The Goldman Sachs Conspiracy

This MarketWatch story is stretching to find something that I don’t think is there.  But it makes for a good read, and it does provide evidence to show that Goldman Sachs is way too influential in our government.  Here’s a taste….

He (“Hank the Hammer” Paulson) got $38 million his last year as CEO in 2006 before becoming Treasury Secretary.

Then during the market meltdown six months ago the $700 million personal fortune he built at Goldman was threatened by Goldman’s huge $20 billion derivatives exposure at AIG: Suddenly his responsibilities at Treasury merged with a strong self-interest in protecting his personal fortune. AIG was “saved.”

There’s a lot more here – some of which I talked about in a previous post – but read it for yourself.

gk

GM grabs another $5 billion

According to Reuters, GM has managed to grab another $5 billion in US tax dollars today.  And the UAW is whining that they aren’t being treated fairly.

“We need President (Barack) Obama and his auto task force to stand up for the interests of workers and retirees in these restructuring negotiations,” the union said in an appeal on its Web site to members.

GM needs to declare bankruptcy.  They need to have a bankruptcy auction of their assets and let someone else make money with the existing factories.  And the UAW needs to shut up and go away.  GM management signed the outrageous union contracts that guaranteed crazy benefits – which they can’t afford to pay.  When the company is gone, both the bad management and the bad union contracts will be history.

And that’s the way the free market works.  It rewards good management and punishes bad management.  GM is a great example of what government does everyday – promise too much to too many people.  (Which helps to explain why I think the government should be smaller too, but that’s another story.)

gk

The lesson of Ireland

In the NY Times today, Paul Krugman does a good job of explaining why Ireland is in deep trouble.  Unfortunately, Mr. Krugman draws the wrong conclusions from the Irish experience – he thinks we need to nationalize banks, when the lesson to learn is to not bailout private banks.

Mr. Krugman says Last September Ireland moved to shore up confidence in its banks by offering a government guarantee on their liabilities — thereby putting taxpayers on the hook for potential losses of more than twice the country’s G.D.P., equivalent to $30 trillion for the United States.

The combination of deficits and exposure to bank losses raised doubts about Ireland’s long-run solvency, reflected in a rising risk premium on Irish debt and warnings about possible downgrades from ratings agencies.

Hence the harsh new policies. Earlier this month the Irish government simultaneously announced a plan to purchase many of the banks’ bad assets — putting taxpayers even further on the hook — while raising taxes and cutting spending, to reassure lenders.

Sound familar?  To me it sounds like the multiple rounds of bailouts that we’re doing in the US.  The sad part is that if the US and Irish governments would have simply let the bad banks fail, we’d be on our way out of this mess by now.  Instead, we’re sinking deeper and deeper into the private sector problems.

For now, the United States isn’t confined by an Irish-type fiscal straitjacket: the financial markets still consider U.S. government debt safer than anything else.

But we can’t assume that this will always be true. Unfortunately, we didn’t save for a rainy day: thanks to tax cuts and the war in Iraq, America came out of the “Bush boom” with a higher ratio of government debt to G.D.P. than it had going in. And if we push that ratio another 30 or 40 points higher — not out of the question if economic policy is mishandled over the next few years — we might start facing our own problems with the bond market.

Duh.  That’s what many of us have been saying for over a year.  The Chinese are eventually going to get tired of loaning us money to buy more stuff from them.  The US government debt will be paid eventually – but with inflated dollars.

And it all could’ve been avoided if we wouldn’t have started this whole bailout process.  Let the banks that took high risks go broke.  Let the companies and individuals who invested with them go broke.  The good banks (yes, there are some) would have bought those assets at a fire sale price and turned them into a profit center.  But now we’re all on the hook for the private sector losses.

Let’s call it “Going Irish”.  We can also call it dumb.

gk

The real reason we bailed out AIG

In reading through the news over the past few days, it’s apparent that many people are upset with the multiple AIG bailouts.  Some are upset that executives are getting bonuses (I am too) but I think the real reason for the bailouts in the first place is far worse than a few boneheaded executives paying themselves with our money – or as Bernanke says, we paid them by “printing money”.

The real reason is so billions in bailouts could be funneled to other financial firms without having to disclose it.

For example, the Washington Post reports The funds were paid from the government’s initial $85 billion emergency loan in September and included major firms such as Goldman Sachs, Societe Generale, Deutsche Bank, Merrill Lynch, Morgan Stanley, Bank of America and Barclays.

The government has already publicly bailed out Goldman Sachs, Morgan Stanley, and Bank of America  with hundreds of billions of dollars – and I think this is simply an underhanded way to funnel billions more to them to avoid bailing them out again.

The money AIG talked about in this report was from the original $85 billion bailout last year, and doesn’t include anything from the 2 subsequent bailouts.

TIME says AIG, under pressure from Congress and the press, also released the number of the counterparties to many of its credit default swaps. AIG had decided to insure the value of certain paper owned by the likes of Goldman Sachs (GS), Morgan Stanly (MS), and Deustsche Bank (DB). When the value of that paper fell, AIG was on the hook to pay off the “insurance” which kept the likes of Goldman from having to book large write downs. Those write downs might have pushed Goldman into a difficult financial situation.

And by “difficult financial situation” they mean bankrupt, broke, out business Bear Stearns/Lehmann Brothers broke.  That’s the real reason for the AIG bailouts.  Paulson and Bernanke didn’t have to publicly give their old buddies more money – they could pass billions to them through the guise of AIG bailouts.

On the subject of bonuses, The Street.com says Another issue on the table is that AIG and government officials have created a human-resources Catch-22. The firm plans to dole out $165 million in bonuses to keep the employees who created the very derivative products that ultimately destroyed AIG as a private, independent entity. The firm says it is contractually obligated to pay those bonuses, and that the employees have critical knowledge about valuing and winding down its toxic assets.

Really?  Critical knowledge about valuing and winding down the toxic crap on their books?  I’m not too bright, but I think that if your company lost $61 billion in the last quarter alone, there ain’t no one with critical knowledge at your company!

“Maybe [regulators] should have asserted more control at the start, back in the fall,” says David Steuber, co-chair of the insurance-recovery practice at Howrey LLP. “But now they’ve made some of these people indispensable, and those people are going to need to be compensated at or about the market rate.”

Oh come on!  these people are “indispensable?”  Maybe so, because there aren’t a hell of a lot of people capable of screwing up a company this badly.  Dudes, you freaking lost $61 BILLION in the 4th quarter alone – how “indispensable” can you be?!?

Are you “indespensable” because the average wino off the street might have only lost $1 billion?  Get a life assholes – you would not have a building to go to work in today if taxpayers hadn’t given you over $170 billion.  And you think you deserve a freaking bonus?!?  WTF have you been smoking, snorting, or shooting?

Idiots.  Kick their asses out on the street and stop giving them our money to blow and pass on to their buddies.  Let the comapnies who made bad bets on derivatives suffer the consequences and go broke.

gk

Honk if you're paying my mortgage

I’m not a Republican (or a Democrat), but I like this.

Honk if you're paying my mortgage

The only thing that might be better is if it said “Honk if I’m paying your mortgage”

Or maybe a few others:

Honk if you’re bailing out my bank.

Honk if I’m bailing out your bank.

Honk if you’re tired of bailouts.

Honk if bailouts suck.

Honk if you got stimulated.

Honk if I’m stimulating you.

Honk if you want to stimulate me.

Honk if you have a massive stimulus package.

Honk if you got off on Obama’s package.

Honk if you got stimulated by Obama.

Honk if you’re tired of stimulation.

And finally – Stimulate this!

gk

Why AIG blew up

The NY Times has a good article today which examines why we’re stuck paying hundreds of billions in bailouts to AIG.  The article is titled Propping Up a House of Cards.

It’s a good article, and it does a good job of explaining what happened, but I think it draws the wrong conclusion.  The NY Times says we need to continue the bailout of AIG regardless of the cost.  I say we should simply let them fail and let the house of cards collapse.

No, the result won’t be pretty, but it will be over. A lot of large banks will go under, both here and in Europe, but some will be left.  And the trillions of dollars of losses will have been taken by the people who invested in AIG and the banks that relied on them – and that’s the way it should be.

gk

Housing in the tank

The housing market is bad.  And it’s getting worse.  A report on CNN today says:

Hammered by the ailing housing market, mortgage finance giant Fannie Mae said Thursday it would tap its lifeline from the Treasury Department after reporting $58.7 billion in losses for 2008.

The company, a crucial source of funding for mortgage lenders, said it would draw down $15.2 billion of its $200 billion federal line of credit. In return, the government will receive preferred shares.

And it gave a dour view of the housing market — saying it expects peak-to-trough price declines to be in the 33% to 46% range, up from the 27% to 32% range it gave in the previous quarter. For 2009, it predicts home values will drop 12 to 18%.

For the fourth quarter, Fannie Mae reported $25.2 billion in losses, or $4.47 per share. The results mark the sixth straight quarter of losses, though slightly narrower than it reported in the third quarter. A year ago, Fannie Mae reported $3.6 billion in losses.

The company, which was taken over by the government in September along with Freddie Mac, attributed the losses to soaring defaults. Its provision for credit losses plus foreclosed property expense came to $12 billion for the quarter, up 30% from the previous quarter. Its charge-offs, or loans written off as uncollectable, rose 219% to $7 billion in 2008.

So as bad as the housing market has been, Fannie Mae expects it to get worse.  Prices are expected to drop another 12% to 18% this year.  And we (the US taxpayers) are on the hook for another $15 billion in bailout money.

Why not let Fannie go broke?  Investors in Fannie Mae would be screwed, but it’s better than soaking all of us who didn’t give them money willingly.  Instead. we’re now all investors in Fannie – whether we think it’s a good investment or not.

Socialism sucks.

gk

Is Bernanke playing dumb?

It’s hard to believe that Federal Reserve Chairman Ben “Helicopter” Bernanke is actually as dumb as his statements make him sound.  In his testimony to the Senate today, he said that if the government purchases common shares in banks, that it “may or may not” have an impact on shareholders.

Has he never heard of supply and demand?  Whenever the supply of something is increased, each individual part of the “something” is worth less.  This holds true for everything from apples to zebras – and I’ve never seen an exception to that rule.  But Ben doesn’t seem to understand that simple concept.

According to MarketWatch.com, Bernanke spoke in response to questions raised by Sen. Bob Corker, R-Tenn., who expressed concern about how conversion of government capital infusions into common shares could have a negative impact on existing common shareholders of financial institutions. However, Bernanke argued that once converted, the government common stakes “may or may not” dilute common shareholders depending on expectations of the equity shareholders, Bernanke said.

Based on the proposal, preferred shares aren’t converted to common shares until losses that were forecast by the stress test actually occur, Bernanke said. “Only at that time would the ownership implications become relevant,” Bernanke said.

Senate Finance Committee Ranking Member Charles Grassley, R-Iowa., argued in a letter to Treasury Secretary Timothy Geithner that a new approach that involves the government receiving preferred shares that convert into common shares is risky.

“Common stock is riskier than preferred shares,” said Grassley in the letter. “The American taxpayers are already shouldering a lot of risk these days. This move could expose taxpayers to even more risk.”

At least Corker and Grassley are now saying the right things.  Hopefully they’ll keep their recently grown backbones and continue to hold these appointed officials accountable.  They didn’t have the backbone to stand up and say this when Bush was president, and I don’t care if political differences cause them to do the right thing or if they figure it out on their own.  Doing the right thing is what matters in the end.

Bernanke simply can’t be that dumb, but he sure plays the role of a dumbass well.

gk

Another Bailout for AIG

Looks like $150 billion wasn’t enough to stop the bleeding at AIG – we’re getting ready to give them more money. 

According to Reuters AIG is asking for more aid and bracing for a fourth-quarter loss of roughly $60 billion, a source familiar with the matter said. It would be the biggest loss in a quarter in corporate history.

The $60 billion would exceed Time Warner’s $54 billion single-quarter loss in 2002 and dwarf the $24.5 billion loss AIG posted in the third quarter, when the government increased its rescue package for the insurer to about $150 billion.

By contrast, two analysts polled by Reuters Estimates have forecast on average a net loss of $5.46 billion.

The latest round of talks with the government include the possibility of additional funds for the insurer and trading debt for equity, another source said on Monday.

How many billions more are we going to dump into these financial cesspools?  Why not simply let them go broke?  That’s what needs to happen in order to get through this mess – the bad debt needs to be accounted for and written off. 

This is just giving the wino another drink.

gk

Stimulus bill explained

This is hilarious – the sad part is that much of it is also true.  Check out Stimulus Package Explained” on The Daily Capitalist.  Here’s a snip: We need to keep that money here in America. You can keep the money in America by spending it at yard sales, going to a baseball game, or spend it on prostitutes, beer (domestic only), or tattoos, since those are the only businesses still in the US.

I’m adding that site to my blogroll, be sure to check it out!

gk