Monday, July 27, 2009

Those Crazy Conspiracist libertarians.....errr, excuse me, Democrat & Republican House Members...Expose Goldman Sachs and Demand Answers....

[I hope they don't hold their breaths waiting for a rational (or any) explanation for Goldman Sachs' special little singular arrangement.]

Dear Chairman Bernanke:

In the fall, Goldman Sachs secured access to government funding by converting from an investment bank into an ordinary bank. Despite this shift, the CFO of the company, David Viniar, said last week that the company is continuing to operate as if it were still a high-risk investment bank: "Our model really never changed," he noted in a quote to Bloomberg. "We've said very consistently that our business model remained the same."

This statement seems accurate. Earlier this year, the Federal Reserve granted a temporary exemption to Goldman Sachs from standard bank holding company Market Risk Rules, allowing the company to continue operating as if it were an investment bank. The company and its employees have taken full advantage of its new government subsidies, and the retained ability to bet big. In its most recent quarter, Goldman Sachs earned high profits of $2.7 billion on revenues of $13.76 billion, with 78 percent of this revenue derived from high-risk trading and principal investments. It paid out much of this revenue in compensation, setting aside a record $772,858 for each employee at an annualized rate. The company's own measurement of risk, its Value-at-Risk model, recently showed potential trading losses at $245 million a day, up from $184 million last May.

Despite its exemption from bank holding company regulations, Goldman Sachs has access to taxpayer subsidies, including FDIC-backed bonds, TARP money (since repaid), counterparty payments funneled through AIG, and an implicit backstop from the taxpayer that allowed a public equity offering in a queasy market. The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money. This is the very definition of "heads we win, tails the taxpayers lose."

It is worth noting that there sometimes might be good reasons to grant temporary regulatory exemptions, considering that companies cannot instantly change their business model. Still, given Goldman Sachs's last quarter results and public statements that it is not changing its business model, we are worried that the company is using its regulatory freedom to evade capital requirements and take outsized risks with taxpayers on the hook for losses.

With this in mind, our questions are as follows:

1) In the letter granting a regulatory exemption to Goldman Sachs, you stated that the SEC-approved VaR models it is now using are sufficiently conservative for the transition period to bank holding company. Please justify this statement.

2) If Goldman Sachs were required to adhere to standard Market Risk Rules imposed by the Federal Reserve on ordinary bank holding companies, how would its capital requirements differ from the current regulatory regime?

3) What is the difference in exposure to the taxpayer between these two regulatory regimes?

4) What is the difference in total risk to the portfolio between these two regulatory regimes?

5) Goldman Sachs stated that "As of June 26, 2009, total capital was $254.05 billion, consisting of $62.81 billion in total shareholders' equity (common shareholders' equity of $55.86 billion and preferred stock of $6.96 billion) and $191.24 billion in unsecured long-term borrowings." As a percentage of capital, that's a lot of long-term unsecured debt. Is any of this coming from the Government? In this last quarter, how much capital has Goldman Sachs received from the Federal Reserve and other government facilities such as FDIC-guaranteed debt, either directly or indirectly?

6) Many risk-management experts, most notably best-selling author Nassim Taleb, note that VaR models can dramatically understate risk. What is your overall view of Taleb's argument, and of the utility of Value-at-Risk models as regulatory tools?

As we work through legislative conversations regarding systemic risk, these questions are taking on increased significance. We appreciate your time and the efforts you are making to explain the actions of the Federal Reserve to Congress, and to taxpayers.


Alan Grayson (D-Fla.)

Brad Miller (D-N.C.)

Dan Lipinski (D-Ill.)

Elijah Cummings (D-Md.)

Ron Paul (R-Texas)

Tom Perriello (D-Va.)

Maxine Waters (D-Calif.)

Jackie Speier (D-Calif.)

Maurice Hinchey (D-N.Y.)

Walter Jones (R-N.C.)


Less than 4 years ago....

Bernanke: There's No Housing Bubble to Go Bust
Fed Nominee Has Said 'Cooling' Won't Hurt

By Nell Henderson - Washington Post Staff Writer

Thursday, October 27, 2005

"Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households....

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump -- posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31.

Bernanke's testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown....

Bernanke believes "the Fed's job is to protect the economy, not to protect individual asset prices," said William Dudley, chief economist for Goldman Sachs U.S. Economics Research.

That view mirrors Greenspan's. He and Bernanke have both said it is unrealistic to expect the Fed to identify a bubble in stock or real estate prices as it is inflating, or to be able to pop it without hurting the economy. Instead, the Fed should stand ready to mop up the economic aftermath of a bubble..."

...and wipe the derriere of Goldman Sachs with Federal Reserve Notes charged to the American taxpayer.


Anonymous said...

The next big bust is the credit card industry. If we the citizens dont push for a Consumer Protection Agency forcing credit card companies to make their contracts l to 2 pages, instead of 33 of fine print and traps for can bet we the public will continue to be screwed, royally.

The TARP funds weres supposed to go to our banks so they could offer more loans for cars, and stop the foreclosures. Instead, the bankers used it like pac men to gobble up other banks, and delivered trillions overseas to back up the foreign markets. All those toxic debts were bundled and sold to other countries, to avoid a international banking crisis, the FED, Goldman, Bush/cheney saw their last grab at the american treasury. I am blaming Obama for putting the Goldman Sacks thieves in his cabinent after they destroyed the system. How can those who broke the banks, fix the banks.

I agree with Ron Paul, get rid of the Federal Reserve and create a Consumer Protection Agency that will force these banksters to stop robbing the people with sinister, traps hidden in their contracts.

Anonymous said...

"The TARP funds weres supposed to go to our banks so they could offer more loans for cars, and stop the foreclosures."

This is not correct. They may have sold it to the public like this, but that was never the intent. What we saw, for a brief period, was actual deflation (as opposed to a drop in CPI, which is *not* deflation). This deflation is what sparked the panic in the political and banker ranks (redundant... i know).

TARP was a necessary step in order to maintain the status quo. However, it was also an oppoortunity to fix the problems with the status quo, such as the fact that deflation is considered a bad thing. We failed in that opportunity and the banks are better off for it.

Deflation is a natural part of the business cycle. The fact that it cannot possibly occur in order for our system to function sheds light on how flawed our system is. The Fed and the Congress will do whatever it takes to prevent deflation from occuring regardless of Constitutional authority.

In short, the rich will get richer, and the poor will get poorer. That's the system we've set up for ourselves. The TARP bill ensures that we'll continue down that path.

Democrats and Republicans are the same in this regard. They know that as long as the wealth is centralized, their power structure will remain in place. For all of the talk that the Democrats spew on the wage gap, there is no way that anyone wants to actually fix the problem. They just want to control it.

Libertarian in Colorado