Monday, April 13, 2009

Happy Days Are Here Again?

Barry Ritholtz at The Big Picture passes on a rumor of enormous profits at Goldman Sachs for Q1 in Taxpayer Funded GS Profits:

Karl Denninger notes that a nasty rumor is circulating about Goldman Sachs amongst observers of the Street. Allegedly, GS is about to report their second-best quarter in history, +$12 billion or so…

In this era of financial disasters, credit crisis, and recession, how is that possible?

Easy. You — and your grandkids — are the ones who paid for it:

“The fact that they (like so many others) are being paid by the taxpayer through AIG’s “conduit” for losses that didn’t (yet) happen at 100 cents on the dollar might be the basic math.

And further (and potentially much worse) there is the repeated statement by Goldman executives that they were “fully hedged” against a potential counterparty default by AIG. One wonders - was that “hedge” to be short the equity on AIG itself, perhaps?

Why is this important?

Because if that’s how Goldman hedged they got paid twice and the taxpayer literally got robbed. Someone in Congress needs to look into this now; there are already rumblings of investigation. Those rumblings need to get a lot louder and turn into subpoenas, not “polite inquiries.”

DoctoRx here. If these rumors are more or less true, then the Street will try to tell us that the past year was just a bad dream. Those who know better will know that political influence is everything, and the Government remains committed to a healthy financial sector uber alles, no matter how many tent cities spring up across from state Capitols. This was precisely the Hoover strategy.

However, now the Federal Reserve notes that are the medium of exchange for cash transactions are increasingly backed by junk bonds, and unlike in the Great Crash, the U. S. Government is heavily indebted, both to foreign powers and via all sorts of explicit promises to its own population.

It is said that a financial crash seems to take forever to occur, and then it occurs suddenly. The sham "stress tests" and the injustice of PPIP appear to be taking forever to be finalized/announced, but please consider what actually happens when the Administration can't keep the lid on the (likely) fact that if it takes its SIVs back on-balance sheet, then Citi is insolvent even on a discounted cash flow basis re its CDOs and related assets? Will there be a run on Citi? BofA?

As Elizabeth Warren, head of the Congressional Oversight Panel re TARP, keeps pointing out, per the interview Keeping Tabs on the Bailout (thanks to NC link), Treasury is unresponsive to oversight and has no clear plan for its actions. Things are just kind of happening . . . or not happening . . .the opposite of the decisive way FDR dealt with the banking crisis, or even the way the U. S. dealt with the S&L crisis when it finally could not be ignored.

At this time of shrunken profitability for the nation, the idea that the industry- Big Finance- that led the country into this mess would be subsidized to have in some cases record profits, just to continue the same charades, is unconscionable. But if appearances are correct- which they may well not be- it is in fact happening.

Copyright (C) Long Lake LLC 2009

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