GS gets another stinging rebuke

Originally posted by zeeblebot
http://www.mcclatchydc.com/2010/04/26/92928/obama-energy-official-has-ties.html

(comments)

Goldman Sachs, recently charged with defrauding investors, was President Obama’s top Wall Street contributor during the 2008 election cycle, donating nearly $1 million to his campaign." http://images.opensecrets.org/obama_top_contribs.htm?cycle=2008&cid=N000096 ...[text shortened]... , and over 1 mil to Repubs... http://www.opensecrets.org/orgs/summary.php?id=D000000085

....

http://images.opensecrets.org/obama_top_contribs.htm?cycle=2008&cid=N00009638

This table lists the top donors to this candidate in the 2008 election cycle. The organizations themselves did not donate , rather the money came from the organization's PAC, its individual members or employees or owners, and those individuals' immediate families. Organization totals include subsidiaries and affiliates.

Because of contribution limits, organizations that bundle together many individual contributions are often among the top donors to presidential candidates. These contributions can come from the organization's members or employees (and their families). The organization may support one candidate, or hedge its bets by supporting multiple candidates. Groups with national networks of donors - like EMILY's List and Club for Growth - make for particularly big bundlers.

University of California $1,591,395
Goldman Sachs $994,795
Harvard University $854,747
Microsoft Corp $833,617
Google Inc $803,436
Citigroup Inc $701,290
JPMorgan Chase & Co $695,132
Time Warner $590,084
Sidley Austin LLP $588,598
Stanford University $586,557
National Amusements Inc $551,683
UBS AG $543,219
Wilmerhale Llp $542,618
Skadden, Arps et al $530,839
IBM Corp $528,822
Columbia University $528,302
Morgan Stanley $514,881
General Electric $499,130
US Government $494,820
Latham & Watkins $493,835

Originally posted by Melanerpes
I do agree that a major problem with Fannie and Freddie was that the government needed to specifically state what the policy was regarding these companies. You had this situation where "it was widely believed" that these companies had government backing, but no one really knew for sure what the situation was.

I agree that we need to either declare in n t the same time, you can't blame all (or even most) of what happened on Fannie and Freddie.

Capitalism is an ugly business. You have success, but you also have failure. No matter what Marauder says, the problem here is that companies that become too big to fail become a threat to the entire welfare of the country. Like it or not, these are the two monsters the government let loose. In addition, they ended up being the two biggest money pits of ANY corporation out there. You can lay the blame to anyone you want in terms of what triggored the credit crisis but the bottom line is that Fannie and Freddie were the worst of the worst in terms of cleaning it all up. It all comes down to how much money the tax payers had to bail them out and/or how badly they effect the economy if they fail. You can argue all you want that Fannie and Freddie did not take on any more risk and did not act any worse than other private corporations, but if that is the case why did they hemorrage the worst of them all? I would even go so far as to say that any private individual should have the right to take on as much risk as they want and fail, however, when if someone is required to pay for their misfortunes then they should have a say in what they are doing. This is the only time that freedom should trump regulation so it seems to me that in order to stay free, perhaps small businesses should be favored over the large corporate structure.

Of course, the other avenue is to expand government through never ending regulations or flat out takeovers. I suppose you could simply nationalize everything like the former USSR. That way no one EVER fails. In fact, I don't recall them having any credit crisis. Of course, at that point I suppose you just sit back and wait until the government goes belly up as they did.

So contrary to popular opinion, I do have some ideas as to what needs to be done. We need more clarity on Wall Street in terms of the condition of banks in regards to long term financial standing. In addition, we need to rate assets so that we know if we are investing in high risk investments. And lastly, any corporation that becomes "too big to fail" is a threat to the welfare of the overall economy. Corporations like GS become more like small governments than actual businesses as they begin to control and manipulate government itself. In addition, God forbid they go belly up as ALL businesses eventually do. Therefore, I favor a way to reduce those who are too big to fail whether it be the private sector or even government. It is a well known fact that small business employ up to 2/3 of the work force every year. Then after a certain point the hiring deminishes significantly. In a way, they begin to become like leaches on society. They then become a problem as they try to snuff out the little guys and weild their power in Washington. In turn, this deminishes small employment rates as small business after small business is snuffed out by their larger competitor. In fact, we saw this during the credit crisis as Big Brother threw trillions at large corporations and let small businesses be thrown to the curb. This is what happens when the big boys have sway over Big Brother. However, the worst part of it all is when these mamouth corporations then become a heart beat away from being taken over by Big Brother as we all have seen since they have become too big to fail. As a result, I feel that the larger these corporations become the closer we come to Socialism itself.

Originally posted by no1marauder
A long raving diatribe in favor of government regulation by someone who screams that the government is absolutely useless! The mind reels.

This cut and paste's basic premise i.e. that Fannie and Freddie took more risk than other players in the mortgage game is absolutely false. In fact, as your OTHER cut and paste showed, they moved int ...[text shortened]... protection and the regulation of derivatives) and thus should be considered separately.

Another long Diabtrive over the evils of Wall Street but how great government and Fannie and Freddie are? How about a history lesson?

A Senate reform bill introduced by John Corzine in 2003 never made it out of the Senate Banking, Housing, and Urban Affairs Committee. At the time members of the 108th Congress expressed faith in the Solvency of Fannie and Freddie. Barney Frank described them as "not facing any kind of financial crisis."

Then in 2005, the Federal Housing Enterprise Reglatory Reform Act, sponsored by Senator Chuck Hogel, and co-sponsored by Elizabieth Dole, John McCain, and John Sununu, who were ALL REPUBLICANS, would have increased government oversight of loans given by Fannie and Freddie. However, like the 2003 bill it also died in the 109th Congress.

So again, I ask you, who cost the American tax payer the most money? Was it Wall Street or Fannie and Freddie? You can lay the blame at the feet of whoever you want, but the bottom line is no one cares about this unless it effects them in a negative way and Fannie and Freddie win that prize.

Originally posted by no1marauder
[ This cut and paste's basic premise i.e. that Fannie and Freddie took more risk than other players in the mortgage game is absolutely false. In fact, as your OTHER cut and paste showed, they moved into the subprime mortgage market late in an effort to recover market share. For most of their existence (according to Lowenstein): Fannie operated ...[text shortened]... orm to Fannie's guidelines and would thus be less marketable". (End of Wall Street, p. 9.)

I think we should get a little more insight as to what led to the downfall of Fannie and Freddie.

http://www.aci.org/outlook/28704

Now that the federal government has been required to take effective control of Fannie and Freddie and to decide their fate, it is important to understand the reasons for their financial collapse -- what went wrong and why. In his statement on September 7 announcing the appointment of a conservator for the two enterprises, Treasury Secretary Henry M. Paulson pointed to their failed business models as the reason for their collapse. This was certainly a contributing factor, but not the direct cause. The central problem was their dependence on Congress for continued political support in the wake of their accounting scandels in 2003 and 2004. To curry favor with Congress, they sought substantial increases in their support of affordable housing, primarily by investing in risky and substandard mortgages between 2005 and 2007.

AS GSE's, Fannie and Freddie were serving two masters in two different ways. The first was an inherent conflict between their government mission and their private ownership. The government mission required them to keep mortgage interest rates low and to increase their support for affordable housing. Their shareholder ownership, however, required them to fight increases in their capital requirements and regulation that would raise their costs and reduce their risk taking and profitability. But there were two other parties -- Congress and the taxpayers -- that also had a stake in the choices that Fannie and Freddie made. Congress got some benefits in the form of political support from the GSE's ability to hold down mortgage rates, but it garnered even more political benefits from both affordable housing and lower mortgage rates, but ultimately faced enormous liabilities associated with GSE risk taking. This outlook tells the disheartening story of how the GSE's sold out the taxpayers by taking huge risks on substandard mortgages, primarily to retain congressional support for the weak regulation and special benefits that fueled their high profits and profligate executive compensation. As if that were not enough, in the process, the GSE's operations promoted a risky subprime mortgage binge in the US that has caused financial crisis.

The special relationship with Congress was the GSE's undoing because it allowed them to escape the market discipline -- the wariness of lenders -- that keeps corporate managements from taking unacceptable risks."

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For me, this refutes your ascertion that Fannie and Freddie did not take greater risk than any other institution. I'm not sure how you can even make the claim that Fannie and Freddie did not take on greater risk because they ended up losing the greatest amount of money of any corporation out there. The bottom line is that Fannie and Freddie were treated differently because of their political clout as well as the backing of Joe Shmoe taxpayer.

I said earlier that I veiwed the two GSE's as a type of entitlement. I will show you what I mean by that. The article continues:

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"The failure to adopt meaningful GSE reform in 2005 was a crucial missed opportunity. Fannie and Freddie hired dozens of Washington's movers and shakers -- at spectacular levels of compensation -- to sit on their boards, lobby Congress, and in general help them to manage their political risk. The GSE's also paid for academic research to assure the public that the GSE mission was worthwhile and that the GSE's posed minimal risk to taxpaers. For example, Nobel prize laureate Joseph Stiglitz coauthored an article in 2002 purporting to show that the risk of GSE default producing taxpayer loss was "effectively zero".

One of the most successful efforts to influence lawmakers came thorugh community groups. Both Fannie and Freddie made "charitable" or other gifts to community groups, which could then be called upon to contact the GSE's opponenets in Congress and protest any proposed restrictions on the activities or privlleges of the GSE's. GSE supporters in Congress could also count on these groups to back them in their reelection efforts.

But these activities, as important as they were in managing the GSE's political risks, paled when compared to the billions of dollars the GSE's make available for spending projects in the congressional districts and states of their supporters. Many of these projects involved affordable housing. In 1994, Fannie Mae replaced its initial $10 billion program with a $1 trillion affordable housing initiative and both Fannie and Freddie announced new $2 trillion initiatives in 2001. It is not clear to what extent the investments made in support of these committments were losers -- the GSE's profitability over many years could cover a multitude of sins -- but it is now certain that the enormous losses associated with the risky housing investments appearing in support of affordable housing between 2005 and 2007 -- investments that ultimately brough about the collapse of Fannie and Freddie.

Even if the earlier affordable housing projects were not losers, however, they represented a new and extra-constitutional way for Congress to dispense funds that should otherwise have flowed through the appropriations process. In one sense, the expenditures were a new form of earmark, but this earmarking evaded the constitutional appropriations entirely. An illustration is provided by a press release from the office of Senator Charles Schumer, one of the most ardent supporters of the GSE's in Congress. The headline on the release, dated November 20, 2006 -- right in the middle of the GSE's affordable housing spending spree -- was "Schumer Announces up to $100 Million Freddie Mac Committment to Address Fort Drum and Watertown Housing Crunch." The subheading continued, "Schumer Unveils New Freddie Mac Plan with HSBC That Includes Low-Interest Low-Downpayment Loans. In June, Schumer Urged Freddie Mac and Fannie Mae Step Up to the Plate and Deliver Concrete Plans -- Today Freddie Mac is Following Through." If this project had been economically profitable for Fannie and Freddie, Schumer would not have had to "urge" them to "step up". Instead, using his authority as a powerful member of the Senate Banking Committee -- and a supporter of Fannie and Freddie -- he appears to have included Freddie Mac to make a financial committment that was very much in his political interests but for which the taxpayers of the US would ultimately be responsible.

Of course, Schumer was only one of many members of Congress who used his political leverage to further his own agenda at taxpayer expense and outside the appropriations process. The list of friends of Fannie and Freddie changed over time, while the GSE's enjoyed broad bipartisan support in the 1990's, over the past decade, they have become increasingly aligned with the Democrats. This shift in the political equilibrium was especially clear in the Congressional reaction to the GSE's acconting scandels of 2003 and 2004."

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So as we see, Fannie and Freddie shifted toward the Democrats after their scandels in 2003 and 2004. The Democrats seem to have decided to support them so long as the GSE's, in turn, agree to support their agendas. Of course, what I am referring to are one of FDR's agendas in his "Second Bill of Rights", which was affordable housing. In short, the GSE's spent money they did not have with the knowledge that the taxpayer was ultimatley on the hook in order to give people "affordable housing". And so it goes with most entitlement programs, the taxpayer is on the hook so why not spend their money to "give" things to people that will vote for you?

Originally posted by no1marauder
Believe that fairy tale if you want; God knows your grip on reality is tenuous.

EDIT: Actually nothing in the article you cite actually supports the claim that Goldman Sachs wouldn't have been bankrupted without Federal government aid the situation 6-9 months later notwithstanding.

EDIT2: And far from being dragged into a government bailout by the ...[text shortened]...
http://online.wsj.com/article/SB124762129423442667.html

Reality check, ElfBoy.

A reality check from clown-college boy? That'll be the day.

Why did you even cite that particular article, it shows Goldman's wisdom in cooperating with the government originally, but not based on any of their own failings, just more benefit for them.
"Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it's not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong"


Like it or not, the investment banks all had to be converted to bank holding companies to be part of the government plan to save all troubled investment banks within the approved stimulus bill and the money intended for banks only. They avoided contaminating a bank in the process of aproving it by having even healthy ones like Goldman sign up too. You don't have to believe it, it wouldn't be convenient for you given all you incorrect statements already. You probably didn't even follow the credit crisis closely or read up on it at the time. However, the participation of Goldman and others that didn't needed was known, and by many sharp people it was understood, as a tool to avoid sinking with a poison pill before they got there the banks they were trying to save.

Originally posted by eljefejesus
A reality check from clown-college boy? That'll be the day.

Why did you even cite that particular article, it shows Goldman's wisdom in cooperating with the government originally, but not based on any of their own failings, just more benefit for them.
"Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fan ...[text shortened]... id sinking with a poison pill before they got there the banks they were trying to save.

You're sharp as a marble if you believe that Goldman Sachs converted to a bank holding company as a favor to the government so it could receive tens of billions of taxpayer money.

Originally posted by whodey
Capitalism is an ugly business. You have success, but you also have failure. No matter what Marauder says, the problem here is that companies that become too big to fail become a threat to the entire welfare of the country. Like it or not, these are the two monsters the government let loose. In addition, they ended up being the two biggest money pits of A ult, I feel that the larger these corporations become the closer we come to Socialism itself.

So how do we go about ensuring that the capitalist system isn't allowed to create these mammoth businesses?

This was one of the main reasons why anti-trust regulations were enacted in the late 1800s and early 1900s - to ensure that you didn't have a huge company like Standard Oil or US Steel getting too much power. But due to various court decisions and all the changes in the economic structure over the past century, the current laws don't seem to have much teeth left - we need to update them in some way to address the 21st century.

Unfortunately, there doesn't seem to be much public support for such an effort. Almost all of the populist rage gets directed against big governments and very little gets focused on big businesses. I suspect that a lot of this is due to the money being spent by big businesses to deflect popular opinion away from the sorts of concerns that you are bringing up here.

Originally posted by whodey
I think we should get a little more insight as to what led to the downfall of Fannie and Freddie.

http://www.aci.org/outlook/28704

Now that the federal government has been required to take effective control of Fannie and Freddie and to decide their fate, it is important to understand the reasons for their financial collapse -- what went wrong and why. ...[text shortened]... y to "give" things to people that will vote for you?

I do agree with you on a lot of this. Both you AND marauder have made a lot of points that make a lot of sense.

Since it's been the widespread belief among investors that Fannie and Freddie had "strong government backing", it would be hard to believe that they didn't take more risks than a company that didn't have "strong government backing". This "strong government backing" also must have given them a rather unfair advantage over private sector firms that were engaging in the same business as Fannie and Fannie.

Marauder points out that mortgage securitization plays an important role in providing liquidity for the housing market. I agree. But it seems to me that the private sector is capable of handling this without any special hand-holding from the government. So why not just allow Fannie and Freddie to become fully disconnected from the government and let them compete on a level playing field with other investment firms? (If indeed they are "too big", we could first break them up so that there'd be maybe five smaller firms instead of two huge ones, but that issue should be part of the general anti-trust reform I've addressed in my previous post)

And I agree that one of the things at the base of all this has been a strong widespread belief (across the entire political spectrum) that homeownership is some sort of general panacea. There's this sense that you're not truly a "success" until you have a large suburban home with an immense overly fertilized lawn, and an awful lot of taxpayer money has been spent to prop up this myth. Unfortunately, it's going to be very difficult to change this perception - especially since even most Tea Partiers probably adhere to it.

Originally posted by Melanerpes
I do agree with you on a lot of this. Both you AND marauder have made a lot of points that make a lot of sense.

Since it's been the widespread belief among investors that Fannie and Freddie had "strong government backing", it would be hard to believe that they didn't take more risks than a company that didn't have "strong government backing". This "st ...[text shortened]... is perception - especially since even most Tea Partiers probably adhere to it.

The private sector can't handle mortgage securitization though. The experience in the 1930's was that lending completely dried up once the economic downturn hit due to the banks lacking sufficient capital reserves. That's why Fannie was created in the first place.

If Fannie and Freddie had such a competitive advantage over other private firms, it's a bit puzzling that their market share dropped so significantly in the early 2000's. This assertion is at odds with reality.

It seems to me that the mistake that was made was turning Fannie into a private, for profit corporation in the late 1960's.

Originally posted by Melanerpes
So how do we go about ensuring that the capitalist system isn't allowed to create these mammoth businesses?

This was one of the main reasons why anti-trust regulations were enacted in the late 1800s and early 1900s - to ensure that you didn't have a huge company like Standard Oil or US Steel getting too much power. But due to various court decisions an ...[text shortened]... es to deflect popular opinion away from the sorts of concerns that you are bringing up here.

How indeed. Of course, I am probably at odds with many of my conservative freinds when I say that business should be regulated regarding its overall size, but that is how I see it. Basically, business should be allowed to take risks that they want. However, what happens when this risk taking can take down an entire world economy? It is akin to the libertarian concept of letting people do as they please so long as they don't harm others. Of course, my concept of only allowing small businesses to exist works because it assumes that people will not make risks they are not willing to take based upon the knowledge that no one will be there to bail them out. However, this will only happen IF they have prior knowledge that they are despesable.

Of course, in an age of Big Government and Big Business that is coddled by Big Government we have a snow balls chance in Arizona of this EVER happening, but I can dream can't I?

Originally posted by no1marauder
The private sector can't handle mortgage securitization though. The experience in the 1930's was that lending completely dried up once the economic downturn hit due to the banks lacking sufficient capital reserves. That's why Fannie was created in the first place.

If Fannie and Freddie had such a competitive advantage over other private f hat was made was turning Fannie into a private, for profit corporation in the late 1960's.

If that is the case, there would then have to be some sort of government role if we want mortgage securitization to continue to exist. But whatever that role is, it should treat all firms in the mortgage securitization business equally.

BUT - maybe we could just allow the system to go back to one where loans aren't packaged and divided into millions of pieces. With the old-fashioned type of loan, if housing values drop, a lender would have a lot of reasons to negotiate new terms in order to avoid having to foreclose on a property that is now worth less than value of the original loan. But when each loan has been divided into lots of pieces, these types of negotiations don't occur and it becomes a lot harder to resolve the mess.

Of course, going back to an old-fashioned system would mean less liquidity in the mortgage market, and it would become a lot harder for many people to get a mortgage. It would probably mean that the percentage of the US population that owns their own home would drop. And the value of housing in general would become lower than what it would otherwise be.

So be it.