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Is Taxpayer Money Behind Profits at Goldman Sachs?

February 12, 2010 at 12:00 AM EST
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Paul Solman continues his series of reports examining investment powerhouse Goldman Sachs and how it makes money.
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JEFFREY BROWN: Next: Goldman Sachs, part two.

Last night, “NewsHour” economics correspondent Paul Solman examined how the Wall Street investment firm makes its money — tonight, the government’s role in the company’s success.

It’s all part of Paul’s ongoing reporting Making Sense of financial news.

PAUL SOLMAN: Across from the construction site that was once the World Trade Center, Goldman Sachs’ new world headquarters.

To help foot the $2-plus billion construction bill, Goldman got New York City and State to bless a $1.65 billion tax-free so-called liberty bond issue, plus another $66 million in job grants, tax exemptions, and energy discounts.

And, yet, the same firm just reported the most profitable year in Wall Street history, prompting protests when it channeled most of those profits to pay salaries and bonuses. It was a year of horrible P.R., which saw Goldman and its CEO, Lloyd Blankfein, vilified…

LLOYD BLANKFEIN, CEO, Goldman Sachs: Everybody have that now?

PAUL SOLMAN: … by everyone from passersby commenting on painter Geoffrey Raymond’s portrait, to Glenn Beck on the right blasting Goldman’s profits…

GLENN BECK, host, “Glenn Beck”: Goldman Sachs up 65 percent, even though they took over $10 billion in government aid.

PAUL SOLMAN: … to “The Daily Show With Jon Stewart” voicing almost exactly the same skepticism on the left.

ELIOT SPITZER, D, former New York governor: Goldman Sachs will have a profit that we estimate of about $12 billion the last year.

JON STEWART, host, “The Daily Show With Jon Stewart”: Let me see if I have got this straight. The only people who have fully recovered from the financial meltdown are the ones who caused the financial meltdown.

PAUL SOLMAN: In a recent “NewsHour” story, experts explained how Goldman made most of this money by trading for its own account. For details, you can watch or read the story online.

But this story is about the claim that Goldman has been getting most of the money to trade from you and me, via our government.

Nomi Prins, a 10-year veteran of Wall Street trading, left Goldman after 9/11.

NOMI PRINS, former managing director, Goldman Sachs: First, of course, they received $10 billion in TARP money. Even though, a year later, they can say, “Well, we didn’t really need it,” They really needed it.

PAUL SOLMAN: They’ needed it, says MIT’s Simon Johnson, who is working on a book about the undue influence of Wall Street, because, during the panic of 2008, they were on the brink.

SIMON JOHNSON, former International Monetary Fund chief economist: Goldman Sachs and Morgan Stanley had a problem, which is, they were about to fail, and that everyone felt that this was coming, and they couldn’t borrow easily from the Fed, because they weren’t banks.

PAUL SOLMAN: Then the authorities had a vision of salvation, according to Johnson.

SIMON JOHNSON: And they said, aha, we will turn them into bank holding companies, so they get — they have access to this cheap money from the Fed.

PAUL SOLMAN: Bank holding companies own or control one or more U.S. banks.

Though no one from Goldman would give us an interview, CEO Blankfein recently told the Financial Crisis Commission that the firm wasn’t necessarily on the brink after Lehman Brothers collapsed in mid-September 2008.

LLOYD BLANKFEIN: That weekend, when we became a bank holding company, the next day, we capitalized ourselves, in part privately, with Warren Buffett. And the day after that, we did a capital raise for $5.75 billion, which you could have made a lot higher. We had access to the capital markets. And we could have made more. And we weren’t relying on that government help.

PAUL SOLMAN: But others are dubious that Goldman could have raised so much money without government help.

NOMI PRINS: You don’t go to the Fed on a Sunday night and say, I really need to become a bank holding company now because I want to help out all my competitors. You go because you need capital, and this was a way to do it.

PAUL SOLMAN: Because the government could only give them money if they were a bank, or bank holding company, as opposed to an investment bank?

NOMI PRINS: Right.

SIMON JOHNSON: Now, basically, if you hold securities or anything else, I think including your car, if you’re Goldman Sachs, at this point, you can take that to the Fed and mortgage it and use it as a — to get credit. And then all your liquidity problems go away, and actually a lot of your solvency problem goes away as well, because people really start to believe in you again.

PAUL SOLMAN: Investment adviser Jeff Macke, however, thinks it’s unfair to single out Goldman.

JEFF MACKE, former hedge fund owner: The entire system was teetering on the brink. When you have a tidal wave coming, it doesn’t discriminate between the sinners and the winners. It’s going to drown us all.

When we bailed the system out, we saved Main Street, as well as Wall Street. We didn’t just save Goldman Sachs.

PAUL SOLMAN: No, we didn’t, but saving Goldman by giving it access to money is only one thing the government did.

NOMI PRINS: And the other thing is, because they were a bank holding company, they now would receive, ultimately, FDIC protection, in terms of guaranteeing new debt that they would be able to raise.

PAUL SOLMAN: Indeed, Goldman has raised $28 billion in the past year, enough money to pay back TARP. The problem is, the money is at least implicitly guaranteed by the government.

So, why should we average Americans be responsible for Goldman’s fate? We asked that question to Goldman defender Jeff Macke.

It doesn’t bother you that they are too big to fail, and, therefore, we, the U.S. taxpayers, have to bail them out if push comes to shove?

JEFF MACKE: I don’t — they’re not too big to fail. They’re too good to fail. Wilt Chamberlain said it best when he said, nobody roots for Goliath.

Everyone is out to get Goldman Sachs because they’re the best, they make money, and they survive in this environment, when other people aren’t.

PAUL SOLMAN: Goldman investor Warren Buffett told Bloomberg TV that he agrees.

WARREN BUFFETT, chairman & CEO, Berkshire Hathaway: I’m very happy with the way Goldman has performed. I mean, they have — they have — that place is very well run.

REPORTER: With the way Blankfein has performed.

WARREN BUFFETT: Oh, I think he’s been — I don’t think you could have had a better manager than Lloyd Blankfein.

PAUL SOLMAN: But, wait, says corporate governance lawyer Jay Eisenhofer. Not only did the government provide TARP money and a guarantee. It also bailed out AIG, which owed Goldman Sachs $12.9 billion.

JAY EISENHOFER, corporate governance lawyer: A great deal of Goldman’s success can be attributed to the AIG bailout. That’s a big part of Goldman’s success this year. If Goldman had not received the money indirectly through the AIG bailout, you know, Goldman wouldn’t have had the year that it had.

PAUL SOLMAN: But beyond the billions in bailouts and guarantees, there’s yet another way the government has aided Goldman Sachs, and it may be the most important of all, says President Reagan’s budget chief, who later spent years on Wall Street, David Stockman.

DAVID STOCKMAN, former Reagan administration budget director: They have the Federal Reserve working for them.

PAUL SOLMAN: Goldman’s status as a bank holding company means it can borrow money directly from the Fed. Moreover:

DAVID STOCKMAN: In its wisdom, the Federal Reserve has driven interest rates down to 10, 15, 30 basis points, so their cost of funding is zero.

PAUL SOLMAN: So, you mean Goldman Sachs borrows money from the Federal Reserve at a tenth-of-a-percent, a quarter-of-a-percent, takes that money, invests in U.S. Treasury securities at 3.5 percent, 4 percent…

DAVID STOCKMAN: Three-and-a-half percent, exactly.

PAUL SOLMAN: … and they make the money just…

DAVID STOCKMAN: On the spread.

PAUL SOLMAN: And the money is simply being recirculated from the Fed back to the Treasury?

DAVID STOCKMAN: That’s exactly right.

PAUL SOLMAN: But, mainly, Goldman raises money privately, through the markets. And because the Fed is keeping interest rates so low, that private money is also very cheap, as long as the markets think the government will never let Goldman fail.

SIMON JOHNSON: Goldman Sachs recently was borrowing between 100 and 150 basis points. That’s between 1 percentage point and 1.5 percentage points above what the government was borrowing. In the aftermath of the greatest financial crisis since World War II? That’s incredible.

It doesn’t — it makes no sense, unless Goldman Sachs is almost as good a risk as the U.S. government. Then, it makes complete sense. And that’s what the market is saying, and the market is thinking. And the market is right.

PAUL SOLMAN: And, so, it can borrow at 1.5 percent interest for short-term money, make bets with that money, and, if they pay off, it can make a fortune and pay big bonuses?

SIMON JOHNSON: Yes, absolutely, make money, get the bonuses, take the money and do it again. Don’t even bother running. You don’t have to run, because nothing’s going to happen to you.

PAUL SOLMAN: Or, as David Stockman puts it:

DAVID STOCKMAN: There has never been more of a, you know, easy-money scam that I can remember in modern economic history.

PAUL SOLMAN: But, hey, says former hedge fund manager Jeff Macke, in the end, if this is a problem, it’s the government’s, not Goldman’s.

JEFF MACKE: Amen. That’s exactly how it works. And that is a problem. You’re pushing on a string if you’re just going to give the banks free money and expect them to do anything other than that which makes them more money.

How do you fix that? Well, you can either make a bunch of laws as thick as a phone book, or you can raise interest rates, stop giving the banks free money.

PAUL SOLMAN: A bunch of laws or higher interest rates, not an especially attractive pair of options for Goldman Sachs, and currently the subject of considerable debate in Washington.