How You Finance Goldman Sachs' Profits

[Truth2Tell]

http://www.motherjones.com/politics/2009/07/how-you-finance-goldman-sachs'-profits

Mother Jones
Tue July 28, 2009

An insider’s view of Wall Street’s rebound.
By Nomi Prins

This is perhaps the most important thing I learned over my years working on Wall Street, including as a managing director at Goldman Sachs: Numbers lie. In a normal time, the fact that the numbers generated by the nation's biggest banks can't be trusted might not matter very much to the rest of us. But since the record bank profits we're now hearing about are essentially created by massive federal funding, perhaps it behooves us to dig beneath their data. On July 27, 10 congressmen, led by Rep. Alan Grayson (D-Fla.), did just that, writing a letter to Federal Reserve Chairman Ben Bernanke questioning the Fed's role in Goldman's rapid return to the top of Wall Street.

To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Bear Stearns had been taken over by JPMorgan Chase in March, 2008, Lehman Brothers had just declared bankruptcy due to lack of capital, and Bank of America had been pushed to acquire Merrill Lynch because the firm didn't have enough cash to survive on its own. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.

Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks'. That's the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.

Goldman didn't like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what's called the Market Risk Rules that bank holding companies adhere to when computing their risk.

http://www.motherjones.com/politics/2009/07/how-you-finance-goldman-sachs’-profits">Continued...