Rolfe Winkler
Option ARMageddon
Wherein Gary Cohn rewrites history
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Bethany McLean pens a good article on Goldman for Vanity Fair. She gets the internal view from CEO Lloyd Blankfein and COO Gary Cohn on why Goldman’s really better than the competition and why they didn’t really need the government’s help. She’s properly critical of this. One reader passes on this telling paragraph:
Goldman’s press releases about its spectacular earnings never mention government assistance of any kind. In June, the firm paid back the $10 billion in tarp funds it had taken. Taxpayers got a 23 percent return. As for the $21.6 billion in funds guaranteed by the F.D.I.C. that Goldman still has outstanding, a recent Congressional report estimates that it will save Goldman $2.4 billion over the life of the debt. But Cohn argues that that is actually costing the firm, in fees to the F.D.I.C. and interest, because it is excess liquidity. (When I repeat that to another Wall Streeter, he closes his eyes and says, “Please tell me Gary didn’t say that.”) Cohn also says that issuing the F.D.I.C. debt was “the single biggest mistake we made.”
Including commercial paper, Goldman borrowed as much as $28 billion in FDIC guaranteed debt. Lest people forget how desperate they were for the funding, Joe Hagan’s New York Mag piece noted they were the first to borrow using the program.
Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill. “Goldman was desperate for it,” says a prominent Goldman alumnus. “Everybody knows it. Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.”
As the memory of Fall ’08 recedes, the reality that all of Wall Street would have collapsed were it not for bailouts and guarantees is slowly being forgotten. But at least folks are still angry about it. And the mainstream media is doing a decent job keeping the heat on.
There’s much more in the piece.
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Agree with just about everything except that I do think that as time passes the momentum for reform and better oversight of financial markets is decreasing. There are occasional initiatives, but nothing to date that promises to prevent another Lehman.Joseph TibmanAuthor, The Murder of Lehman Brothers, An Insider’s Look at the Global Meltdownlehmanbook.blogspot.comjospehtib man@live.com
For Goldman’s sake, I hope they deeply appreciate the exent that their reputation and brand are continuing to disintegrate as a result of poor ethics.The economy definitely could use the ‘good Goldman’ — the smart and saavy bank that sees things well in advance of others and moves capital where it ought to be.The market does not on the other hand need the ‘bad Goldman’ — a bank that profits by putting their counterparties on the losing end of complex transactions that they do not understand — or a bank that profits by such activities as high frequency trading used to profit on the price movements created by the large investors in the market.The ‘bad Goldman’ is ruining their franchise. How can one attract the world’s smartest people to work for one of the world’s most hated companies? How can counterparties feel safe doing business with a company that has left so many holding the bag?If Goldman wants to do what’s best for Goldman, they will cut out the ‘bad Goldman’ even at the expense of some present profits for the sake of rebuilding trust and preserving their franchise. A reputation for integrity is terribly important in their business and their kind of company cannot survive long-term without it.
Goldman is too smart to be wasting their time with zero-sum games (HFT, most derivatives, short-term trading). That is like aspiring to be kudzu. In the short term that’s a good strategy but after a while everything is a mess and even the kudzu can’t find much to climb since it doesn’t work very well to climb other kudzu. Better to aspire to be oak trees, by focusing on the sustainable businesses that provide services people need.