Monday, July 13, 2009

• Goldman Sachs: Thank You Mr. President

Dear Mr. President,

This should prove a challenging week on the PR front for us at Goldman Sachs. There are a few situations surfacing for which appropriate clarification will provide you sufficient context in the event that the inevitable questions arise. We also have a couple of suggestions.

Regarding this nastiness of the past week, please do not be too concerned about all this talk surrounding our super high-speed fully automated transaction processors. Also please understand that they are our future. Admittedly, we are enamored with the technological prowess we have acquired. Don’t believe those jealous rumors coming from begrudging low-level corners of the financial community, whining about our “edge.” We run a clean and very efficient business that can withstand any scrutiny. Our company represents about one quarter of all program trading on the NYSE. We realize you are not familiar with our business or what we do, but just know that the billions in valuations that represent our daily trades require extremely fast, exceptionally complex algorithms running on the largest, and fastest processors money can buy, with as close proximity to the NYSE as is physically possible. This is part of our multifaceted long-term strategic plan.

This business is not for the feint of heart. We take risks, but we are extremely adept at minimizing our exposure. That’s all. Don’t listen to noises suggesting that we make money on trades even when we buy and sell at the same price levels to ourselves. Everyone in the business is familiar with our fee structures. What’s a half penny a trade anyway? Nothing. There is no magic. As for front running orders with our faster than light system on stocks or options, well, that is just not the way we work, and it’s not even legal, is it? We’ll get back to you on that. In these difficult times people can become very excited, and reactive to unwarranted rumors. Pay no attention to hearsay coming from bottom feeders. … Front running indeed.

Thank the guys at Justice and the FBI for being so quick to respond, and picking up that frustrated dancer, Sergey Aleynikov. Stealing secret algorithms should be punishable by incarceration for life. Oh, could you check into what’s wrong with that judge who let him out on bail? Bail should be revoked. This is a matter of grave concern, and is of National import. As we said, someone could get a hold of this program and use it to manipulate the markets. OK, not “manipulate,” so much as harm the markets. We would never manipulate of course, but someone else certainly could. This is no superficial matter. This breach and the whole episode must be snuffed out before it develops any legs. This is no time to demonstrate any sign of weakness or lethargy in addressing such a heinous affront to the intellectual property at the deepest core of our business, and in some ways, the characterization of its essence.

You should see what we pay the guys like Sergey who develop and run our systems. It takes half a million a year to get them out of bed, but we tie them up for life with more legalese than they can understand. No matter what precautionary measures are implemented, there always has to be one that must feed a need we can’t fill and he becomes an abomination, turning to criminal activity.

On other matters, thank you for keeping those lovable and sleepy bureaucrats at the SEC off our backs. We also have to express our sincere gratitude for leaving the AIG dogs to die without clamor. Our involvement was very profitable, but if it had surfaced too visibly, the exposure would have been embarrassing. Our boy Tim is pretty slick isn’t he? He left all the folks in place at AIG who rode that trick pony over the abyss. Amazing talent. Keep him in the job for another year, or two, won’t you? Make sure the billions in bailout checks are cashed before sending him to Paris as ambassador. We need to make sure our friends on the Street are still standing. Competition is good for us, to a certain extent. The smaller fish keep prying eyes busy.

On a sadder note, we feel really bad for the Iceland economic implosion, but hey, we didn’t force them to buy our derivative packages. We sell what we can to make money. They had cash that needed to find a home, and we obliged.

We should point out that operating speculative derivative or futures markets outside the bounds of national or international oversight is fundamentally critical and necessary given the world we now live in. How else could we possibly continue to take advantage of events and situations around the globe unfolding at lightning speed and impacting the fluctuations in such things as commodities or financial instruments. You can get more background on this from Tim, but being nimble in a rapidly changing environment is critical to success. Nothing moves faster than money flowing over electronic waves. Agility is part of our very survival.

Naming our colleague Philip Murphy to an ambassadorship in Germany is a nice touch, which should provide our firm with a very friendly ear on governance in the EU at a time when these countries are fighting over each other’s relative “tax advantages.” What a bunch. They’re killing capitalism with their policies. You can’t find a real capitalist over there anymore. Everyone is an employee, from the Chairman to the clerk, no one is an owner, and everybody waits for a paycheck and the year-end bonus. What’s this world coming to?

Speaking of bonuses, you will be hearing some announcements about our historically large earnings for fiscal 2009, which means it is once again bonus time. The numbers might sound really big, really, really big, but keep in mind that we have top-notch employees we aim to retain in branches spread around the world. If we didn’t provide them ample compensation, they would leave for greener pastures. Do you recall when we told you that about the AIG bonuses, and after a few days you succumbed to pressure, making some angry statements about … well you remember, let’s not have a repeat of that sordid week, shall we. We’re putting aside billions to cover all benefits and compensation, so we are good to go. We are simply in great shape. You should be pleased that at least one company in this country really has its act together. This will in turn enable us to be of help to others as we all weather the economic storm together. Do us all a favor and ignore the squawking.

We might point out that California needs a visit. They’re cracking at the seams in Sacramento. Tell Arnold we said hello, and we’ll see what we can do to help out in a few weeks when we get around to it. He’s not hurting badly enough yet. We’ll wait till they repossess his state issued limousine, at which point we’ll have a chat. Don’t you find his IOU business hilarious? Those Californians are just a little too arrogant, thinking all trends start in the West, and all innovation starts there. We like your attitude, or is it Timmy’s, on holding off and making them sweat before sending in the bailout team. What a day that will be. Bailing out a bankrupt State with bailout money created by debt financing.

Please continue to demonstrate insouciance toward rising unemployment which we believe is heading to 11%. Such distractions can be disquieting and being President requires a clear mind, … so many decisions, so much to learn, so many speeches to give, so many trips to take.

One final note to buttress against the reactionary comments from some invidious corners attacking us with “too big to fail,” accusations. Don’t listen to this jealous and frivolous drivel. We are a proud organization seeped in history and what is good for Goldman Sachs is good for America.

Mr. President, please just let the boys take care of that money supply expansion machine, and we will do our very best to manage its trade, efficiently and diligently. We will also endeavor to do our best to always find a home for your debt.

We know you are grateful for our past contributions, and likewise, we thank you for your continuing support in these emotional and turbulent moments.

Your Friends at G.S.


  1. No doubt this is true given the arrogance of government sacks.

  2. Wow, congratulations, well written. Let's keep this momentum up as we need to badly deal with these government sucks. They set the tone for everyone else in the financial sector, and what a tone it has been. Chinese opera on speed rings a bell.

    Ferdinand Balfoort

  3. Sergey Aleynikov Fan Club on Facebook:

  4. Yes, well written indeed.

    Too bad it is most likely all true.

    Too bad for America anyway.

    Papa Ray
    West Texas

  5. "Everyone in the business is familiar with our fee structures. What’s a half penny a trade anyway? Nothing."

    Goldman Sachs is essentially following the Gus Gorman Plan from Superman 3.

  6. From what I've read Goldman seems to be able to weather financial pitfalls better than any other investment company. It's been suggested they have an inside edge. Perhaps it's Government connections. They treat their employees quite well all the way down to the mail room clerks. It's a great company to work for. I wish I could get in on all those profits, bonuses and perks too.

  7. I got this analysis from a friend in London, who got it from a friend in Cambridge who got it from ......I thought it contains a nice analysis to round out the discussion of Goldman Sachs.

    "So what’s wrong with Goldman posting $3.44 billion in second-quarter profits, what’s wrong with the company so far earmarking $11.4 billion in compensation for its employees? What’s wrong is that this is not free-market earnings but an almost pure state subsidy.

    Last year, when Hank Paulson told us all that the planet would explode if we didn’t fork over a gazillion dollars to Wall Street immediately, the entire rationale not only for TARP but for the whole galaxy of lesser-known state crutches and safety nets quietly ushered in later on was that Wall Street, once rescued, would pump money back into the economy, create jobs, and initiate a widespread recovery. This, we were told, was the reason we needed to pilfer massive amounts of middle-class tax revenue and hand it over to the same guys who had just blown up the financial world. We’d save their asses, they’d save ours. That was the deal.

    It turned out not to happen that way. We constructed this massive bailout infrastructure, and instead of pumping that free money back into the economy, the banks instead simply hoarded it and ate it on the spot, converting it into bonuses. So what does this Goldman profit number mean? This is the final evidence that the bailouts were a political decision to use the power of the state to redirect society’s resources upward, on a grand scale. It was a selective rescue of a small group of chortling jerks who must be laughing all the way to the Hamptons every weekend about how they fleeced all of us at the very moment the game should have been up for all of them.

    Now, the counter to this charge is, well, hey, they made that money fair and square, legally, how can you blame them? They’re just really smart!

    Bullshit. One of the most hilarious lies that has been spread about Goldman of late is that, since it repaid its TARP money, it’s now free and clear of any obligation to the government - as if that was the only handout Goldman got in the last year. Goldman last year made your average AFDC mom on food stamps look like an entrepreneur. Here’s a brief list of all the state aid that is hiding behind that $3.44 billion number they announced the other day. In no particular order:

    1. The AIG bailout.

    Goldman might have gone out of business last year if AIG had been allowed to proceed to an ordinary bankruptcy, as AIG owed Goldman about $20 billion at the time it went into a death spiral. Instead, Goldman gets to call upon its former chief, Hank Paulson, who green-lights this massive, $80 billion bailout of AIG (with Lloyd Blankfein in the room), at least $12.9 billion of which went straight to Goldman. Moreover, let’s not forget this: both Goldman and Bank Societe Generale had been tattooing AIG with collateral calls in the period before AIG’s collapse, with Goldman extracting a full $5.9 billion from the company during that time. It was those collateral calls that really killed AIG.

    Now, ask yourself: exactly how big would Goldman’s profits be this year, if they had to fill a still-extant $13 billion or even a $20 billion hole on its balance sheet from AIG’s collapse? You think it would still be $3.44 billion? What if Hank Paulson had elected to save Lehman instead of saving AIG/Goldman, how big would Goldman’s profits be then? Is anyone even asking this question?

    Next Part II

  8. Part II.

    I keep hearing people say, “Well, so what — it’s only fair that Goldman got paid off for its deals with AIG. After all, AIG was contractually obligated to Goldman. Goldman deserves that money, because it was doing the right thing in buying insurance from AIG in the first place.”

    That’s bullshit, too. As Rich Bennett over at the hilarious monkey business blog pointed out to me the other day, Goldman was insane and reckless in making those deals with AIG. Goldman wasn’t removing risk from its books by buying CDS protection from AIG, they were exchanging one kind of risk for another kind of risk, counterparty risk. “If you have too much risk to one entity and they go bust, you’re shit outta luck,” Rich says. “They took AIG for a ride, and when the music stopped, they and their partners were going to be taking up the proverbial tookus.”

    So to review: Goldman makes insane bets, runs wild on AIGFP’s house idiot Joe Cassano for a while, sticking him with $20 billion in risk, and when it all went to shit — as it inevitably had to — they drove a big stake through AIG’s heart and got the government to step in and pay them off using our money. How’s that for market capitalism? Just like Adam Smith drew it up, right? They’re just smart guys!

    2. TARP.

    Much discussed, no need to really review here. Goldman got its $10 billion. It paid off its $10 billion. Good for them. However, there’s one thing to note here, and it hasn’t been mentioned really at all in the press. It is continually reported that now that Goldman has repaid its TARP money, it no longer has restrictions on its executive compensation. That’s actually not true. The government still holds warrants from Goldman and other companies that it acquired during the TARP process, and until the banks pay off those warrants (and they’re all already trying to pay them off at below market prices), the Treasury still technically has the authority to prevent lavish bonuses. Not that that will happen, of course, and this is yet another government handout — a firmer government would be hard on Goldman to the end of the process, while this government is doing its matador job and waving through these massive bonuses early on in the repayment schedule.

    3. The Temporary Liquidity Guarantee Program.

    So Goldman last year converts from an investment bank to bank holding company status, which now makes it eligible for a new program that gives commercial banks FDIC backing for unsecured debt. This is not a direct subsidy in the sense of us actually handing over a bunch of money to Goldman, but it’s almost better, in a way. This basically hands over a free AAA rating to the big banks and allows them access to mountains of cheap money, with all of us on the hook if something went wrong. This is the equivalent of telling Exxon it can take crude from the Strategic Petroleum Reserve at below-market rates during an energy crisis and then turn around and sell it on the market at whatever price it wants, and pocket the difference, for the good of God and country. Goldman took full advantage of this deal, issuing $28 billion in FDIC-backed debt after its conversion. Exactly how hard is it for a bank to make a profit when it has unlimited access to virtually free money? It is almost impossible for banks to not make money when their cost of capital sinks this low.

    Ask yourself this question: has borrowing money gotten any cheaper for you this year? Did someone from the government walk up to you after you foreclosed on your house or missed payments on your charge card and, as a favor, just because you’re so cool, jack your credit score back up to the 99th percentile and invite you to start all over again? Because that’s what happened to these assholes. They made every bad move you can think of and they not only got a clean credit slate but a vitually ceiling-free spending limit.

  9. Part III

    4. The Fed Programs.

    By converting to a bank holding company, Goldman also became eligible for a whole galaxy of new bailout programs administered through the federal reserve like the Term Asset-Backed Securities Loan Facility (TALF); it also became eligible to borrow cheap money from the Fed’s discount window. There is so much to cover here that it would take forever to get to all of it, but the key number to remember here is $2.2 trillion (not billion, trillion). That’s how much the Fed has lent out in assistance since this crisis started and we have no idea how much of it went to Goldman or any other firm, thanks to Ben Bernanke, who refuses to disclose this information. But you can bet that Goldman has taken full advantage of all the various programs designed to relieve the banks of the worthless crap assets they acquired while they were playing roulette the past ten years or so. We just have no idea how much crap they unloaded on the Fed, or how much they borrowed. Would you really bet that it wasn’t much?

    5. The TARP Repayment Bonanza.

    See the story at the top of this piece. As part and parcel of the TARP program, the banks that received money had strict guidelines imposed on them by the state in the area of how they could raise the money to repay. TARP recipients had to issue new equity according to certain parameters, and guess who one of the only major equity underwriters left on Wall Street is? That’s right, Goldman, Sachs. So say International Reckless Dickwad Bank needs to issue $100 million in new stock to pay off TARP; they hire Goldman to do the deal, and since the fee for equity underwriting is 7%, Goldman gets, in essence, a state-mandated $7 million fee. Because so much money was lent out under TARP, the underwriters on Wall Street made a massive bonanza on all the new bank stock. As noted above, Goldman’s equity underwriting department hauled in $736 million this quarter. Does this happen without the bailouts? No. Do the bailouts happen if banks like Goldman hadn’t blown up the universe in the first place? No. You do the math; this is another subsidy.

    And that’s just some of the help they’ve gotten. Should we bother to count Goldman’s status as one of just 17 remaining primary dealers in U.S. Treasuries, which naturally did a crisp business last year as the U.S. borrowed its way out of a hole the banks had themselves created? Should we count the ban on short-selling Goldman asked for and got last year? Or how about the seemingly obvious fact that the bank used all of this state assistance and guarantees as a crutch to prop up lots of new risk-taking activity, which was the exact opposite of what was supposed to have been achieved by the bailouts, which were supposed to usher in an new era of austerity and temperance?

    Next to Part IV

  10. Part IV

    As Felix Salmon notes, Goldman last year, after it converted to bank holding company status, announced that it was “taking steps to reduce leverage.” But what’s happened since then is that Goldman has actually been emboldened by all its state backing to borrow more and gamble more than ever. This is the equivalent of a regular casino gambler who hears that the house has doubled down on his credit line and decides to stay up at the tables all night, instead of going home and sobering up. Just look at Goldman’s VaR, or Value at Risk, which measures the amount of money the bank puts at risk on any given day: it’s soared since last year.

    Taken altogether, what all of this means is that Goldman’s profit announcement is a giant “fuck you” to the rest of the country. It is a statement of supreme privilege, an announcement that it feels no shame in taking subsidies and funnelling them directly into their pockets, and moreover feels no fear of any public response. It knows that it’s untouchable and it’s not going to change its behaviour for anyone. And it doesn’t matter who knows it.

    There are going to be some people who say that some of this stuff isn’t government subsidy so much as ordinary government contracting. After all, do we criticize Boeing for making airplanes or Electric Boat for making submarines during a war? If we don’t do that, then why should we be pissed about Goldman making a profit underwriting TARP repayment stock issuances, or Treasuries?

    The difference is that Boeing and Electric Boat didn’t start the war. But these guys on Wall Street caused this crisis, and now they’re raking in money on the infrastructure their buddies in government have devised to bail them out. It’s a self-fulfilling cycle — beautiful, in a way, but at the same time sort of uniquely disgusting. That they’re going to get away with it is bad enough — that they’re getting praised for it, for being such smart guys, is damn near intolerable."

  11. Now, now... Obama is a true liberal who is out for the best interests of the common man. After all, just listen to him talk, and the media and outspoken adoring public that gets the airplay. You, my friend, are sounding cynical. So... he continues the policies of his vile, hated predecessor in this regard - and, gee no one sees that? Why is it that you can? And... gee, don't you realize that the secretary of the treasury had to take a big pay cut - in order to extend his altruism toward the best interests of the individuals in the U.S. and away from the capitalist society? Hmmm.... methinks a touch of cynicism here - c'mon, these guys are lauded by true liberals - and you're a dissenting voice? Wow....

    I trust you realize, I wholeheartedly agree with you - and am doing my best to express exasperation with the fact that you see through all this - but so, so many do not.


  12. Dave,

    Thanks for the note. I trust that many by now are in agreement that on the big picture of the economy, Obama is just is not knowledgeable enough, and is allowing absolute abuse of the system.

    Bush in effect did the very same thing with Paulson. He didn't know enough to question him. Obama seems to know even less.

    The plundering is continuing unabated. Taxpayers are not being well served by guys like Bernanke who only last year testified that there was no housing bubble, etc., etc. Goldman and friends are firmly in control.

    As far as "social" programs are concerned, they could care less what Obama does, although with their inside track, they will always know which way to play in those
    "side games," .... those they don't fully control. Nice place to be. We can only wish that morals and ethics were present, but wishful thinking is just that, ... wishful thinking.

  13. Thank you all for this blog and the comments.

    I agree with all of you.

    Barack Obama needs an did George Bush. Unfortunately, neither man has the willingness or morality to read articles on and others like David Kotok ( from Cumberland Advisors ) Barry Ritholz,etc.

    We need bettter leaders in Congress and the White House. I have had it with both the Republicans and the Democrats.

  14. Anonymous,

    There is also need for more parties at the table.

  15. These guys are smart in the same way that Madoff was a genius. He said himself, from his prison cell, that he had no idea how he got away with it for so long. If it wasn't so repulsive it would be pretty impressive. These people would make great supervillains in the next comic book movie.

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