banking system, no government ability to tax and give the money to bankers, no rip off.

What else can be said? M Moore=Confusion.

As I sit here typing this on my lap top, outside, enjoying the beautiful Los Angeles day, I think of the result of capitalism being the lap top I am using, the Blackberry next to me, the Boston Red Sox scores being sent to me live on my Blackberry, the comments coming from around the country, make that around the world, to my blog posts, the youtube video I viewed earlier, the pre-washed jeans I am wearing, the non-wrinkled shirt I am wearing, the new fusion-sushi restaurant down the street, the bottled water I am drinking, the twitter post coming to me, and the emails coming to me.

The positive results of capitalism are so prevalent that it is really hard to recognize how vast they are. It is not an exaggeration to say that it is as impossible to count all the positive creations of capitalism as it is to count the stars in the universe. Goldman Sachs is like a meteor that has caused a a huge destructive crater on earth. Moore has looked at this 155 mile in diameter crater and has pronounced all stars evil, including the sun.

Yes, Moore will look inside the Goldman created creator, film from its edges, yell at the crater and, I'm sure, get filmed being thrown out by security guards. But, he won't for a minute, show you the cell phone he is using, the lightweight camera he is using, the sophisticated web site he is using to market the film, the sophisticated network used to distribute the films.

If Moore is really so down on capitalism, I will really be impressed with his movie making abilities, and his theories on capitalism, when he goes to a truly non-capitalist country, say Cuba, and uses only film and communications tools he acquires there.

I'd also like to see the fat man eating on a totally Cuban food rationed diet, while he is making such film. And I don't want to even imagine being around the seedy fat man with the coming shortage of toilet paper in Cuba.

Goldman's Lloyd Blankfein Tops the Vanity Fair 100

Is this any lesson for kids?

The evil manipulator of government resources is ranked number 1 on Vanity Fair's list of the top 100 in the Information Age.

Did Paulson Tip Off Wall St Insiders that Bernanke Was Cutting Rates?

NyPo's John Crudele is suspicious:

What has been of particular interest to me is whether Paulson contacted his friends at Goldman after a lunch with Federal Reserve Chairman Ben Bernanke on Thurs., Aug. 16, 2007. That day Wall Street seemed to get wind of the idea that the Fed was planning to do something big, and stock prices rallied strongly at the very end of that trading session.

The very next morning Bernanke cut interest rates, the first of many such moves.

Goldman/Paulson activities from the day Paulson took the oath of office as Treasury Secretary to the day he left needs to be investigated.

Crudele also catches a curious comment from current Treasury Secretary Geithner:

And, in an interview with the Journal, Tim Geithner claimed the government never did anything to benefit Goldman.

But then he also admitted that Washington had been "forced to do extraordinary things and, frankly, offensive things to help save the economy."

Nobody bothered to ask about those "offensive" things and whether they had anything to do with Goldman.

Goldman Hit Pieces Must Be Selling Newspapers

WSJ is fronting with another Goldman is a beast story.

This piece is on how privileged clients get stock tips sooner than others. Writes WSJ:

Every week, Goldman analysts offer stock tips at a gathering the firm calls a "trading huddle." But few of the thousands of clients who receive Goldman's written research reports ever hear about the recommendations...Some Goldman traders who make bets with the firm's own money attend the meetings.

It's pretty much of a non-story in my book. As anybody who has worked on the street for more than three days knows, information is not always delivered via Chairman Mao's equality for all Little Red Book formula. This kind of stuff has been going, well, forever. Some firms are more aggressive at this semi-shady stuff, with Goldman apparently leading the pack, while there are other firms who play it straight.

Of note, in the piece, it is mentioned more than once that when a Morgan Stanley analyst has a change in opinion, it is emailed to all clients simultaneously. Is Morgan Stanley leaking to WSJ or is it just dumb luck that WSJ is focusing on a Goldman move where MS is playing it Boy Scout style? Excerpts from the WSJ piece do make for a nice MS marketing piece in the context of Goldman's priviled dissemination:

At least one competitor discloses such trading tips much more broadly. Morgan
Stanley's research department sends blast emails with short-term views onvarious stocks to thousands of clients, and posts the information on its Web site. It doesn't call customers to convey the tips, because Morgan Stanley officials decided that could expose the firm to questions about selective disclosure, according to people familiar with the matter.

On the Odd Nature of the "Recovery" and Krugman's Failure to Understand It

Paul Krugman writes:

The real problem here is that the standard language doesn’t make much allowance for the kind of gray zone we’re now in; that’s because in the pre-1990 era recessions tended to be V-shaped, so that jobs snapped back as soon as GDP turned around. I don’t think what we’re going through is good news — but GDP is almost surely rising, so the recession, as normally defined, is over. ...But the economy is not recovering in the most crucial area, job creation ...

Krugman gets this correct. However, because he doesn't understand business cycle theory, he doesn't understand why this is occurring. He doesn't understand that money flows to specific sectors and not the aggregate, "the economy".

Here is what is going on. When Bernanke stopped printing money in the summer of 2008, he turned the break in the sub-prime market into a full fledged recession, thus, causing a spike up in unemployment, especially in the capital goods sectors like housing.

Normally what happens at this point is the Fed panics and starts printing money that flows back into the capital goods sectors, and hiring resumes in those sectors. Bernanke did panic in September of 2008 and started to print money, but instead of putting the funds out through the banking system, the money went to prop up the banks themselves, i.e., the favored banks and investment banks, e.g. Goldman Sachs.

So whereas in the past the Fed printed money and it was spread throughout the capital goods sectors, and hiring began anew, this time the money has ended up in the hands of the favored banks through "trading profits," so there is no new hiring, since Blankefein and crew already have their jobs. The money is just split up amongst the already employed Goldman type players. It's all recorded as revenue and income, though, thus boosting GDP.

Eventually, this money will work its way through the system, but the failure for new jobs to develop while GDP is strengthening points to how manipulated and phony this recovery is. There's no other explanation for what is going on. The money is going into the hands of the still employed, specifically the Goldman Sachs and JPMorganChase employed.

Yeah, its a recovery, for the Goldman Sachs/JPMorganChase economy.

Get Ready for the Goldman Sachs Puff Pieces

Goldman Sachs CEO Lloyd Blankfein made himself available for a TIME magazine story about him and Goldman Sachs, which is a strong indication that Goldman is starting a PR blitz to improve its image.

But to launch such a campaign with TIME is laughable. Who the hell reads it anymore?

The 6 page story, itself, is useless.

Goldman Sachs: We Are Teflon

Goldman Sachs told CreditSights analysts that the negative image of the firm portrayed in the press had not damaged its franchise with its institutional clients nor adversely impacted its funding levels, liquidity access or stock valuation

The Man Who Knows Too Much (About Goldman Sachs)

The man that the FBI jumped to bring to justice at the behest of Goldman Sachs, Sergey Aleynikov, appears close to getting a pass on his alleged theft of Goldman secrets.

Goldman apparently has woken up to the fact that a trial would mean big time exposure for the secret high frequency trading methods they use. Aleynikov is going to use this awakening to his advantage.

At a hearing in Manhattan federal court on last week, defense attorney Sabrina Shroff said she will seek to persuade prosecutors to enter into a rare "deferred prosecution" agreement.
Such deals are a form of probation in which prosecutors agree to dismiss criminal charges, provided a defendant doesn't break the law for as much as 18 months

Max Keiser and "Tyler Durden" on High Frequency Trading

In part 2, "Tyler Durden" is gone and Max Keiser cranks it up a notch discussing the very unusual trading profits of Goldman Sachs:

Was Goldman Sachs Tipped Off About the Unemployment Number in Advance?

John Crudele is justifiably suspicious. He writes:

Another curious thing happened before the employment report was made public.

Sometime before late afternoon Thursday, Goldman Sachs suddenly broke with the Wall Street pack that was predicting a loss of 320,000 or so jobs in July.

A Goldman economist decided that the job losses would be 250,000 -- which, of course, is suspiciously close to the actual number. His previous guess was 300,000.

I'm sure this was purely a coincidence and that Goldman's legendary close ties with the government and US Treasury had nothing to do with the forecast change.

And, at the very least, I'm sure Goldman shared its incredibly prescient forecast with the rest of the world before making any trades based on this sudden vision

This isn't a game, folks, serious money can be made getting this data in advance.

Hank and Lloyd As Crisis Phone Pals

Like to teen lovers that can't spend anything more than a few seconds without calling each other again and again on the phone, the phone lines between Treasury Secretary Hank Paulson and Goldman Sachs CEO Lloyd Blankfein were burning hot and heavy as the government decided to bailout AIG, though Paulson is claiming that the decision to bailout AIG was more a Federal Reserve call than his, write NYT reporters Gretchen Morgenson and Don Van Natta Jr.

Here's Morgenson and Van Natta:

Michele Davis, a spokeswoman for Mr. Paulson, said that the former Treasury secretary was busy writing his memoirs and that his publisher had barred him from granting interviews until his manuscript was done...Ms. Davis...said Goldman never received special treatment from the Treasury...Ms. Davis said, because the A.I.G. rescue was conducted by the Federal Reserve. The Treasury had no power to rescue A.I.G., she said. Only the Fed could make such a loan.

But according to two senior government officials involved in the discussions about an A.I.G. bailout and several other people who attended those meetings and requested anonymity because of confidentiality agreements, the government’s decision to rescue A.I.G was made collectively by Mr. Paulson, officials from the Federal Reserve and other financial regulators in meetings at the New York Fed over the weekend of Sept. 13-14, 2008.

These people said Mr. Paulson played a major role in the A.I.G. rescue discussions over that weekend and that it was well known among the participants that a loan to A.I.G. would be used to pay Goldman and the insurer’s other trading partners...

Over that weekend, according to a former senior government official involved in the discussions, Mr. Paulson said that he had been warned by lawyers for the Treasury Department not to contact Goldman executives directly. But he said Mr. Paulson told him he had disregarded the advice because the “crisis” required action.

Ms. Davis said: “Hank doesn’t recall saying that. Staff had advised that he interact one on one with Goldman as little as possible, not because it would be a violation but for appearances, recognizing someone would likely attempt to read too much into it.”

On Sept. 16, 2008, the day that the government agreed to inject billions into A.I.G., Mr. Paulson personally called Robert B. Willumstad, A.I.G.’s chief executive, and dismissed him. Mr. Paulson’s involvement in the decision to rescue A.I.G. is also supported by an e-mail message sent by Scott G. Alvarez, general counsel at the Federal Reserve Board, to Robert Hoyt, a Treasury legal counsel, that same day...

Mr. Paulson’s schedules from 2007 and 2008 show that he spoke with Mr. Blankfein, who was his successor as Goldman’s chief, 26 times before receiving a waiver.

On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day. The first call was placed at 9:10 a.m.; the second at 12:15 p.m.; and there were two more calls later that day. That evening, after taking a call from President Bush, Mr. Paulson called Mr. Blankfein again.

When the Treasury secretary reached his office the next day, on Sept. 18, his first call, at 6:55 a.m., went to Mr. Blankfein. That was followed by a call from Mr. Blankfein. All told, from Sept. 16 to Sept. 21, 2008, Mr. Paulson and Mr. Blankfein spoke 24 times.

At the height of the financial crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any other executive, according to entries in his calendars...

According to the schedules, Mr. Paulson’s contacts with Mr. Blankfein began even before the height of the crisis last fall. During August 2007, for example, when the market for asset-backed commercial paper was seizing up, Mr. Paulson spoke with Mr. Blankfein 13 times. Mr. Paulson placed 12 of those calls.

By contrast, Mr. Paulson spoke six times that August with Richard S. Fuld Jr. of Lehman, four times with Jamie Dimon of JPMorgan Chase and only twice with John Thain of Merrill Lynch.

This should be one doozy of a memoir that Paulson is going to be putting out. And, I'm really glad he is taking much more seriously his publishers request not to grant interviews before his book is out, than he did his Treasury staff's warning about limiting one-on-one calls to Goldman.

(htNick)

Goldman Wives, Acting Like Goldman Husbands, Try to Front Run the Crowd

We all know that Goldman Sachs has been cashing in to the tune of billions, partly by getting in front of other traders. This apparently is now a family thing.

Despite chairman Lloyd Blankfein's warning to lay low and not cause money scenes, Blankfein's wife did not get the memo, or really doesn't pay attention to Lloyd memos, since she put on an attmpted front ruinning scene that will certainly be the envy of every geek front running computer programming writer, ever.

NyPo reports:

Laura Blankfein and her friend Susan Friedman, wife of another Goldman honcho, Richard Friedman, caused a huge scene at Super Saturday in the Hamptons last weekend when they arrived at the event before the noon start time and balked at waiting in line with the other ticket-holders.

"Their behavior was obnoxious. They were screaming," said one witness. Blankfein said she wouldn't wait with "people who spend less money than me."

Another observer said the women were so impatient, it was as if they werewaiting on line for a kidney transplant instead of a charitable designer clothing sale.

Friedman shouted at the event organizer, "You have lost so much money because of this . . . Why should we be treated like the $650 donors?"

Sources said Blankfein and Friedman had bought tables with blocks of tickets going for $833 a piece...

NyPo then smugly reports that the women got into the designer clothes buying event:

In the end, the hot-headed duo got in at 12:03 p.m., three minutes after those who arrived before them.

NyPo clearly doesn't understand that when you are from Goldman, it's about getting in front of every one else at least by miliseconds. Three minutes after everyone? It's like why bother even going?

Free Sergey Aleynikov?

The alleged Goldman Sachs high-frequency trading code stealer, Sergey Aleynikov, has just received a continuance in his case, for 14 days, at the request of prosecutors.

Two theories are emerging on this latest development.

A. Sergey is spilling the beans on what is going on in Goldman's high frequency trading room. The government is listening and this is not good for Goldman.

B. Goldman has realized that a prosecution of Sergey will mean public exposure of whatever Goldman does in its high frequency trading room, which means that Goldman after first putting pressure on the government to bust Sergey, now wants the Sergey case to disappear.

Either way, it looks like Sergey walks.

ViaNick

Blankfein to Goldman Employees: Lay Low with Your Riches

Goldman Sachs CEO Lloyd Blankfein has warned his employees to avoid making big-ticket, high-profile purchases, NyPo is reporting.

A source within the bank said Blankfein first began calling for an end to the conspicuous consumption late last year, but has stepped up his campaign in recent weeks as the White House has sought to rein in compensation and as the firm has gotten dinged by a pair of high-profile magazine articles.

As the late private banker, Edmond Safra, once told one a very wealthy client of mine , "Just because you have a stick of butter, doesn't mean you should take it out into the sun."

So This Is How You Make Huge Trading Profits...

Harry Sender at FT reports:

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage...

A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”

The firms that are in the berst position to take advantage of this istuation are Fed designated "primary dealers." The primary dealers are:


BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J. P. Morgan Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International, Inc.
RBC Capital Markets Corporation
RBS Securities Inc.
UBS Securities LLC.

No wonder Bernanke doesn't want an audit. Wouldn't it be nice to see what the Fed is buying, at what price and from whom? How many ways is the Fed shoveling money to Goldman Sachs, JPMorgan Chase, et al.

The Truth About Value at Risk...

It's another phony mathematical number based on an equations that do not necessarily reflect reality. (Though the government is using it as a regulatory tool to measure risk.)

Pablo Triana explains:

Is Goldman Sachs (GS) the biggest risk-taker on Wall Street? Besides
headlining the record profits the bank just posted (months after getting taxpayer support), the media have reported extensively on the firm's all-time-high risk exposure—measured, of course, by that widely embraced financial metric: VaR, or Value at Risk.

VaR, used for decades on the Street, supposedly reveals the maximum amount an investment house could lose (to a statistical degree of confidence) on its trading portfolios in a specified period. And the peak in Goldman's average daily VaR—$245 million in the second quarter, almost double that of a year earlier—prompted accusations that the well-connected firm had dangerously ratcheted up risk-taking in the midst of a crisis.

There's no reason to think this is true. Whatever your opinion of Goldman's fortunes and market forays in this recession, the fact is that a VaR-based analysis of any firm's riskiness is useless. VaR lies. Big time. As a predictor of risk, it's an impostor. It should be consigned to the dustbin. Firms should stop reporting it. Analysts and regulators should stop using it.

Some, including regulators who base capital reserve requirements on this metric, may call VaR a "measure of market risk" and "predictor of future losses." But it is neither of those things. Its forecast of how much an investor can lose from a trading position is entirely calculated from historical data. It's a mathematical tool that simply reflects what happened to a portfolio of assets during a certain past period. (The person supplying the data to the model can essentially select any dates.)

The VaR metric has little to do with how a portfolio will fare in the future—and that includes tomorrow. When it comes to the market, the past is definitely not prologue. A current calm may not yield future placidity. Turbulence is not inevitably followed by further chaos.

VaR models also tend to plug in weird assumptions that typically deliver unrealistically low risk numbers: the assumption, for instance, that markets follow a normal probability distribution, thus ruling out extreme events. Or that diversification in the portfolio will offset risk exposure (because a group of assets happened to move in different directions previously).

Read Triana's full article here.

Warren Buffett's Insider Bet Paying Off, Big Time

Warren Buffett is getting 10% right now on the money he loaned to Goldman and the loan is convertible to Goldman stock at $115. He’s up 40% in nine months!

Via MaxKeiser

Dark Pools and Goldman's Collar

Is Goldman Sachs front running?

Warren Edward Pollock comes right out and says he's pretty sure they do.

Is Goldman Front Running Its Way to Profit?

In the Max Keiser video that I posted, he briefly alludes to the fact that Goldman is making its trading profits by front running.

Front running is the market situation where a trader knows a major institution is about to place a trade that will move the market. The trader jumps in front of the trade by, say, buying before the institution does and trading out after the institution pushes the stock up. Not surprisingly exchanges have all kinds of regulations against front running.

A lot of Goldman's current profit is coming from high frequency trading. Supposedly the speed required to execute some of Goldman's trades is milliseconds. For some trades, they can't even use computers located across the river from Wall Street in Jersey City, because the milliseconds in extra time for the data to cross the river and be processed is too long.

This is all real black box stuff going on here. The problem comes in when Goldman is so close to government and exchange regulators. Who knows what kind of data they are getting before others? And because they have captured the regulators, there is no independent body that knows.

As ZeroHedge puts it:

It is imperative that Wall Street firms shed much more light into this astronomically profitable yet highly misunderstood and under the radar concept. In the absence of more information, the likelihood that Wall Street firms who dominate order flow and have material unfair advantages over virtually everyone else, should be isolated from trading up to the point where they provide sufficient information to make the market a fair and equal playing field for all investors. Until that moment, investing, trading and speculating is doomed to have the same outcome for the majority of market participants as playing roulette with 35 instances of 00, a much lower fun coefficient and no ability to be comped for your room in light of significant trading losses.

Of course, if you are a long term buy and hold trader this won't impact you much beyond the penny or two Goldman, and the like, will scrape from your trade.

How big a player is Goldman in all this? Here's ZeroHedge again:

Throw in Goldman's domination of dark pool trading through Sigma X, and one can come up to quite a sizable number - It would not be a stretch to conclude that, through various conduits, Goldman is directly responsible for over 20% of global HFT trading. 20% of $21 billion is over $4 billion a year [in profit].

Is some, any or all of this front running gain? Who knows? Its all non-transparent stuff, with Goldman having major influence over who gets to look at the trades.

Glen Beck on the Goldman Oligarchy

This looks like it is going to be video clip day. Here's another must see video. This one from Glenn Beck. He does a great job of explaining the latest domestic Goldman Sachs machinations.

I should note that it is great that all this exposure of Goldman Sachs is developing. However, if you were a long time reader of EPJ, you would have known this stuff years ago.

I also believe I was the first person to use the term oligarchs in relation to America's financial elite. Simon Johnson followed.

Here's the Beck video. He does an awesome job.

Pete Peterson: Short the Dollar, Go Long Gold and Goldman

American oligarch Pete Peterson appears to be decidedly bearish on the United States. During an interview with FT, he recommends going short the dollar and Treasury bills, and going long gold and Goldman. He is also bearish on oil and California IOU's. He is bullish on China.

His bearish take on oil (He says "long term" short) is because he expects alternative fuels to enter the market soon.

During the interview he also disclosed that he and George Soros would be meeting soon to discuss, ahem, philanthropic endeavours.

Max Keiser: “Goldman Sachs Is Scum”

First Harry Alford, now Max Keiser, there is hope!

Oh, The Tricks They Will Play

Is Goldman Sachs inflating its employee numbers so that its profit per employee is lower? That's the latest speculation on the street.

Here's Dealbook's Graham Bowley:

Some people on Wall Street are suggesting that Goldman Sachs inflated its staffing numbers to deflate its compensation figures per employee.

In a footnote to its financial results on Tuesday, Goldman said that for the first time it was including consultants and temporary staff in its overall employee figures. This had the result of increasing its official staffing levels by 2,000 jobs or so in both the first and second quarters.

Earlier this year, for example, Goldman said it had 27,898 workers at the end of the first quarter, but now it says that number was 29,800.

The reason for the increase, Goldman said, was that the costs associated with these workers had always been in the overall compensation figures it reports. Now that it is a commercial bank, Goldman wants to do what other commercial banks do, and they include such workers in their numbers.

But the statistical change also had the effect of reducing Goldman’s compensation per employee number. Coincidence? Or useful in a quarter when it knew it was going to get political heat for returning to big bonuses so soon after taking all that government aid to see it through last year?

Goldman Gains on Rivals' Pain

Wow, WSJ explains what is behind Goldman's record profits:

Wall Street's meltdown fueled the most profitable quarter ever at Goldman Sachs Group Inc., which snatched business away from weakened rivals and churned out huge trading gains by revving up risk taking.

With competitors such as Lehman Brothers Holdings Inc. and Bear Stearns Cos. gone, and others like Citigroup Inc. flailing, Goldman appears to be pulling off one of the biggest market-share grabs in Wall Street history...The primary earnings driver was wider profit margins on the buying and selling of securities, in part due to fewer competitors...

The gains -- net revenue was up 46% to $13.76 billion -- bolster Goldman's reputation as one of the savviest on Wall Street.

They also underscore the emergence of a handful of large U.S. financial institutions that are likely to profit mightily from the wreckage left by the financial crisis.

Of course, it was former Goldmanite Hank Paulson as Treasury Secretary that was largely responsible for the takedown of Lehman and Bear Stearns, while Goldman WAS BAILED OUT WITH GOVERNMENT (Read Taxpayer) MONEY.

If A Revolution Comes, They're Going After Goldman First

Earlier this evening as I headed back to my hotel, I passed through the mall area of the Prudential Center in Boston.

At one point, there was a kiosk in front of me that contained Russian Matryoshka dolls.

I noticed a guy hitting on the sales clerk at the doll kiosk. As I passed by, in total amazement, I heard the guy say to the girl, "Even the central banker of Italy used to work for Goldman Sachs."

Whether they know it or not, Goldman has a PR problem. When you have a guy hitting on a girl by displaying his sophistication about the world, and that sophisticated knowledge is that Goldman Sachs has penetrated every nook and cranny of government financial agencies around the world, Goldman is in trouble.

Not without justification, the masses now know that there is a revolving door between governments and Goldman Sachs. Not without justification, the masses are highly suspicious of the billions in "trading" profits Goldman has been making when most other financial firms are barely surviving on life support. They know that former Goldman CEO, Hank Paulson, as Treasury Secretary, snowed everyone who came within 30 feet of his breath.

I feel we are all in the early stages of a multi-act play. It's hard to tell how it will end, but it is clear this is a tragedy, not a comedy, that we are watching--and there will eventually be audience participation.

A New Name on the Insider Banking Scene

A blank check firm with $300 million in cash, Global Consumer Acquisition Corp. (To be renamed Western Liberty Bancorp), is moving into the insider banking game.

Jason Ader will become Chairman and Chief Executive Officer of Western Liberty Bancorp. Ader and his group seem to be new players on the scene without any connections to the usual insiders, such as, Goldman Sachs and Carlyle Group. Most of those that will becoming on board with Ader have connections to Ader through his years as an analyst at Bear Stearns, or from relationships he developed while at NYU's business school.

Global Consumer intends to acquire the Nevada operations of Colonial Bank, a subsidiary of the Colonial BancGroup, and First Commerce Bank, combining them under Western Liberty. The operations will be run under the First Commerce name and will have 22 branches, as well as $477 million of loan assets and about $534 million in deposits.

Ader may not be part of the Goldman/Carlyle clique, but he sure appears to know his way around the bank regulatory environment. NYT reports:

Global Consumer worked with federal and state banking regulators to select the loans it wanted to assume in creating Western Liberty, Jason Ader, the investment manager who sponsored the acquisition company, said in an interview last week.

“We’re taking assets that we’re very comfortable with,” said Mr. Ader, who will become Western Liberty’s chairman and chief executive. “There’s a significant margin of safety in our portfolio.”

Put this stock on your watch list, if Bernanke ever starts printing money again, these guys appear to have the touch that will make them big winners.

The FBI Jumps for Goldman

Goldman Execs Bailed While U.S. Propped Up Firm

Was the government propping up the financial sector or providing support that helped Goldman Sachs execs bail during the height of the crisis last year?

Executives at Goldman sold almost $700 million worth of stock following the collapse of Lehman Brothers last September, according to filings with the SEC.

Most of the sales occurred during the period in which the firm was propped up with the help of $10 billion in U.S. government money.

Goldman Sachs is now called...

Government Sachs, on Wall Street, because of the multitude of former GS players in power positions at governments around the world.

NYSE Failed to List Goldman as Top Program Trader

Paging Oliver Stone. Something very quirky is going on here. Goldman's trading code is ripped off. Program trading then breaks to new record highs in terms of volume. NYSE fails to list Goldman as the top program trader.

NYSE Euronext said its previously reported program-trading percentage of 48.6% for the week of June 22-26 was correct because it included trades by Goldman even though the firm was left off the list of most active firms.

After market watchers and bloggers queried how Goldman could have dropped off the most active program traders list, the NYSE revised its list of most active firms in program trading, placing Goldman at the top ahead of Credit Suisse Group's.

This ocurred, we add, after the NYSE announced that they planned to end reporting on program trading disclosure. Here's Zero Hedge's take on that, before the disclosure of Goldman Sachs' code being stolen:

In a move set to infuriate and send many Zero Hedge readers over the top, the NYSE has taken action to make sure that nobody will henceforth be able to keep track of the complete dominance that Goldman Sachs exerts over the New York
Stock Exchange. This basically ends our weekly Program Trading updates disclosed
every Thursday indicating that Goldman single handedly captured all of NYSE's program trading.In an information memorandum released on June 24 (09-31), the NYSE Regulation team has announced the Decommissioning of the Daily Program Trading Report (DPTR).

It appears to us that there is something in those numbers Goldman deosn't want other traders to see, now that their trading code has been compromised.

Insight Into How Damaging the Theft of Goldman Trading Secrets Might Be

At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Serge Aleynikov’s alleged theft of Goldman Sachs trading secrets poses a risk to U.S. markets. Aleynikov transferred the code to a computer server in Germany, and others may have had access to it, Facciponti said.

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public yesterday. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”

Bloomberg reports:

“Someone stealing that code is basically stealing the way that Goldman Sachs makes money in the equity marketplace,” said Larry Tabb, founder of TABB Group, a financial-market research and advisory firm. “The more sophisticated market makers -- and Goldman is one of them -- spend significant amounts of money developing software that’s extremely fast and can analyze different execution strategies so they can be the first one to make a decision.”

Someone could use the code “to implement the same strategies and maybe on certain stocks they can be faster and, in effect, take away money that would normally be Goldman’s,” Tabb said in a phone interview. “The second thing that they can do is actually analyze the code so that they know what Goldman’s going to do before Goldman does it and kind of reverse engineer Goldman’s strategies and make money basically at the expense of Goldman.”

In other words, if that code is out there, Goldman's current trading strategies are destroyed.

Who is Serge Aleynikov?

Serge Aleynikov, who is alleged to have stolen Goldman Sachs' proprietarty trading formulas, has a Linked-In page.

On it, he listed his education:

Rutgers, The State University of New Jersey-New Brunswick

Moscow Institute of Transportation Engineering (MIIT)

He explained his former job at Goldman:

VP, Equity Strategy
Goldman Sachs (Public Company; GS; Investment Banking industry)
May 2007 — Present (2 years 3 months)

• Lead development of a distributed real-time co-located high-frequency trading (HFT) platform. The main objective was to engineer a very low latency (microseconds) event-driven market data processing, strategy, and order submission engine. The system was obtaining multicast market data from Nasdaq, Arca/NYSE, CME and running trading algorithms with low latency requirements responsive to changes in market conditions.

• Implemented a real-time monitoring solution for the distributed trading system using a combination of technologies (SNMP, Erlang/OTP, boost, ACE, TibcoRV, real-time distributed replicated database, etc) to monitor load and health of trading processes in the mother-ship and co-located sites so that trading decisions can be prioritized based on congestion and queuing delays.

• Responsible for development of real-time market feed handlers, order processing engines and trading tools at a Quantitative Equity Trading revenue-making HFT desk.

And he had a recommendation from a Goldman co-worker:

Serge is one of the best and the friendliest developers I had opportunity to work with. He not only has very broad knowledge of various software technologies but also a strong ability to optimally apply each to the problem at hand. His expertise in networking and distributed computing is top notch. I was truly impressed by his innovative software solutions, showing excellent software design skills and effectiveness of implementation. Serge displays a lot of enthusiasm in his work and is very eager to share his knowledge with others.

htFT

"Big Lloyd 3 (The Root.)."

Artist Geoffrey Raymond unveiled his latest work. Placing it in the Wall Street area on the Plaza outside of 85 Broad Street. It's a portrait of Goldman Sachs CEO Lloyd Blankfein, titled "Big Lloyd 3 (The Root.)."

Raymond has painted other Wall Street insiders including Hank Paulson, Jimmy Cayne and Hank Greenberg.

ViaJohnCarney

Goldman's Computer Trading Code Stolen

This is big.

Over the July 4th holiday long weekend, a Russian immigrant living in New Jersey and forner Goldman Sachs trader, Sergey Aleynikov, was arrested on federal charges of stealing top-secret computer trading codes from a "financial institution." It's an open secret that the "financial institution" is Goldman Sachs.

The trading code stolen was the platform Goldman uses for its program trading activities. Writes Reuters:

The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly-rofitable automated trades.

This is a multi-million dollar profit center for Goldman and it may have completely destroyed Goldman's edge in this business.

Zero Hedge writes:

This week's NYSE Program Trading report was very odd: not only because program trading hit 48.6% of all NYSE trading, a record high at least since the NYSE keep tabs of this data, and a data point which in itself was startling enough to cause some serious red flags...but what was shocking was the disappearance of the #1 mainstay of complete trading domination (i.e., Goldman Sachs) from not just the aforementioned #1 spot, but the entire complete list. In other words: Goldman went from 1st to N/A in one week.

It's as if someone stole the secret formula for Coca Cola so every kid on every block can make it, and Coca Cola has decided to junk the Coca Cola business.

But Goldman, being Goldman, knows how to get the FBI to hop. Zero Hedge, again:

What is probably most notable, in less than a month since Sergey's departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases... especially those that allegedly involve Goldman Sachs.

Stay tuned.

Goldman Sachs Penetrates National Review

It's really amazing where you find Goldmanites. Writes Peter Brimelow:

Dusty Rhodes, the former Goldman Sachs executive whom [William F. Buckley], with his snobbish weakness for the wealthy, installed in a vague (probably power-balancing) role at [National Review].

Maybe that's how WFB learned this habit. Brimelow again:

The fascinating news that the ageing William F. Buckley, beset by bladder problems, developed the habit of opening the door of his moving limousine and urinating into passing traffic—revealed by his son, Christopher Buckley in Losing Mum and Pup, his unsparing memoir of his just-deceased parents’ final year—is almost laughably symbolic.

The Further Greening of Goldman Sachs

The Wall Street elite are ready for Tax and Trade. I'm talking really ready, as in, it is their show. Rachel Morris in Mother Jones' Washington bureau explains:

If the Waxman-Markey climate bill is signed into law, it will generate, almost as an afterthought, a new market for carbon derivatives. That market will be vast, complicated, and dauntingly difficult to monitor....Cap and trade would create what Commodity Futures Trading commissioner Bart Chilton anticipates as a $2 trillion market, "the biggest of any [commodities] derivatives product in the next five years." That derivatives market will be based on two main instruments. First, there are the carbon allowance permits that form the nuts and bolts of any cap-and-trade scheme. Under cap and trade, the government would issue permits that allow companies to emit a certain amount of greenhouse gases. Companies that emit too much can buy allowances from companies that produce less than their limit. Then there are carbon offsets, which allow companies to emit greenhouse gases in excess of a federally mandated cap if they invest in a project that cuts emissions somewhere else—usually in developing countries. Polluters can pay Brazilian villagers to not cut down trees, for instance, or Filipino farmers to trap methane in pig manure.

In addition to trading the allowances and offsets themselves, participants in carbon markets can also deal in their derivatives—such as futures contracts to deliver a certain number of allowances at an agreed price and time. These instruments will be traded not only by polluters that need to buy credits to comply with environmental regulations, but also by financial services firms. In fact, a study (PDF) by Duke University's Nicholas Institute for Environmental Policy Solutions anticipates that if the United States passes a cap-and-trade law, the derivatives trade will probably exceed the market for the allowances themselves. "We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market," says Robert Shapiro, a former undersecretary of commerce in the Clinton administration and a cofounder of the US Climate Task Force.

Banks like JPMorgan Chase, Morgan Stanley, and Goldman Sachs already have active carbon trading desks that deal in instruments connected to Europe's cap-and-trade system and voluntary markets here. But business will explode if a cap-and-trade system becomes law. So it's no surprise that the financial industry has taken an intense interest in the fine print of the Waxman-Markey bill. According to data compiled by the Center for Public Integrity, the financial services industry has 130 lobbyists working on climate issues, compared to almost none in 2003. They represent companies like Goldman Sachs, JPMorgan Chase, and AIG (before it was shamed into temporarily halting its lobbying activities last fall). The industry "wants lawmakers to create a brand-new revenue stream for its bottom line, and cap and trade would do it," says Tyson Slocum of Public Citizen, who is a member of a Commodity Futures Trading Commission (CFTC) advisory committee considering how carbon trading should be regulated.

Bottom line: It's as if tree huggers convinced government that tree hugging be required by every man, woman and child, and thus a market for trees to hug developed with very complex rules as to the rights to hug a tree, and Goldman Sachs helped develop the complex rules and then started trading in those rights based on the comples rules only they understand.

In other words, Goldman Sachs has totally co-opted the green movement for lots of green of a very different kind.

Goldman Sachs as "a great vampire squid wrapped around the face of humanity"

Rolling Stone is out with a 12-page story (Not available on the internet) by Matt Taibbi on Goldman Sachs.

I haven't read the article, yet. Here's Felix Salmon's take:

I don't agree with all of Taibbi's article, but I'm surprised at how much of it I do agree with, especially when it comes to the subject of regulatory capture. Taibbi spends no little time looking at Goldman subsidiary J Aron, and the semi-secret letter it was issued by the CFTC in 1991, the existence of which wasn't even known to Brooksley Born, who was then the chair. The letter allowed Goldman to ramp up its activities in Chicago by orders of magnitude. When Congress asked to see the letter, the CFTC was careful to ask Goldman first if that would be OK.

I can't, off the top of my head, think of a single government regulation over the past couple of decades which has remotely harmed Goldman Sachs; by contrast, there are many which have done it a world of good. The chances that the Fed, or any other systemic risk regulator, will be able to rein in this powerful organization are probably slim.

Goldman to Payout Record Breaking Bonus Money

Imagine my surprise.

The UK's Guardian reports:

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year...A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

The lack of competition comes about, of course, as a result of Lehman Brothers going bankrupt and Bear Stearns being swallowed by JP Morgan. Both events occurred during the financial crisis while former Goldman CEO Hank Paulson was Treasury Secretary. The fate for Goldman was much different. When indications appeared that AIG securities held by Goldman might fail to be repaid, the Treasury rushed in to prop up AIG which protected Goldman from a Bear Stearns or Lehman type fate. Thus, setting up the stage for the current Goldman bonuses.

Just How Many Regulations Is Goldman Exempt From?

Zero Hedge asks this question, since dealer managers for a recent offering by Regions Financial Corporation were Goldman Sachs and JP Morgan.

Yesterday, Goldman issued an Upgrade of Regions Financial to a Buy. This, of course, doesn't happen after a deal, since the company is in a regulatory "quiet period". The regulatory "quiet period" has always, up until now, been observed by the deal managers.

Got that, Upgrades don't happen---unless you are Goldman Sachs. In other words, the world of the politically connected corporations continues to spin just nicely, thank you.

Further, it appears that Zero Hedge also suspects the Upgrade came about because Goldman may have been holding some of the stock that they wanted to off load. Writes Zero:

... can Goldman also please vouch that it's prop desk had no exposure to RF stock. Because if it did, that would really take the Larry Summers prize for stock manipulation moment of the year.

The nature of regulators is that they put on so many regulations on the books that it is difficult, if not impossible, to operate by following all of them. Regulators will then ignore the violation of the rule breaking until they want to smack someone down. So let the next Lehman or Bear Stearns try something like Goldman just did and the SEC will be all over them.

Kashkari Admits Regulators Didn't See Housing Bubble

Recently, Neel Kashkari, former Goldman Sachs man and former interim head of the Treasury Department's Office of Financial Stability, spoke at Wharton's San Francisco campus. HIs speech covered his views on the causes of the recent financial crisis.

At one point, he comes out and admits that regulators missed the bubble, just like homeowners did:

"Homeowners took out ever larger mortgages with little or no down payment and little or no documentation of income. Regulators, investors and homeowners took comfort from the belief that home prices only go up.

"As we have learned, that belief was incorrect."

Which raises the question, What superior abilities are regulators, tasked with monitoring for bubbles, supposed to have? In truth, they don't have superior abilities, and will, in fact, be motivated by political agendas, which may result in ignoring some bubbles and shutting down fierece industries from real growth where no bubble exists.

Kaskari followed his comment on regulators with the observation that:

"...home prices adjust downward slowly, in part due to homeowners' reluctance to realize losses; most people would rather keep their home than sell for a loss if they can avoid it since it usually is their largest financial asset."

And then states:

"Treasury also launched a multi-part housing program to reduce borrowing costs and encourage long-term sustainable loan modifications. Finally, Treasury launched a public-private investment program to purchase illiquid assets from banks which has received strong interest from private sector participants."

Kashkari doesn't seem to get that his point about the slow adjustment in prices downward may be to some degree the result of the programs the government has announced.

Who wouldn't homeowners and bankers wait around before trying and sell an illiquid asset at a discount price, when it is clear that the government is doing everything possible to prop up the sector?

Bottom line, from regulators; clulessness to government interventions, Kashkari has all the facts, he just needs someone to help him connect the dots.

Matt Taibbi Disscusses the Long Reach of Goldman Sachs

...in a way that only Matt Taibbi can do. First he notes that WSJ's Evan Newmark has called Henry Paulson a national hero. Then he writes to WSJ:

Dear WSJ,

Just out of curiosity — did Evan Newmark ever work for Goldman, Sachs? And if the answer to the question is yes, don’t you think that might have been a good fact to disclose before he fellated Hank Paulson in his “Mean Street” column?

Sincerely,
Matt Taibbi

Then he reveals that, yes, Newmark is a Goldman Sachs tentacle:

I didn’t get an answer, which I guess is not surprising. But in the interim I found out that Newmark did, indeed, work for Goldman...Can you imagine what a craven, bumlicking ass-goblin you’d have to be to get a job working for the Wall Street Journal, not mention up front that you used to be a Goldman, Sachs managing director, and then write a lengthy article calling your former boss a “national hero” — in the middle of a sweeping financial crisis, one in which half the world is in a panic and the unemployment rate just hit a 25-year high? Behavior like this, you usually don’t see it outside prison trusties who spend their evenings shining the guards’ boots. I can’t even think of a political press secretary who would sink that low. Hank Paulson, a hero? Are you fucking kidding us?

And this is Tabbi just warming up, the rest is here.

HTlrc

Former Goldman Man Wants CFTC to Regulate Derivatives

A Commodity Futures Trading Commission proposal seeks to ensure privately negotiated contracts are regulated with the same oversight as trades on an open exchange, but wants the derivative transactions to remain between private parties and not on an exchange.

Behind the initiative is CFTC Chairman Gary Gensler, an 18 year Goldman Sachs man, the smartest student in his class at Wharton, and the only student Goldman wanted to talk to the year he graduated from Wharton.

“All derivative dealers should be subject to capital requirements, initial margining requirements, business conduct rules and reporting and record keeping requirements,” Gensler said in prepared remarks before told the Senate Agriculture Committee today . “Standards that already apply to some dealers, such as” banks, should be strengthened, he said.

The Gensler proposal is in contrast to free markets on one end and legislation pushed by Senate Agriculture Committee Chairman Tom Harkin that would move all of the $684 trillion over-the-counter derivatives market to regulated exchanges, on the other end.

According to Bloomberg, Gensler cited contracts for physical items being delivered at certain dates, including jet fuel, or municipalities that want contracts of unusual lengths.

“It’s so specific, even confidential, that there’s no liquidity,” Gensler responded. “That would still be regulated” while not being on an exchange.

Confidential regulation, sounds like something Goldman could work with.

Former-Goldman Man Named to BIS

Imagine my surprise.

The Bank for International Settlements reports that William Dudley has been appointed chairman of its Committee on Payment and Settlement Systems.

Dudley, who became President of the Federal Reserve Bank of New York in January, takes the place of Treasury Secretary Timothy Geithner, at the BIC.

The CPSS is a very important postion for members of the cabal to control. It is comprised of central bankers and monitors risks in payment and settlement systems, while also suggesting ways to strengthen and increase the efficiency of these services.

Prior to joining the Fed in 2007, Dudley was a partner and managing director at Goldman, Sachs.

Eliot Spitzer Breaks Down the New York Fed

Spitzer out of power is much, much better than Spitzer in power. Never vote for this guy. Here he is,out of power,doing an awesome job breaking down the inner workings of the New York Fed:

Given the power of the N.Y. Fed, it is time to ask some very hard questions about its recent performance. The first question to ask is: Who is the New York Fed? Who exactly has been running the show? Yes, we all know that Tim Geithner was the president and CEO of the N.Y. Fed from 2003 until his ascension as treasury secretary. But who chose him for that position, and to whom did he report? The N.Y. Fed president reports to, and is chosen by, the Fed board of directors.

So who selected Geithner back in 2003? Well, the Fed board created a select committee to pick the CEO. This committee included none other than Hank Greenberg, then the chairman of AIG; John Whitehead, a former chairman of Goldman Sachs; Walter Shipley, a former chairman of Chase Manhattan Bank, now JPMorgan Chase; and Pete Peterson, a former chairman of Lehman Bros. It was not a group of typical depositors worried about the security of their savings accounts but rather one whose interest was in preserving a capital structure and way of doing business that cried out for—but did not receive—harsh examination from the N.Y. Fed.

The composition of the New York Fed's board, which supervises the organization and current Chairman Friedman, is equally troubling. The board consists of nine individuals, three chosen by the N.Y. Fed member banks as their own representatives, three chosen by the member banks to represent the public, and three chosen by the national Fed Board of Governors to represent the public. In theory this sounds great: Six board members are "public" representatives.

So whom have the banks chosen to be the public representatives on the board during the past decade, as the crisis developed and unfolded? Dick Fuld, the former chairman of Lehman; Jeff Immelt, the chairman of GE; Gene McGrath, the chairman of Con Edison; Ronay Menschel, the chairwoman of Phipps Houses and also, not insignificantly, the wife of Richard Menschel, a former senior partner at Goldman. Whom did the Board of Governors choose as its public representatives? Steve Friedman, the former chairman of Goldman; Pete Peterson; Jerry Speyer, CEO of real estate giant Tishman Speyer; and Jerry Levin, the former chairman of Time Warner. These were the people who were supposedly representing our interests!

I have wondered what the connection was between Geithner and JPMorganChase. The Geithner Goldman connection is obvious. Goldman just has tentacles everywhere. (In the above paragraphs, Spitzer mentions three Goldman connections.) But, I haven't been able to understand why JPMorganChase was given so much preferential treatment.

One clue may be in Spitzer's note that Walter Shipley former chairman of the soon to be JPMorganChase (then just Chase Manhattan Bank) was on the committee that selected Geithner to run the New York Fed. Shipley literally gave Geithner the New York Fed position as president.

There may be other connections. Probably some having to do with Paulson, but clearly Geithner can now be tied into the cabal not only from the Goldman side but also the JPMorganChase side.

Why Did the Stress Tests Treat Goldman Sachs Group Better Than Morgan Stanley?

That's the question WSJ is asking this weekend.

WSJ reports:

In the period, the Treasury and bank regulators are saying Goldman will have $18.5 billion in "resources other than capital to absorb losses." This number primarily reflects how much in earnings, excluding provisions and securities marks, a bank can generate. For Morgan Stanley, the government has a much lower $7.1 billion...

Were the tests' assumptions "stacked in Goldman Sachs's favor?" asks Michael Hecht at JMP Securities. He notes that the $7.1 billion for Morgan is 62% below Goldman's figure, whereas Morgan's reported net revenue has, on average, been only 22% below Goldman's over the past five years.

And, oh yeah, there is transparency, until transparency counts. WSJ, again:

The government documents don't give enough detail to explain the gap.

JPMorgan, Goldman Sachs to Gain as Rivals Seek Funds...

...headlines Bloomberg.

Imagine my surprise.

Somehow Goldman was "lucky" enough to raise funds last month.

And, JPMorganChase swallows Bear Stearns and Washington Mutual and doesn't need to raise any capital. Hmmm, what did JPMorganChase sell off of Bear Stearns and Washington Mutual, at what price and when?

Sounds to me like the Bear Stearns and Washington Mutual deals strengthened JPMorganChase.

Bloomberg goes on:

JPMorgan Chase & Co. and Goldman Sachs Group Inc., banks that passed government stress tests without needing fresh capital, may win more backing from customers and shareholders as competitors such as Bank of America Corp. and Citigroup Inc. raise funds by giving up assets or equity.

Wow: NY Fed Chairman Friedman Resigns

Stephen Friedman, a director and former CEO of Goldman Sachs, has resigned as chairman of the New York Federal Reserve's board of directors. He didn't get caught with his hand in the cookie jar, but he did get caught eating the cookies.

While everyone was panicking about bank stocks, he was buying Goldman stock. Profits to date, in the millions. Was he just shrewd about the markets, or Goldman shrewd?

The possibility of being Goldman shrewd, i.e., in this case, knowing or aiding in the AIG bailout which shoveled billions to Goldman--while he was buying stock in Goldman, is what is forcing his resignation.

Friedman should have put his money like Hank Paulson in a nudge, wink, Blind trust, then he could have bought the sh**t out of Goldman without any heat.

Bank By Bank Stress Test Results

Capital Needs of Big U.S. Banks Based on Government "Stress" Test Results (in alphabetical order)

American Express...None

Bank of America...$33.9 Billion

Bank of New York...None

BB&T... None

Capital One Financial...None

Citigroup...$5.5 Billion

Fifth Third...$1.1 billion

GMAC...$11.5 Billion

Goldman Sachs... None

JPMorgan Chase...None

KeyCorp...$1.8 billion

MetLife...None

Morgan Stanley...$1.8 Billion

PNC Financial...$0.6 Billion

Regions Financial...$2.5 billion

State Street...None

SunTrust Banks...$2.2 billion

U.S. Bancorp...None

Wells Fargo...$13.7 Billion

NY Fed Chairman's Ties to Goldman

WSJ is out with a broad piece examining New York Fed chairman Stephen Friedman and his Goldman Sachs stock holdings:

The Federal Reserve Bank of New York shaped Washington's response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.

During that time, the New York Fed's chairman, Stephen Friedman, sat on Goldman's board and had a large holding in Goldman stock, which because of Goldman's new status as a bank holding company was a violation of Federal Reserve policy.

The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They've since risen $1.7 million in value...

Jerry Jordan, a former president of the Fed bank in Cleveland, says Mr. Friedman should have stepped down once Goldman became a bank holding company in September and thus fell under the Fed policy barring stock ownership by certain directors of Fed banks. "Any kind of financial transaction at all by any of the directors is always a problem," Mr. Jordan said. "He should have resigned."

While the WSJ piece points to conflicts for Friedman after Goldman became a bank holding company, the conflicts are much deeper than that. As chairman of the New York Fed, Friedman has all kinds of inside access to Fed monetary thinking, interest rate policy thinking and foreign exchange policy thinking. All areas where  inside knowledge would be extremely valuable to Goldman traders.

In short, power centers created by government regulation--and the Fed is certainly a power center--attract those who can benefit from some type of influence over the power center. 

There are no regulations that can change the attempt to seek influence over power. There is only one solution end the power source, in this case, end the Fed.

Kashkari Headed to His Cabin

Former Goldman Sachs man Neel Kashkari, who was brought over to the Treasury by Henry Paulson as "interim" head of the Office of Financial Stability, is leaving the Treasury. Most likely, revolving back into the oligarch sector.

As "interim" head, he did not have to disclose his assets or divest any assets that might have been in conflict with his regulatory duties.

As for his new plans, he's apparently not saying. His hometown newspaper, the Cleveland Plain Dealer reports:

For now, they involve merely spending time with his wife in their cabin near Lake Tahoe.

Kashkari is most well known, during his "interim" role, for getting caught on tape discussing Treasury plans which completely contradicted Treasury Secretary Paulson's public statements and statements to Congress.

Goldman Sachs Hires Barney Frank Staffer To Be Its Lobbyist

The Goldman Sachs relationship with Congress has just gotten even more intimate. Goldman has grown another tentacle, designed to grab directly at the House Financial Services Committee chair Rep. Barney Frank, D-Mass.

The new top lobbyist, Michael Paese, was recently the top staffer to Frank. He has been a registered lobbyist for the Securities Industries and Financial Markets Association since he left Frank's committee in September and will join Goldman as director of government affairs.

ViaTimCarney

NYT: Geithner's Clubby Relationship with Wall Street's Power Elite

NYT's Jo Becker and Gretchen Morgenson fill in a lot of detail in the obvious close, relationship Geithner has with Wall Street's power elite (as especially with Goldman Sachs employees and former Goldman Sachs employees):

He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary....“People thought, ‘Wow, that’s kind of out there,’ ” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward
---

[As New York Fed president] He was the federal regulator most willing to “push the envelope,” said H. Rodgin Cohen, a prominent Wall Street lawyer who spoke frequently with Mr. Geithner.

---

An examination of Mr. Geithner’s five years as president of the New York Fed...
shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions.

His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.

---

His calendars from 2007 and 2008 show that those interactions were a mix of the professional and the private.

He ate lunch with senior executives from Citigroup, Goldman Sachs and Morgan Stanley at the Four Seasons restaurant or in their corporate dining rooms. He attended casual dinners at the homes of executives like Jamie Dimon, a member of the New York Fed board and the chief of JPMorgan Chase.

Mr. Geithner was particularly close to executives of Citigroup, the largest bank under his supervision. Robert E. Rubin, a senior Citi executive and a former Treasury secretary [and former Goldman CEO], was Mr. Geithner’s mentor from his years in the Clinton administration, and the two kept in close touch in New York...

While the New York Fed’s rules do not prevent its president from holding such one-on-one meetings, that was not the general practice of Mr. Geithner’s recent predecessors, said Ernest T. Patrikis, a former general counsel and chief operating officer at the New York Fed.

“Typically, there would be senior staff there to protect against disputes in the future as to the nature of the conversations,” he said.

---

In fashioning the bailout, his drive to use taxpayer money to backstop faltering firms overrode concerns that such a strategy would encourage more risk-taking in the future. In one bailout instance, Mr. Geithner fought a proposal to levy fees on banks that would help protect taxpayers against losses.

The bailout has left the Fed holding a vast portfolio of troubled securities. To manage them, Mr. Geithner gave three no-bid contracts to BlackRock, an asset-management firm with deep ties to the New York Fed.

---

Mr. Geithner played a pivotal role in the next bailout, which was even bigger — that of the American International Group, the insurance giant whose derivatives business had brought it to the brink of collapse in September. He also went to bat for Goldman Sachs, one of the insurer’s biggest trading partners...

A.I.G.’s chief executive at the time,Robert B. Willumstad, said he had hired bankers at JPMorgan to help it raise capital. Goldman Sachs had jockeyed for the job as well, but because the investment bank was one of A.I.G.’s biggest trading partners, Mr. Willumstad rejected the idea. The potential conflicts of interest, he believed, were too great.

Nevertheless, on Monday, Sept. 15, Mr. Geithner pushed A.I.G. to bring Goldman onto its team to raise capital, Mr. Willumstad said.

Mr. Geithner and Mr. Corrigan, a Goldman managing director, were close, speaking frequently and sometimes lunching together at Goldman headquarters. On that day, the company’s chief executive, Lloyd C. Blankfein, was at the New York Fed.

---

Mr. Geithner has also faced scrutiny over how well taxpayers were served by his handling of another aspect of the bailout: three no-bid contracts the New York Fed awarded to BlackRock, a money management firm, to oversee troubled assets acquired by the bank.

BlackRock was well known to the Fed. Mr. Geithner socialized with Ralph L. Schlosstein, who founded the company and remains a large shareholder, and has dined at his Manhattan home

---

According to a recent report by the inspector general monitoring the bailout, Neil M. Barofsky, Mr. Geithner’s plan to underwrite investors willing to buy the risky mortgage-backed securities still weighing down banks’ books is a boon for private equity and hedge funds but exposes taxpayers to “potential unfairness” by shifting the burden to them.

Geithner: Goldman Is in Complete Control of World Financial Domination

Treasury Secretary Timothy Geithner writes in today's FT:

...the G20 meeting in London transformed the framework of global economic and financial co-operation. In addition to measures to boost the global economy and support the international financial institutions, leaders agreed that the Financial Stability Forum, renamed the Financial Stability Board (FSB) and expanded to include all of the G20 nations, should be given greater responsibility for the stability of the international financial system.

The US is initiating a comprehensive reform of our own system of financial regulation as part of our determined effort to lead a race to the top in regulatory and supervisory standards. That effort will not be wholly successful, however, without parallel action in other national financial systems. The FSB will play a critical role in this international co-operation.

So what is this FSB that has been "given greater responsibility for the stabilty of the international financial sysytem"? And, who runs it?

According to a recent press release (pdf):

It will monitor and advise on market developments and their implications for regulatory policy; advise on and monitor best practice in meeting regulatory standards; manage contingency planning for cross-border crisis management, particularlywith respect to systemically important firms; and collaborate with the IMF to conduct Early Warning Exercises...

The FSB and IMF will intensify their collaboration, each complementing the other’s roleas per the 13 November 2008 letter by the Managing Director of the IMF and the Chair ofthe FSF.

The chairman of the FSB is Mario Draghi. Draghi is the governor of the Bank of Italy, former Executive Director of the World Bank from 1984 to 1990, and, naturally, he was a a Managing Director of Goldman Sachs and Vice Chairman of Goldman Sachs International, and a member of the Goldman's "Commitments Committee." He is also a trustee of the Brookings Institute where former Treasury Secretary and former Goldman CEO Henry Paulson uses office space while he writes his memoirs.

On November 13, 2008, Draghi and IMF head Strauss-Kahn sent a letter to the G-20 leaders, with the guidelines of the plan which envisions the FSF and the IMF as the two pillars of the world finance.

At the November 14, 2008 at a working dinner at the White House, Draghi gave the main address. On November 17, the Italian daily Il Giornale commented, "Only one central banker appears in the family photo of the 25 participants at the G-20 financial-economic summit--a clear privilege of Mario Draghi, present at the Washington summit as chairman of the FSF."

Like Goldman, Like Citigroup

Like Goldman Sachs in its earnings report earlier this week, Citigroup seems to be losing money everywhere except in the black hole trading division.

From Citi's earnings release:

Citigroup Inc. (NYSE: C) today reported net income for the first quarter of 2009 of $1.6 billion... Revenues were $24.8 billion, approximately double those of the prior-year period. Strong trading results and lower net write-downs in Securities and Banking drove revenues. The difficult economic environment continued to have a negative impact on all other businesses.

What I wrote about the Goldman earnings applies for Citi:

Investment banking revenues were down, financial advisory revenues were down and net revenues in asset management were down. The only revenues that were up is where they could have been shoveled to Goldman through AIG. Net revenues in Trading and Principal Investments were $7.15 billion, compared with net revenues of $5.12 billion for the first quarter of 2008 and negative net revenues of $4.36 billion for the fourth quarter of 2008.

The Goldman Sachs Three Card Monte Act

These guys never stop. Bob Murphy has pointed out to me a letter to the editor of WSJ written by Goldman Sachs managing director Lucas van Praag:

Prof. Amar Bhidé does his readers a disservice when he asserts that Goldman Sachs miscalculated the creditworthiness of AIG and was “made whole” by a government bailout of the company (”You Can’t Rush a Recovery,” op-ed, April 9).

These are the facts: Goldman Sachs is in the business of acting as an intermediary for numerous clients and often assumes risk on their behalf. Our normal protocols require that we protect our shareholders from loss associated with our incurring these positions through rigorous risk management. This includes buying credit insurance which, in the matter at hand, we did from AIG, then one of the world’s largest insurance companies. The terms of this insurance included a requirement that AIG give us enough cash collateral to protect us against possible future loss.

We have consistently said that we had no direct economic exposure to AIG. We marked to market the risk we had insured with AIG, and AIG was contractually required to give us collateral to cover any diminution in value. Because there were periods when AIG didn’t provide enough collateral, we hedged ourselves against the then seemingly unlikely event that AIG might default. The cost of this hedging was over $100 million. If AIG had failed, we would have had both the collateral and the proceeds from the credit default swaps and therefore would not have incurred any economic loss.

In order to collect under a credit default swap, there has to be an event of default. No event of default means no payout. By supporting AIG, the government prevented the company from defaulting. Some have questioned whether, if AIG had defaulted, we would have received the money owed to us under the credit default swap arrangements. Because these swaps were written by large financial institutions which mark to market their obligations to each other and net their positions at the close of business every day, we exchanged collateral with the CDS providers on a daily basis. This protected us from the risk of any knock-on defaults.

Finally, others have asked why Goldman Sachs didn’t take a “haircut,” in other words, less money than we were owed. We had taken great care and incurred considerable expense to protect our shareholders. Why would it have been appropriate for them to have suffered a loss when they didn’t need to?

Far from miscalculating the creditworthiness of AIG, we acted in a way which most people would think of as a good example of responsible risk management.

Lucas van Praag
Managing Director
Goldman Sachs & Co.
New York

Bottom line, van Praag is saying, look we had insurance if AIG went bankrupt, but because the government propped up AIG, we couldn't exercise our credit default swaps (i.e. insurance), so that's why the government gave us money because they prevented the bankruptcy which we hedged against.

Was Goldman fully protected on their own? Maybe, maybe not, depending on how much insurance Goldman actually bought. But, what van Praag is doing is, like an expert three card monte shark, keeping you focused on the wrong card. While everyone is focused on the card van Praag is playing with, the real action is the card left over on the other side. That card is the wholesale liquidation of AIG portfolios at fire sale prices that Goldman and money center banks were able to flip for billions in profits at the expense of the taxpayer.

Unless those trades are analyzed, no one will really know what went down to make Goldman profitable in Q1. Further, I suspect Goldman, and others are gearing up for more of these wholesale liquidations. After the stress test results are released the government will force the sale of Private Eqiuty positions held by banks.

It is a three card monte act, but instead of ripping off NYC tourists on Broadway and Fifth Avenue for $20, it is ripping off taxpayers for billions without the taxpayers even getting to look at any of the cards. Only Timothy Geithner gets a peek.

Behind the Huge Quarter From Goldman

Goldman Sachs has pre-announced its earnings. Goldman reported net revenues of $9.43 billion and net earnings of $1.81 billion for its first quarter ended March 27, 2009. Diluted earnings per common share were $3.39 compared with $3.23 for the first quarter ended February 29, 2008 and a diluted loss per common share of $4.97 for the fourth quarter ended November 28, 2008. Annualized return on average common shareholders’ equity was 14.3% for the first quarter of 2009.

Q1 EPS at $3.39 came in way above analyst estimates of $1.59.

BUT, get this. Investment banking revenues were down, financial advisory revenues were down and net revenues in asset management were down. The only revenues that were up is where they could have been shoveled to Goldman through AIG. Net revenues in Trading and Principal Investments were $7.15 billion, compared with net revenues of $5.12 billion for the first quarter of 2008 and negative net revenues of $4.36 billion for the fourth quarter of 2008.

As I wrote this morning:

Given the government is shoveling earnings to the banks through AIG the "surprises" should be on the upside.

This is turning out not to be an overstatement.

A Golden Easter Egg for Goldman

"Goldman Sachs has raised $5.5 billion for a fund to buy discounted private equity holdings – the largest amount ever raised for a fund of this type – as investors anticipate a flood of forced sellers trying to offload private equity stakes," reports FT.

Note the words "forced sellers". A lot of this will be the government forcing banks to sell their PE stakes. It reminds me of the huge forced sales of junk bonds around the time of the S&L collapse. The government forced banks to sell their junk bonds, and those who bought the avalanche of junk bonds coming on the market made a fortune.

As FT writes:

Banks, which account for about 25 per cent of private equity investors, are expected to be big sellers of their holdings as they seek to raise capital.

David de Weese, a principal at Paul Capital, a secondary market firm, said: “There is $130bn of private equity on the balance sheets of the six big US banks and AIG. AIG alone has $30bn. When you have a federal regulator sitting in your office, you develop a new view of what you are willing to sell.”

Of course, if you were an EPJ reader back in February, you knew this kind of stuff was going to happen. When the stress test program was announced, I wrote:

How would a stress test kill off some players? By defining some kind of paper as bad paper that would result in that paper being dumped by banks immediately onto the markets. Who knows who and how such paper would be defined? When the government wanted to kill the junk bond market, it ruled that banks and S&L's couldn't own junk paper even if it was sound paper unlikely to ever go bad. The junk market crash dived, good paper and bad--never too recover.

Banks are not going to hold paper that the government for whatever reason wants to declare a non-passing security in a stress test--it will be gone and muck up the markets as that type of security is sold by banks and other financial institutions across the country.

There are probably other holdings that the government will view as must sell by banks to raise more liquid capital, but the government's view on PE stakes is another gift to Goldman and the like. My suspicion is that there is at least one other bank the government wants to take out, this bank will be holding a significant PE stakes and the government will be sure to define as problem paper other securities held by this bank.

There will be other sellers of PE stakes as well, but to the degree banks are forced to sell this paper NOW, will determine how far the PE market crashes.

How Else Did Paulson Help Goldman Sachs?

John Crudele asks the BIG question:

Now that American International Group has finally revealed that Goldman Sachs was on the top of the list of companies that benefited from the government bailout, maybe Congress will decide to conduct the full-blown investigation that should have happened years ago.

Former Treasury Secretary Hank Paulson was the one pushing for the AIG bailout. He is also the former chairman of Goldman.

During his tenure at Treasury, Paulson said that he felt it was his job to communicate with "market participants."

I've taken that to mean - at the very least - that he was speaking to his former colleagues at Goldman.

Now, the question is, did Paulson do other favors for Goldman before bailing out AIG, like revealing sensitive information?

H. Rodgin Cohen Withdraws as Treasury Candidate

Power house lawyer, Sullivan & Cromwell's H. Rodgin Cohen, has withdrawn his name from consideration as a candidate for a Treasury position, George Stephanopoulos is reporting.

Does this mean Tim Geithner has a longer life as Treasury Secretary? Possibly.

I fully suspected that a heavyweight like Cohen was being vetted for the top spot. Cohen is the top outside counsel for Goldman Sachs and just about every other major player on the street.

The reason for the withdrawal is still unclear at this time. Stephanopoulos is merely reporting that sources are saying that an, "issue arose in the final stages "

Geithner Gone by June?

Christopher Whalen of Institutional Risk Analytics thinks so. In an interview with Street.com, Whalen says the only reason that Timothy Geithner is in at Treasury is to protect the interests of Goldman Sachs.

Could the H. Rodgin Cohen vetting actually be to replace Geithner? Cogden would obviously be an even stronger spear carrier for Goldman Sachs than Geithner, and would bring a stronger presence to Treasury for the insiders ever continuing quest to grab every dollar in America that is not hidden under a mattress.

Another Big Score for Goldman?

Simon Johnson writes:

On p.A4 of today’s WSJ, Deborah Solomon and Jon Hilsenrath report more detail on the Treasury’s “Bad Bank” funding plan.  On first (and third) read I’m not impressed, but we’ll go through all the available details and report back later.

For now, I just have one question.  Isn’t this essentially the same plan that Goldman Sachs has been shopping around for the past month or so?  There’s nothing necessarily wrong with that, of course.  But it would be a huge win for Goldman and Lloyd Blankfein - explaining, for example, the confidence displayed in his recent FT article

And, whatever the reality of lobbying, pressure, and idea exchange here, the optics (as they say in the message spinning business) don’t look great.

What's the deal all about? Goldman, and the like, will get to borrow billions from the government to buy distressed assets at a huge discount and, get this, "To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans."

Borrow billions to bet on a turnaround on bad assets by buying them. If things do not turnaround, there is no hit to the borrower, since the loans are non-recourse. Nice.

I have to start hanging around bars near the Treasury, so I can run into the Treasury guys that can set me up on one of these oligarch plays. I'm ready.

Obama Nominee for Director of Weapons Procurement Is Goldman Sachs Consultant

President Barack Obama recently nominated Ashton Carter to be the Under Secretary of Defense for Acquisition, Technology and Logistics. This is the top weapons purchasing position.

In addition to other roles, his bio lists him as a consultant to Goldman, Sachs. Imagine my surprise.

Carter is also a member of the Aspen Strategy Group, the Council on Foreign Relations, the International Institute of Strategic Studies, and the National Committee on U.S., China Relations.

HTpeu

Goldman President to Retire at End of March

They are sliding under the rocks. Paulson is gone at Treasury. Robert Rubin resigned from Citi. And now Goldman Sachs President and Co-Chief Operating Officer Jon Winkelried will retire effective March 31.

They know things are gong to get bad. There will be more.

Who is Timothy Geithner?

Morgan Reynolds, who served as chief economist for the US Department of Labor during 2001–2, George W. Bush's first term, has done a little fact checking on the new Treasury Secretary:

Who is Geithner? He is a creature of the eastern banking establishment and ruling class through and through. His résumé nicely matches his actions in handing out government money and guarantees to the "right people." Geithner’s father Peter is director of the Asia program at the Ford Foundation, a New World Order operation. Peter Geithner oversaw the "microfinance" programs developed in Indonesia by Ann Dunham-Soetoro, Barack Obama’s mother. Geithner’s maternal grandfather, Charles F. Moore, was an adviser to President Eisenhower and vice president of Ford Motor Company, according to Wikipedia. Geithner’s wife Carole Marie, like Geithner a 1983 graduate of Dartmouth College (Ivy League), is daughter of Mr. and Mrs. Albert Sonnenfeld of Princeton, N.J., a professor of French and comparative literature at Princeton University (Ivy League) for 27 years.

After Timothy Geithner graduated from Dartmouth he picked up an M.A. at Johns Hopkins in something called "international economics" and East Asian studies. That is the extent of Geithner’s formal training in economics, as far as I can tell. Then he worked for Kissinger and Associates for three years, a Rockefeller satrapy, before a series of government appointments, mostly at Treasury where he was Under Secretary for International Affairs under Robert Rubin of Goldman Sachs and Rockefeller’s notorious Council on Foreign Relations (CFR) and then Lawrence Summers of Harvard University (Ivy League), World Bank and CFR. Summers, of course, is currently Obama’s head of the National Economic Council. Want a solution for the financial and economic woes? Why, hire the same experts who caused the problem(s).

Geithner departed Treasury to join the International Monetary Fund and CFR in 2001–2. In October 2003 he was appointed president of the New York Fed where he subsequently arranged rescues of Bear Stearns, AIG and other well-connected,world-class losers, all in the best interest of the American people, of course.

Did you catch this:"Peter Geithner [Timothy's father] oversaw the 'microfinance' programs developed in Indonesia by Ann Dunham-Soetoro, Barack Obama’s mother" ?

Earlier, I reported that NYT identifies Peter Geithner, in Timothy's wedding announcement, as the "program officer in charge of developing countries for the Ford Foundation." This just smells to me like a spook cover. I said so back then, before I knew about the connection between Obama's mother and Geithner's father:

One side note. Geithner graduated from the International School of Bangkok, Thailand. His father appears to be a possible CIA agent...

It makes you wonder how long "they" have been grooming Obama as the "agent of Change" president.

No Salary Cap for Goldman Execs

Imagine my surprise.

Bloomberg has the details:

Executives at Goldman Sachs Group Inc., JPMorgan Chase & Co. and hundreds of financial institutions receiving federal aid aren’t likely to be affected by pay restrictions announced yesterday by President Barack Obama.

The rules, created in response to growing public anger about the record bonuses the financial industry doled out last year, will apply only to top executives at companies that need “exceptional” assistance in the future. The limits aren’t retroactive, meaning firms that have already taken government money won’t be subject to the restrictions unless they have to come back for
more.

Geithner Considering Former Goldman Sachs Vice-Chair for Treasury Undersecretary

Imagine my surprise.

WSJ reports:

Among those said to be under consideration for the key position of Treasury Undersecretary is Suzanne Nora Johnson, a former vice chairman at Goldman Sachs Inc. But Ms. Johnson, who headed Goldman's global investment research division, may not have an easy time being confirmed. Between her ties to Goldman and the fact that she sat on the board of American International Group, Inc. — which was taken over by the government this fall — Ms. Johnson could face an icy reception in Congress.

For Undersecretary for International Affairs Geithner, according to WSJ, is considering Caroline Atkinson. Atkinson was an advisor to Treasury secretaries Robert Rubin and Lawrence Summers, Rubin was, of course, also co-chairman of that Wall Street firm. Ah, let me see, what is its name? Oh yeah, Goldman Sachs.

Just In Time For the Super Bowl: A Football Analogy

Tyler Cowen refers to the proposed "stimulus" package as a "Hail Mary" football pass. I call it a fumble.

The "Hail Mary" reference implies the offensive team is running a play that has a chance. In fact, the offense has dropped the ball and it is bobbing around on the ground with the likes of Goldman Sachs, the Carlyle Group, the AFL-CIO, the Military-Industrial Complex all diving at it. As for the average American, he was illegally knocked out of the play, is laying out of bounds in pain, but the referees in this game turn out to be "men of delusional integrity" such as Paul Volcker and Colin Powell, who didn't see a thing.

Bunning Statement On The Hypocrisy Of Treasury Secretary Timothy Geithner

Well, somebody is awake in the Senate.

Senator Jim Bunning (R-KY) today issued a statement in regards to the hiring of a former Goldman Sachs lobbyist to serve as Chief of Staff to Treasury Secretary Timothy Geithner.

As the Bunning statement notes, this appointment came after Treasury Secretary Geithner imposed new rules restricting contacts with lobbyists at the Treasury Department.

"The hiring of a former Goldman Sachs lobbyist to be Chief of Staff to Treasury Secretary Timothy Geithner sure sends the ‘message of change’ to the American people in the middle of a financial crisis," said Bunning . "On day one, Secretary Geithner confirmed to me why I opposed his nomination to be Treasury Secretary. The appointment of this former Goldman Sachs lobbyist to be Chief of Staff flies in the face of President Obama’s guidelines on ethics. I hope for the sake of the American worker this hypocritical appointment is the only mistake Secretary Geithner makes during his tenure at the Treasury Department."

Geithner's Chief of Staff Was Lobbyist for Goldman Sachs

Imagine my surprise.

The new chief of staff to Treasury Secretary Timothy Geithner was a top lobbyist for Goldman Sachs until last year, reports WSJ.

Mark Patterson left Goldman in April, he was vice president for government relations, and was registered to lobby Congress on legislation including energy tax credits and Indian gaming, according to disclosure forms filed with Congress. Patterson monitored other issues moving through Congress that Goldman never took a position on, including foreclosure-prevention measures and shareholder votes on executive compensation.

Goldman Man Named NY Fed President

Imagine my surprise. The Goldman Sachs octopus has grown another tentacle.

William C. Dudley was named today to serve as President and Chief Executive Officer of the Federal Reserve Bank of New York. His appointment by the Board of Directors of the New York Fed, succeeding Timothy F. Geithner who was sworn in as Secretary of the Treasury yesterday, was approved by the Federal Reserve Board of Governors.

Dudley was executive vice president of the Markets Group at the Federal Reserve Bank of New York. He was also the manager of the System Open Market Account for the Federal Open Market Committee.

Prior to joining the Bank in January 2007, Dudley was a partner and managing director at Goldman, Sachs & Company and served for a decade as the firm’s chief U.S. economist.

“I am honored to have this opportunity to lead an institution of such high quality—its people and their collective commitment to the public good are exemplary,” said Dudley according to a press release issued by the Fed.

Goldman Man Top Contender for NY Fed Spot

Imagine my surprise.

Fed Governor Kevin Warsh, once a leading contender to succeed Timothy Geithner as president of the New York Fed, will remain Chairman Bennanke's chief liaison with the Treasury Depart ment and other regulators, Nypo is reporting. Warsh's withdrawal leaves William Dudley, the New York Fed's top markets official and a former Goldman Sachs economist, as the leading candidate.

Timothy "Soprano" Geithner: Punk Treasury/Goldman Enforcer?

Treasury Secretary nominee Timothy Geithner, who in the past has been slow sending the Treasury tax money owed (It slipped his mind, or something) is now a reported punk enforcer for the Treasury/Goldman Sachs Family. Chris Whalen of Institutional Risk Analytics reports (Via Henry Blodgett)

To me, the apparent conflict of interest between Geithner, Hank Paulson, Robert Rubin and other principals of Goldman Sachs is Topic A for the Senate confirmation hearing. In particular, I'd like to see Paulson finally respond to the numerous FOIA requests from news organization for his telephone and email logs.

In particular, the Senate needs to focus on the reported activities of Geithner on behalf of Goldman Sachs to stop members of the media from reporting on Geithner's apparent rescue of GS by bailing our AIG. I understand that Geithner threatened a member of the NY press corps because of that journalist's reporting on the AIG rescue. I have promised said journalist not to reveal the writer's name for now, but I hope to see that writer in touch with members of the Senate minority early next week.

Goldman Sachs Being Goldman Sachs

To much fanfare, Goldman Sachs cut its bonus pool nearly in half. Tough times and all. Now, it turns out that Goldman found another way to shovel money to bonus babies. Goldman has eased rules on stock grants to allow employees to cash out faster. Reports WSJ:

This week, some of the roughly 30,000 employees at Goldman got a letter telling them that the Wall Street firm has changed how it doles out certain stock grants, including by easing the rules on when restricted shares may be sold.

Translation: Cash-strapped employees now can use their Goldman stock like an automated teller machine.

The Robert Rubin Wing of Goldman Sachs is Doing Well Under President-elect Obama

The Robert Rubin Wing of Goldman Sachs (Citigroup) did very well for itself under GW and Treasury Secretary Paulson.

It appears that the trend will continue under Obama. Dean Baker spots a very interesting tax break as part of Obama's "stimulus" package (my emphasis):

The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal. According to theWashington Post, the proposal will allow companies to write off current losses against taxes paid over the last 4-5 years, not just 2 years,as in current law.

There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against. But, really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007.

Baker then asks the big question:

Did the political connections of Robert Rubin and others in the financial industry have anything to do with the decision of Obama's economic team to be so generous to them? I don't have an answer to that question, but the media should be asking it.

How tight are Obama and Rubin? Very tight.

Former Goldman Sachs/Merrill Man, What Recession?

Investment banker Peter Kraus, formerly of both Merrill Lynch and Goldman Sachs, has just paid $37 million for a Park Avenue apartment.

Here WSJ reports on Kraus' move to Mother Merrill:

[Because of the Merrill Lynch takeover by Bank America/ Government bailout]former Goldmanite Peter Kraus is getting his $25 million bonus, according to people familiar with the situation, though he has been at Merrill only three months. Kraus left Merrill Friday, shortly after after his rich exit package was triggered by the Merrill sale. In a year when some bankers are being paid with junk, Kraus’s exit payment is a stunner that represents about 0.1% of Bank of America’s $25 billion capital injection from the U.S. government.

New York Magazine has pics, here, of what an American Oligarch gets for $37 million. It's baronial, yet cozy, said the Brown, Harris Stevens real estate brochure hustling the place. Kinda reminds you of the Hooters' slogan, "Delightfully tacky, yet unrefined."

Obama to Nominate Goldman Sachs Man for CFTC

The Goldman octopus has captured control of another regulatory position.

Obama is expected to name Gary Gensler as the next chairman of the Commodity Futures Trading Commission, according to WSJ.

Gensler, a former assistant secretary for financial markets at the U.S. Treasury Department, used to work as a partner at Goldman Sachs.

Goldman Sachs Advising Short Positions on California, Wisconsin and New Jersey

Goldman Sachs, one of the top five U.S. municipal bond underwriters, is angering politicians and public-finance officials in New Jersey, Wisconsin, California and Florida by recommending that investors purchase credit-default swaps to bet against 11 states’ debt, according to Bloomberg.

In the three months since Goldman recommended “shorting municipal credit,” the value of the Markit MCDX index of the derivatives’ price more than tripled, to as high as 278.33 basis points from 87.75. A basis point on a credit-default swap protecting $10million of debt for five years is equivalent to $1,000 annually.

It’s “disturbing” to advise investors to bet against the financial health of a state whose bonds Goldman helps sell,New Jersey Assemblyman Gary S. Schaer, a Democrat who chairs the Financial Institutions and Insurance Committee, said last week in a letter to Chief Executive Officer Lloyd C. Blankfein.

“New Jersey needs to maximize its presence in the credit markets, not to see its presence undermined.” Schaer wrote.

Short sellers borrow securities to sell, betting their value will decrease. Credit-default swaps, conceived to protect bondholders against default, pay a buyer face value in exchange for the underlying securities or the cash equivalent should an issuer fail to adhere to debt agreements. They increase in value as perceptions of credit quality deteriorate.

As part of a September presentation to institutional investors on “Best Long and Short Risk Strategies,” Goldman recommended buying credit-default swaps on “a basket of liquid State General Obligation credits with current and worsening fiscal outlooks,” including California, Florida, Nevada, Ohio, Wisconsin and Michigan.

The firm also recommended the derivatives on states with “significant unfunded pension” and other retiree obligations, including Illinois, Connecticut, Hawaii, New Jersey, Massachusetts and Nevada.

A Stronger SEC Is Not the Answer

It's starting. The SEC's abysmal failure, at detecting the $50 billion Bernard Madoff Ponzi scheme, is drawing out critics who are calling for new stronger leadership at the SEC.

"The agency can't help but look bad," said Barbara Roper, director of investor protection at the Consumer Federation of America. "It does raise questions ... about the quality of the enforcement division generally. It's obviously something that the new (Obama) administration has to get to the bottom of."

"A few days ago we suggested that investors monitor potential changes at the SEC. We continue to believe that this would be important to the long-term health of the market," blogs Jeffrey A. Miller PhD and CEO of NewArc Investment.

What these critics don't understand is that, while the SEC leadership under Christopher Cox has been laughable, it is the nature of the SEC itself that is the problem. It is a government agency that, like all governmant agencies, reacts to political pressures. That is why they announced their absurd financial crisis fighting changes in short-sale rules that even Cox later admitted was only a publicity stunt.

It is why they are going after Mark Cuban on bizarre insider trading charges.

So far the SEC's only defense to missing the $50 billion fraud which Boston money manager and fraud investigator, Harry Markopolos, attempted to bring to their attention for 9 years is that they get lots of such tips.

That's the point, if you are average Joe, or even money manger, fraud investigator Harry Markopolos, the SEC is not going to respond to you. They respond to power politics. They are not there to protect average investors. They are there to design new rules that give the edge to politically connected insiders. And it won't change with new leadership. Ha!

Obama's man in charge of finding a new SEC chairman is Gary Gensler. Gensler spent 18 years at Goldman Sachs and did two stints at the Treasury. Nuff said.

If anything, Obama will do nothing but replace an incompetent political hack, with a competent political hack who will make the game even more rigged for the Goldman Sachs' push to control the world.

The SEC needs to be abolished. They are not protecting investors, they are protecting Goldman Sachs from competition.

The private sector can take care of policing the investment world. Indeed, the Madoff ponzi scheme has taught investors, all investors, valuable lessons: 1. The SEC won't catch the bad guys. 2. Some in the private sector will figure out the scam (at least enough of it to warn you to stay away) and 3. If you are not a professional, you need to check out investment opportunities with at least one or two outside professionals who have no conflicts of interest and can do an independent evaluation for you.

For the record, here's a list of some in the private sector who smelled enough of scam to stay away from Bernard Madoff and warn others that they should stay away:

Harry Markopolos

Aksia LLC

MAR/Hedge Magazine

Barron's

Doug Kass

Societe Generale

Salomon Konig

The Obama Mantra: "Things Are Going To Get Worse"

The influence of Rockefeller operative Paul Volcker on President-elect Barack Obama is coming through loud and clear.

Twice during the opening moments of his interview Sunday on NBC's "Meet the Press." Barack Obama said the economic situation "is going to get worse before it gets better."

"It's going to be a tough period," Volcker said in a speech at the Urban Land Institute in late October. And Obama just named him to head his an economc advisory team.

What will it mean if Volcker has Obama's ear?

It likely will mean that Ben Bernanke will not be renamed Fed chairman when his term runs out in 2010, if he lasts that long. Volcker has been a long-time behind the scenes critic of Bernanke.

It will also mean more regulation of the financial industry, including hedge funds. Look for more power to shift to money center banks. Any changes will benefit Citi, Goldman Sachs, JPMorgan Chase and the like. Volcker has this absurd notion that the mortgage crisis was caused because there wasn't enough regulation. Here's the LA Times on his views:

Volcker feels that tremendous changes in the financial system have eclipsed government regulators, allowing excesses to go unchecked and subjecting the economy to ever greater shocks. Over time, the U.S. has moved from a system of highly regulated banks that funded the economy to a system of highly engineered financial markets that operated outside the scope of regulators.

For the true facts of the Housing Crisis be sure to read Larry White's column, which I first linked to below.

Volcker is correct in that financial engineering also played a role in the crisis, but as I argue here, it is absurd to think that government has the all knowing crystal ball that will direct the economy in the right direction.

Volcker and Obama, though, are going to use the mantra, "Things are going to get worse," to add more regulation and, thus, in a sense they are correct. Things are going to get worse by the new burdens that more financial regulation will create.

It will be crony capitalism at its worst, championed as though it was designed by wise men of high integrity. Volcker's integrity is probably self-delusional, Obama is just slick. What a team.

An Attack from a Soldier in the "Save the Water" Army and An Economist Responds

I'm in San Francisco and I'm staying at the downtown Hilton.

Immediately after posting my story discussing the speculation about a gold shortage, I decided to head down to the Hilton gym. It's a pretty decent workout facility and also has a good steam room. I took my razor with me because I like to shave right after coming out of the steam room.

After a quick workout and steam, I headed to the sink area in the men's locker room to shave. The faucets were those complicated types where it is difficult to tell hot from cold, and full power from low power. So I lather up, start shaving, and I keep the water running. After a couple of strokes, I would put the razor under the water to wash it off.

A couple sinks down from me is a short guy, who says to me in a mousy voice, "Excuse me, are you going to keep that water running."

I am not Italian, but I can pass. Friends tell me I have a "Are you talkn' to me" look that could have gotten me a roll on the Sopranos, when when someone is not minding his own business and irritating me. I may have had that look on when I responded to him, "What?" My New York accent probably filled more of the picture for him.

The mousy voice replied, "You are wasting a lot of water."

My reply, "I am not wasting water. I am using it. If there was a shortage of water, the Hilton would start charging for it. I would be more than happy to discuss this in detail with you."

Now at this point I'm thinking of where I can get a pen and paper to draw some supply and demand curves. The guy meanwhile quickly heads back to his locker, gets dressed and bolts.

While all this was going on, I spied a well groomed man, good hair cut etc., taking all this in from the locker area. He's chuckling to himself. I figure him for an investment banker, maybe even Goldman Sachs. I know he gets what I'm talking about. Hell, if he's from Goldman, he more than gets it. Their philosophy is something like, if it's not nailed down it is yours.

But, is this what it is going to be like during the Obama Era? Little pip squeaks are going to be emboldened to harass those that aren't politically correct and actually understand basic economics? I can handle these Obama punks, but I pray for those of you who don't look like you could get a roll as a made man in one of the Godfather films.

Unbelievable: A New Member Coming To The Goldman/High Powered Government Inner Circle Elite

Gerald Corrigan just entered the Goldman Sachs/High powered government elite inner circle revolving door. The former head of the Federal Reserve Bank of New York is being tapped by Goldman Sachs as chairman of its newly created bank holding company, FT is reporting.

For the full story of Goldman trying to run the world, see here.

Dinner for Two, Two American Oligarchs

Goldman Sachs and Morgan Stanley have been bitter rivals. But since the financial crisis began, Morgan CEO John Mack, and Goldman CEO Lloyd Blankfein have become "best friends forever…", says CNBC.

CNBC is reporting that the two have been dining together regularly, including this last Monday.

I'll let Adam Smith take it from here:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public...

What Exactly Did Robert Rubin Do To Earn $115 Million?

WSJ is asking:

Was Mr. Rubin to be primarily a member of the board overseeing management, or a part of the management reporting to the board? Things became even murkier when Messrs. Weill and Reed described Mr. Rubin's job: "Bob will participate in strategic managerial and operational matters of the Company, but will have no line responsibilities."

As a great man of finance, Mr. Rubin would be paid CEO money -- a total of $115 million since 1999, not including stock options -- but without having to run a business or be accountable for the results. For years, journalists tried to figure out exactly what Mr. Rubin's job was at Citigroup, and perhaps even his fellow Citi directors weren't entirely sure.

Then WSJ reaches the only conclusion possible. He was the fixer. As former Treasury Secretary and former head of Goldman Sachs, he's the man with the insider hook-up:

Mr. Rubin was reportedly critical to securing the latest federal bailout of Citi -- $20 billion in preferred shares plus taxpayers taking on most of the risk in a $306 billion portfolio of dodgy assets. This is on top of the $25 billion in Citi preferred shares that taxpayers bought in October. Giving Mr. Rubin the benefit of the doubt that he is the fixer who delivered the federal cash, this could make his paycheck appear more reasonable to many shareholders.

Former Treasury Secretary and former Goldman CEO Rubin cut a deal with current Treasury Secretary and former Goldman Sachs CEO Henry Paulson for billions in taxpayer money and guarantees. Cute, eh?

Oh, to be the head of Goldman Sachs and a Treasury Secretary, this is a club you want to get into.

Citi wasn't stupid paying Rubin what they paid him. That's how insiders operate. Many, many years ago I worked for a money manager of sorts, who had this high powered white shoe law firm on his payroll. Month after month, he sent this firm a pretty big check. I never saw any of them and they certainly weren't doing any work for the firm. At the time, I didn't understand it. Why was my man sending this firm this huge check, which it appeared he had been doing for years? Then one day a knock came on the door and my man appeared to be in, shall we say, a little trouble. My man called the law firm he had been sending checks to for years, and they came over and sat down with the people who knocked on the door, all like true gentlemen, the white shoe lawyers all wore suspenders and horn rimmed glasses, and they all discussed this "misunderstanding" .

Something that usually doesn't go away very easily, completely went away. The door knockers went to knock on other doors of those who didn't have a downtown law firm on retainer.

That's what Rubin is there for at Citi, so that if a problem arises, he can sit down like a gentlemen, solve sticky problems and rape taxpayers when necessary.

Goldman Faces Loss of $2 Billion for Quarter

Goldman Sachs Group is likely to report a net loss of as much as $2 billion for its quarter ended Nov. 28, according to industry insiders, says WSJ.

Can you imagine what the losses would have been like if Hank Paulson wasn't shoveling money to them every way possible?

Goldman Sachs Starts the Avalanche That Will Crowd Out Non-Connected Borrowers

Goldman Sachs yesterday became the first US bank to issue debt backed by the Federal Deposit Insurance Corp under yet another new Paulson/Geithner government plan to shovel money to the politically connected. Goldman raised $5 billion.

Under this program, money raised is guaranteed by the FDIC, which makes it as good as a Treasury raise. Among others, JPMorgan and Morgan Stanley, GE Capital are all expected to follow Goldman.

When all is said and done. $300 billion is expected to be raised by this program. That's $300 billion that won't be available to non-bank, non-privileged elite.

CITIGROUP BAILOUT: It's Up To $306 Billion in Guarantees Plus Equity Infusion

The United States government will guarantee up to $306 billion of Citigroup assets, as part of a major bailout of Citi.

In addition, Citi will receive a capital injection of $20 billion. As part of the capital injection, the U.S. government will receive warrants exercisable at $10.61 on 254 million shares. Given the stock closed Friday at $3.77, this is a non-dilutive deal on a per share price basis for Citi shareholders.

THIS IS THE FIRST DEAL DONE BY THE GOVERNMENT WHERE SHAREHOLDERS HAVE NOT BEEN FORCED TO TAKE HUGE HITS ON THEIR STOCK POSITIONS. Freddie and Fannie shareholders are likely to lose everything. Lehman Brothers is in bankruptcy and Bear Stearns shareholders received less than 50% of the closing price on the last day Bear Stearns traded before the government rescue. In this deal, if the warrants are exercised, the government will pay more than 280% above the closing price on Friday.

It pays to be the Robert Rubin wing of Goldman Sachs.

UPDATE: Unlike Freddie, Fannie, Bear and Lehman, no one at Citi in senior management will lose their jobs. Bobby R. has their back.

It's the Robert Rubin Wing Of Goldman Sachs That Will Be In Charge of Obama Economic Policy

So says WSJ:

The new economic team emerges from the Democratic Party's moderate flank, with Mr. Rubin as the common denominator. Mr. Summers was Mr. Rubin's longtime deputy at Treasury and then succeeded Mr. Rubin as Treasury secretary. Mr. Geithner was a senior aide at Treasury during this period.

Peter Orszag, who will be Mr. Obama's budget director, was the first director of the Hamilton Project, a program co-founded by Mr. Rubin at the Brookings Institution, a think tank...

Rubin was Vice Chairman and Co-Chief Operating Officer from 1987 to 1990. From the end of 1990 to 1992, Rubin served as Co-Chairman and Co-Senior Partner along with Stephen Friedman. He then served as the 70th United States Secretary of the Treasury during both the first and second Clinton administrations.

He now is Director and Senior Counselor of Citigroup where he draws an annual salary of $17 million.

The supermerger between Travelers Group and Citicorp was facilitated by the repeal of the Glass-Steagall Act (Gramm-Leach-Bliley Act). This legislation was passed under the Clinton administration, days before Rubin's resignation. Some believe that Rubin's $17 million Citi salary is quid quo pro for his role in the repeal of Glass-Stegall.

Citi Execs Meeting With Government Officials

The meetings started Friday on how to stabilize Citi.

Since this is the Robert Rubin wing of Goldman Sachs expect a new twist to the bailout format: Shareholders will be protected.

Tim Geither In Profile

According to various news sources, Tim Geithner will be nominated as Treasury Secretary by Barack Obama. An official announcement is expected Monday.

Judging by his actions it does not appear Giethner believes in free markets. For him, the government needs to stand by with buckets and buckets of money.

According to reports, in 1997 he was instrumental in pushing then Treasury Secretary Rubin to OK a bailout of South Korea.

Geithner also was reportedly behind the $29 billion guarantee against losses that the Fed made to JP Morgan when JPM purchased Bear Stearns. The guarantees against losses, it should be noted was in addition to the fact that JPM stole Bear Stearns at a huge discount from its liquidation value.

His interventionist credentials are pretty well established on Wall Street. Here's Larry Kudlow's thinking on Geithner ans the next tranche of the $700 Billion Paulson boondoggle:

As for the TARP bailout story, it is generally believed that Geithner is a strong interventionist. And so we can expect him to move toward raising the second $350 billion tranche of the originally authorized $700 billion package by Congress

.

Geithner graduated from Dartmouth College with a bachelor’s degree in government and Asian studies in 1983 and from the Johns Hopkins School of Advanced International Studies with a master’s in International Economics and East Asian Studies in 1985, according to his official bio on the New York Fed site.

He joined the Treasury in 1988 and worked in three administrations, serving as Under Secretary of the Treasury for International Affairs from 1999 to 2001 under Treasury Secretaries Robert Rubin and Larry Summers.

He also worked for Kissinger Associates for three years.

He become New York Fed president in 2003. In that capacity, he worked as the vice chairman and a permanent member of the Federal Open Market Committee, the group responsible for formulating the nation's monetary policy.

One side note. Geithner graduated from the International School of Bangkok, Thailand. His father appears to be a possible CIA agent and is listed by the New York Times as the "program officer in charge of developing countries for the Ford Foundation."

Geithner falls under the Robert Rubin wing of Goldman Sachs influence, as he worked for Rubin when Rubin was Treasury Secretary.Geithner also serves as chairman of the G-10’s Committee on Payment and Settlement Systems of the Bank for International Settlements. He is a member of the Council on Foreign Relations and the Group of Thirty.

But it is his interventionist bent that could prove we have a major inflationist at Treasury. One Obama confident relates a recent conversation between an associate and a Fed official, in which the latter complained, "Christ, Geithner wants to save everybody."

More money hand outs to Wall Street, no wonder the market jumped 500 points on news of the Geithner selection.

The Transfer of Risk to Idiot Shareholders...and Then To Taxpayers

Michael Lewis, author of Liar's Poker, explains (ViaMP):

John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.)

He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders.

But it made fantastic sense for the investment bankers. From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government . “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

Obviously, the government shouldn't be in the game. The shareholders at Goldman Sachs and Morgan Stanley should have been allowed to fail just like Bear Stearns and Lehman Brothers shareholders. Burned shareholers wouldn't be investing in investment banks again any time soon, and new financially grounded partnerships would rise from the ashes.

Hank Paulson Must Think Water Freezes at 60 Degrees

The latest news from our Treasury Secretary is that the consumer credit markets are frozen. The only problem is that Hank Paulson's idea of frozen is different than yours and mine. This guy is probably the only person lookng, in August, for the ice skating rink in New York's Central Park.

Robert Higgs explains:

Notwithstanding the many developments on the bailout front during the past six weeks, the New York Times, like other media outlets, continues to quote Wall Street insiders who report, as Alex Roever of JPMorgan Chase did recently: "You have a market that is frozen." What planet do these guys live on? It certainly is not the same one to which the Federal Reserve's data apply. I’ve been singing this song for many weeks, but I’m going to keep singing it until somebody in the news media wakes up and realizes that these "frozen credit market" tales are pure hooey. Look at the data, for crissake. By now we should all be ready to move beyond hysteria, get a grip on reality, and begin thinking about how to repeal everything the government has done during the past six weeks...

Memo to NYT: check the data on consumer loans published by the Federal Reserve System. The latest report, dated November 7, says: "Consumer credit increased at an annual rate of 1-1/4 percent in the third quarter. Revolving credit increased at an annual rate of 2-1/2 percent, and nonrevolving credit increased at an annual rate of 1/2 percent. In September, consumer credit increased at an annual rate of 3-1/4 percent." Would you describe this report as indicating a "frozen" credit market? Total consumer credit outstanding in September, $2,588 billion, exceeded the average amount outstanding in any year from 2003 to 2007, the period of the credit bubble.

My gut tells me that in Henry's mind unfreezing this non-frozen market means shipping more billions to the Robert Rubin wing of Goldman Sachs, i.e. Citigroup.

Lazard Rising

Goldman Sachs may have company in running government as a private fiefdom. It appears that former Lazard Freres employees are edging in under the Obama regime.

The latest signal comes from Obama in his announcement yesterday of his transition team. He has put Josh Gotbaum, a Clinton administration veteran and long-time investment banker at Lazard Frere, in charge of reviewing the Treasury.

Lazard has been cutting crony capitalism deals even before Paulson got out of diapers. Their last peak in influence came when Felix "The Fixer" Rohatyn "saved New York City" and ruled the roost at Lazard.

Goldman Chief (With A Straight Face) Says Turmoil Could Be A Boon

FT reports:

The current turmoil in the capital markets is testing Goldman Sachs, but it is also creating historical opportunities for growth, says the bank’s chief executive, Lloyd Blankfein.

Speaking at Merrill Lynch’s annual banking and financial services conference, Mr Blankfein conceded that his firm was not immune from the current downdraft in the markets....

[But] “The most important opportunities in Goldman Sachs’ history came in times of stress,” he said. “Our culture has given us the wherewithal to embrace change.”

Embrace change? Especially when your man, Paulson, is at the Treasury making the change. FT again:

In the past 12 months, as the competitive landscape on Wall Street changed, Mr Blankfein said Goldman Sachs had gained more than 100 new clients that had either been involved in billion-dollar deals or raised more than $500m in funds.

No kidding? Paulson blows away Goldman's competitors, Bear Stearns and Lehman Brothers, and Goldman picks up 100 new clients. Helluva a plan.

The Obama Press Conference: John Maynard Keynes and the Oligarchs Are Alive and Well

John Maynard Keynes and Oligarchs appear to be alive, well and ready for the Obama Administration.

In Barack Obama's first press conference, since winning the presidential election, Obama sounded like a typical big spending Democrat. In opening remarks, he called for a "rescue package" for the middle class, unemployment extensions and other fiscal stimulus. He also said that something had to be done for the automobile industry since it is "the backbone of the country." Somewhere, John Maynard Keynes and Marx are blushing.

Obama did not address how any of these proposals would be paid for.

I took special note of some of the members of his "economic transition advisory team", most of whom stood behind him as he promised to do vasts sums more spending than Imelda Marcos ever did during a good shoe shopping trip to New York City. It was a politically correct mixed crowd that included many women, a Latino and even another African-American, interspersed with oligarchs. Just what you need to fight a downturn in the economy, a politically correct group and oligarchs.

The oligarchs we were told included Warren Buffett (who, golly shucks, usually just represents himself) and Robert Rubin (former Goldman Sachs CEO, now running the Rubin/Citigroup wing of Goldman),but both failed to appear in chorus line fashion behind Obama for the press conference, as did the politically correct and other oligarchs and oligarch representatives.

At the press conference chorus line, the towering Paul Volcker was there, who has been a career long Rockefeller operative. The tiny Robert Reich was there, who was most likely invited as a reward for his regular bashing, on his blog, of Hillary, during the primaries.

An oligarch stepped a bit out of the shadows for the chorus line, Chicago-based Penny Pritzker, who was an early Obama backer, was there. Pritzker served as Obama's National Finance Chair. She and her husband hosted a $28,500 per plate fundraiser for Obama's campaign in Chicago with Warren Buffett and his wife, and Obama advisor Valerie Jarrett. She is also a member of the Council on Foreign Relations. She is 135th richest person on the Forbes 400 list of "America's wealthiest," with an estimated net worth of $2.8 billion US. If one was forced to come up with one name that Obama answers to, Penny Pritzker would not be a bad choice. They are on each others cell phone speed dials, guaranteed.

The Chicago Political Machine was well represented by Mayor Richard Daley's brother William, who also is a member of the executive committee at JP Morgan Chase.

Google's Chairman Eric Schmidt was part of the chorus line.

Much to my surprise, Los Angeles Mayor Antonio Villaraigosa was the token Latino. Readers will recall I had a Q & non-A encounter with the mayor, only a few weeks back.

In short, no one in this group strikes me as the type that understands Say's Law, never mind the business cycle. They all are very good, though, at protecting the very powerful interests that they are aligned with, nothing else. The oligarchs are sleeping very well tonight.