Written by Biloxi
I am revising again the rise of profits of Goldman Sachs from the Wall Street collapse. We hear some much criticism against Treasury Secretary Tim Geithner from the media, economists, lawmakers, critics like former New York Eliot Spitzer and so on that want Geithner to resign. In addition, there are rumors that CEO Jamie Dimon of JP Morgan Chase [the bank that took bailout money] may replace Geithner. What the media is ignoring on how Goldman Sachs, an investment firm, became a bank holding company with the help of Hank Paulson, the former CEO of Goldman, and other Goldman affliates that either work in the White House or have ties to the Bush Administration that became the new smartest men in the room.
What you may not know was that Goldman had more subprime debt outstanding than companies such as Credit Suisse, which has almost $10 billion; Citigroup, with $6.8 billion; or JPMorgan Chase, with $7.8 billion. Paulson's tenure at Goldman was from May 1999 through June 2006. Goldman paid Paulson was $38.5 million for 2005. We still don't know how much subprime mortgages contributed to profits at Goldman at the time Paulson was CEO.
Let's retrace back after Lehman Brothers' collapse:
One week later after Lehman's bankruptcy, Goldman and Morgan Stanley were designated bank holding companies. Read Federal Reserve Bank statement on September 21, 2008.Former senior Lehman exec said: “That was our idea three months ago, and they wouldn’t let us do it,” said a former senior Lehman executive who requested anonymity because he was not authorized to comment publicly. “But when Goldman got in trouble, they did it right away. No one could believe it.”
On September 16, 2008, Federal Reserve Bank approved of 85 billion for a bailout for failing company AIG in exchange for the issuance of a stock warrant to the Federal Reserve Bank for 79.9% of the equity of AIG. According to Federal Reserve board minutes, [click here], that Goldman and Morgan Stanley submitted applications to be bank holding companies on September 19,2008.
Geithner was not in that meeting. Geithner was the New York Fed President at the time.
Goldman became the first bank in the nation on November 25, 2008 to benefit from the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program (TLGP), issuing $5 billion in government-secured debt at 3.367%, substantially less than the market rate facing banks which issued unsecured debt.
But what about AIG doling out bonuses after the company received a 85 billion dollar bailout? Well, Fed chair Ben Bernanke warned Senator Kerry in a letter that the Fed did not monitor bonuses by AIG because FED has limited rights:
The Fed had "limited rights" in its oversight of AIG, Bernanke wrote Sen. John Kerry, D-Mass., and was "not in a position to review or approve all of the specific compensation or other expenditures" at the insurance company.In the letter, sent last Tuesday, Bernanke noted that the Fed has the power to "monitor the financial condition of AIG and to restrict certain major decisions that might reduce the ability of AIG to repay its loan from the Federal Reserve."
But he cautioned that the Fed's oversight role was limited, and did not cover compensation or "other expenditures related to the ongoing business operations of AIG and its subsidiaries." Read more from Justice League blog.
In other words, there wasn't anything in place for the FED to oversee and have a role to have a say in the compensation pays and other expenditures of AIG.
Finally, It is safe to say that Paulson reap the rewards from his former employer through:
1.Being a counterparty for payments for AIG
In September 2008, Barclays plc acquired Lehman Brothers. And Barclays received billions of dollars from its insurance arrangements with AIG. And AIG disclosed a list of major recipients last week of collateral postings and payments under credit default swaps, guaranteed investment plans, and securities lending agreements. Two of those recipients were Barclays and Goldman Sachs.
2. Goldman Sachs being a bank holding company
Goldman Sachs and Morgan Stanley, the last two independent investment banks [investment banks Bear Stearns, Lehman Brothers, Merrill Lynch, and AIG went under] became bank holding companies. For Goldman theaccounting rule changes of becoming a bank holding company would benefit them.and gave Goldman access to the discount window of the Federal Reserve. And according to the FED board meeting in September 2008:
GOLDMAN SACHS, MORGAN STANLEY, and MERRILL LYNCH -- Applications by
Goldman Sachs and Morgan Stanley to become bank holding companies and
authorizations to increase liquidity support for certain securities subsidiaries of
Goldman Sachs, Morgan Stanley, and Merrill Lynch.
By the way, Goldman Sachs has 15 subsidiaries overseas. Bank of America: 59. Citigroup: 90. But Morgan Stanley beats them all with at least 158 subsidiaries in the Cayman Islands – seven times the number of hotels. Read more.
And speaking of Morgan Stanley, according to Andrewrosssorkin.com website, Morgan Stanley received a $9 billion investment from Mitsubishi UFJ in the fall of 2008 that kept the firm from collapsing. The payment was supposed to be wired electronically, but because it needed to be made on an emergency basis on a holiday, Mitsubishi cut a physical check, perhaps the largest ever written. Here is a copy of the $9,000,000,000.00 check. Click here.
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