Goldman Sachs, the Tallest Midget in the Room

As much as the big banks want you to think that they're the heart of our free market system, they're not. In fact they never have been. For decades they've been feasting off of subsidies and mini-bailouts at the expense of everyone else.
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What passes for top-notch financial journalism these days is an in depth report in the New York Times about why Goldman Sachs, the most successful of all Wall Street firms, is so modest. Amid billions of dollars in profits, a rising share price, the big Wall Street firm doesn't like to take full credit for its success.

The Times seems to think the Goldman brass, led by CEO Lloyd Blankfein, is being too modest mainly because the firm is afraid to flaunt its brilliance at making money during a time of economic hardship. The writer implores Blankfein & Co. to remember that making money is good for shareholders and taxpayers, and thus they should "take a bow. Don't hide behind the curtain" and starting telling the world how great they really are.

Far be it for me to give my "friends" at Goldman advice (we're so friendly that Blankfein once described me as a "thug"). but the last thing Goldman should be doing right now is taking a bow and telling the world it's a great firm, because when it comes down to it, Goldman isn't really a great firm.

What is it then? Well, in the words of a drinking buddy who is a frequent consumer of financial news, "Goldman is like the tallest midget in the room."

For the record, I'm not and never have been in the Goldman is the root-of-all-evil-camp, though I've gone my rounds with some of the senior people there, including its top flack, Lucas van Praag, who recently tried to deny my story on the Fox Business Network several weeks ago that the last two years of regulatory and media scrutiny into how the firm has made money, often by screwing its clients, has left Blankfein so tired and exhausted that friends say he now appears ready to leave at the end of the year.

It baffles me as to how van Praag can deny someone's impression from a private conversation (his denial in the Times follow-up story was less forceful, it should be noted). But Goldman has done dumber things, including telling the world that the firm didn't need a bailout during the dark days of the financial crisis in late 2008, all of which gets me back to the reason the firm should remain as modest as possible: Its status as a midget, albeit the largest one on Wall Street.

As much as the nation's big banks want you to think that they're the heart of our free market system, they're not. In fact they never have been. For decades they've been feasting off of subsidies and mini-bailouts granted to them by the Fed and the Treasury, often from government bureaucrats who have worked on Wall Street and return there once their "public service" is complete.

The hundreds of billions in cash and guarantees handed the banks in 2008 was just the latest, albeit the largest of the bailouts and subsidies the big banks have received over the years. In other words the banks may be big in size and "too big to fail" as far as the government is concerned, but in terms of innovators and creators of wealth, they're actually quite small, because unlike the guy who does your laundry or owns your favorite restaurant, they couldn't and didn't survive on their own.

Standing the tallest among these little men is Goldman, the firm most adept at exploiting the corrupt system that puts the government in bed with the big banks.

Just today, Goldman announced that it earned $1.64 billion in the first quarter of 2011 even after repaying Warren Buffett the $5 billion he lent them in 2008 when the firm was teetering with the rest of Wall Street. Seems like a pretty amazing feat until you consider how Goldman earned all that cash. Low interest rates from the Fed over the past two-plus years means Goldman can basically borrow at next to nothing to place its market bets.

Those bets, it turns out, really aren't bets at all. Firms like Goldman began buying depressed mortgage bonds in 2009 because they knew prices would rise. How did they know something like that? The Fed instituted a program to buy these bonds in the open market as a way to support the housing market.

Like most things tried by the Obama administration to jump-start the economy, the plan didn't work for Main Street. But not long after the buy-back program commenced, Wall Street -- and Goldman in particular -- began announcing record profits and bonuses to its bankers and traders.

All of which transpired as Blankfein and his team tried to convince the world that Goldman really didn't need all that bailout money in late 2008 and that they accepted the $10 billion in cash from then Treasury Secretary Hank Paulson because they were forced to do so by a government more worried about the health of entire financial system than the financial condition of Goldman Sachs.

Sounds like a very modest gesture until you calculate how the taxpayer bailout of the giant insurer AIG was in actuality a back-door bailout of Goldman Sachs. Just before Paulson signed over the $10 billion bailout check, AIG handed Goldman a check for $13 billion a direct result of the Fed's bailout of the insurance company.

The money was for "collateral payments" AIG owed Goldman, that once the bailouts commenced, became collateral payments owed to Goldman by the US taxpayer. In other words, the day the Fed decided to make good on all of AIG commitments -- 100 cents on the dollar for contracts banks like Goldman held to insure their portfolio of risky debt -- it also bailed out Goldman.

Without the taxpayer bailout of AIG, those Goldman's shareholders that the Times cares so much about, would have been without a $13 billion cushion during the darkest days of the 2008 financial crisis. More than that, they would have been forced to take losses on the firm's portfolio of toxic debt.

So much for Goldman's modesty in the face of such greatness. As all this came to light back in late 2009, I wrote a column here on HuffPost saying Blankfein should just resign and save the world the trouble of holding him accountable for explaining why Goldman is such a large midget. Now that would have been the modest thing to do.

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