I do not think it was a coincidence that Goldman Sachs announced its drop-in-the-bucket $500 million fund to help small businesses yesterday. Because the most important news is a report issued by the government bailout inspector that says Goldman got a huge gift from the Federal Reserve Bank in New York, led at the time by Tim Geithner, which caved into Goldman. From The Wall Street Journal:
For more than a year, Goldman Sachs Group Inc. has maintained that it wouldn’t have suffered material losses had the government allowed one of its major trading partners, American International Group, Inc., to collapse.
A government report throws cold water on that claim.
The report, issued this week by the special inspector general for the Troubled Asset Relief Program, comes amid controversy over whether the government unfairly helped out big banks in its bailout of AIG. The government auditor’s report broadly found that the New York Fed left itself little room in negotiating with the banks for a better deal for taxpayers.
Goldman’s trading position with AIG centered on $22.1 billion of such insurance the firm had purchased from AIG. In a separate series of trades, Goldman itself had sold protection against losses on the same securities to other trading firms.
The problem for Goldman: If AIG collapsed and markets continued to swoon, Goldman would have had to make payments to the other trading firms and been unable to collect on protection it had bought from AIG.
But the audit raised questions about Goldman’s calculations. Goldman believed that it controlled $4.3 billion in assets, pools of fixed-income securities that require complex computer modeling to design and understand, that would have been used to counter an AIG default. The securities are called collateralized debt obligations, or CDOs.
The audit said, however, that given the fact that the market for those securities had tanked in November 2008, and that an AIG default would have sparked a rout, Goldman would have had a difficult time obtaining value for those assets.
What this means is that the New York Fed basically covered AIG’s losses had 100 cents on the dollar–in full. I know of no regular person who suffers a loss or bankruptcy who can ever get that deal. But, Tim Geithner was quite generous in shelling out money to make his colleagues whole.
To me, this is the big story, not the pittance that Goldman is putting out as charity–a mere 3 percent of the $16 billion-plus that has been allocated to bonuses this year. It is a bigger story because it says much about the future, as much as the past. Goldman, and the other financial players, are trying hard to calm the waters of the absolutely justified public rage about the financial calamity that millions of Americans have gone through. And so they apologize and sprinkle a bit of money on the problem–at the same time that the financial giants are doing everything possible to scuttle legislative reform. And we have cause to worry that the very person who let them off the hook in his role as president of the New York Fed will also have a large say in what the regulations look like from his perch as Treasury Secretary.
We can’t let this happen again.