Under the policy enacted by former U.S. Treasury Secretary Henry Paulson, Goldman’s chief executive until 2006, key competitors have failed or been diminished. Goldman is now poised to dominate the investment banking landscape. The following article by David Weidner appeared on MarketWatch.com on April 7, 2009 in Weidner’s “Writing on the Wall” Column. Due to the importance of this piece, we are presenting it in its entirety.
Pro Publica, the online investigative reporting site counts 533 institutions that took $333.3 billion in TARP money. Moreover, the current CEO of Goldman Sachs, Loyd C. Blankfein, also earned over 70 million dollars in 2007.
[In a prior MarketWatch article – “Is the rush to exit TARP a trap?” (April 2, 2009) – Weidner states: “Since the middle of March, at least five banks have said they will either not accept TARP funds or they will return the funds received with interest due to Uncle Sam. Four banks that took a combined $338 million actually returned the cash Tuesday. Officials at Bank of America Corp, which took a combined $105 billion from the program, have hinted they want to repay the funds as soon as they can, possibly this year. … Geithner’s care-free attitude about banks repaying the government early defies a truth about the program: many banks were forced to take bailout cash to cover for troubled banks that truly needed it. The government, which never gave detailed criteria about what institutions would qualify for TARP cash, intentionally tried to create confusion around the program. Pro Publica, the online investigative reporting site counts 533 institutions that took $333.3 billion in TARP money.”]
Government Sachs is in control
Commentary: Investment bank has strengthened its position through bailout
By David Weidner, MarketWatch
Last update: 12:01 a.m. EDT April 7, 2009
NEW YORK (MarketWatch) — Lloyd Blankfein must be the luckiest guy on Wall Street.
Goldman hasn’t had to forfeit an ownership stake in its firm, and its shareholders — many of them management and employees — have benefited. Goldman shares trade above $100. That’s less than half of where Goldman shares traded at their peak, but far better than the $1 and $3 that AIG and Citigroup shares trade for, respectively.
Since the fall of Bear Stearns Cos. a little more than a year ago, Goldman has taken more than $20 billion in taxpayer cash through loans, payments and backstops. Goldman’s latest bailout coup was a $12.5 billion paid out of AIG’s $180 billion government cash infusion.
Until it was fully extricated, Goldman always characterized its exposure to AIG as “immaterial,” and that its $20 billion notional exposure to AIG was hedged. Turns out that it was — through government bailouts that didn’t exist when Goldman entered the contracts.
Even former New York Luv Guv Eliot Spitzer told journalist Fareed Zakaria on Sunday that he thinks something smells.
“The web between AIG and Goldman Sachs is something that should be pursued,” Spitzer said. “Why did [those payments] happen, what questions were asked, why did we need to pay 100 cents on the dollar for those transactions if we had to pay anything, what would have happened to the financial system had it not been paid?”
But the AIG-Goldman affair is just the beginning, under the policy enacted by former U.S. Treasury Secretary Henry Paulson, Goldman’s chief executive until 2006. Major competitors have failed or been diminished. Goldman already seems, if not just poised, to be dominating what’s left of the investment banking landscape.
We last visited Goldman in the early days of the Troubled Asset Relief Program, or TARP, in October. Then, it appeared Goldman would come out ahead by virtue of avoiding a major investment by a commercial bank. Merrill Lynch had just been sold to Bank of America Corp.
Five months later, Goldman’s position in the marketplace looks even stronger — its future even more brilliant.
“Goldman Sachs has the most powerful investment banking franchise and the most successful trading operation on Wall Street,” Brad Hintz of Bernstein Research wrote Friday, adding that he’s been told “new leverage limits are not expected to impact Goldman’s trading performance.”
“New leverage limits are not expected to impact Goldman’s trading performance.”
— — Brad Hintz, Bernstein Research
Hintz said Goldman is touting how it plans to avoid tighter leverage limits. For one, its trading desk can take advantage of widening bid-offer spreads. Fewer players in the marketplace mean there’s a bigger gap to exploit. Without Lehman and with a diminished Morgan Stanley, Goldman has more ability to corner a market.
Goldman’s commodities oil-trading desk has been linked to the failure of Semgroup Holdings, an oil-trading company in Tulsa, Okla., that declared bankruptcy in July 2008. Semgroup investors say Goldman had access to the company’s trading books and could have used that information against the company, according to Forbes.
That’s just the trading business. Goldman also will have less competition when it comes to underwriting stocks and bonds, advising corporate clients and providing prime brokerage services — including trading leverage — to hedge funds. Goldman ranked No. 1 among advisers with $316 million in revenue during the first quarter, according to Dealogic.
Goldman won’t rake in the exponentially growing profits that it did during the middle part of the decade — it reported $9.54 billion and then $11.6 billion in 2006 and 2007, respectively — but it will improve mightily on the $2.04 billion in returns it earned last year.
As glittering as Goldman’s recent history has been and as bright as its future looks, there is a dark cloud on the horizon. Paulson’s successor at Treasury, Timothy Geithner, is proposing a market-risk regulator that would put the regulatory squeeze on any institution deemed so big that its failure would take down the system with it.
Geithner wants to encourage break-ups and the creation of smaller institutions, said John Garvey, a risk management and banking consultant with PriceWaterhouseCoopers. Goldman, which could easily divide itself into a hedge fund, trading business, private equity shop and advisory firm, would be in the crosshairs of such a plan.
Even separated, though, why would Goldman’s roll stop? In the last year, Goldman has benefited from Paulson’s selective bailouts, a fortuitously timed ban on short selling, a liberal interpretation of bank holding company rules and soon, an easily gamed auction of distressed securities run by the government.
A conspiracy theorist might think this run of fortune has something to do with the former Goldman executives having influential roles in the Treasury Department.
Market-risk regulator? Smaller companies? Goldman will find a way around it. It just seems to have that kind of luck.