Goldman Sachs as discussed in TIME

An article in the recent Time Magazine is titled The Rage Over Goldman Sachs, and addresses many of the same issues we covered in our previous Goldman Sachs discussion about their buying back warrants. At one point it also directly addresses the Rolling Stone article on Goldman which was the basis for our earlier discussion.

5 comments:

  1. There are several parts of this article I find curious. Number one is this quote:

    "Goldman's riches have deflected the spotlight from what should be great story fodder: Blankfein's personal journey from one of New York City's poorest neighborhoods to its most √©lite investment bank — and his astounding rise within Goldman. Instead, he has to explain Goldman's performance — and connections — in the face of the nation's epic financial calamity."

    Really? Blankfein's personal story should be a great story in the midst of our economic collapse? Not the performance and profit of the giant of Wall Street, while Wall Street itself brought our country to its knees?

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  2. And Scott, here is the quote about the buyback of the Goldman warrants from the gov't, which we discussed at length in our earlier post:

    "Goldman, [Blankfein] notes, has already paid back the $10 billion — plus $318 million in dividends and an additional $1.1 billion to buy back warrants (at above-market value, he adds) — that Paulson forced it to take last October from the $700 billion Troubled Asset Relief Program. Taxpayers' annualized return on their nine-month investment in Goldman Sachs? A cool 23%"

    I do think 23% is a good return for the gov't on that investment, considering the huge risk that obviously was associated with it. However, that makes it MORE unreasonable for Goldman to turn around and then take huge profits and pay huge bonsues - its survival depended in part upon that big gov't risk. Am I wrong on that?

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  3. Based on the article, it sounds like their survival was not entirely dependent on the government, but the loan made it a lot easier and the 23% return was fair payment.

    If someone's credit is so bad they can only get a mortgage with a 23% interest rate, that is not the same as saying that person is going to default on the loan. It's saying that person is more likely to default than someone with an 18% interest rate and less likely to default than someone with a 25% interest rate.

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  4. That is a very good point.

    The second weird thing about the article is that Goldman claims the $12.9 billion in AIG's bailout money it got from AIG wasn't a big deal:

    "...an AIG default could have been catastrophic for Goldman, although Goldman claims to have been perfectly hedged against an AIG bankruptcy." Their CFO claimed, despite the large value of getting $12.9 billion in an unfriendly economic climate, "that Goldman would have most likely figured out how to make money trading in such a volatile environment."

    Uhh, right. Essentially this article is about AIG downplaying the bad things said about it in the Rolling Stone article. This quote is a good example. Goldman basically saying the gov't help wasn't important for their success... but they got that help anyway, right?

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  5. I agree that this quote was way off. While I do believe that he is technically accurate about being hedged against AIG failing, there is no way they could accurately project the widespread repercussions of such a large insurance company failing to meet any obligations.

    If they had a credit-default swap against AIG with another insurance company, Goldman Sachs may have been ok, but the other insurance company may have suffered enough to be unable to pay the CDS. Or if GS shorted AIG's stock, they would have made some money in that case, but could not project how much incoming revenue would be lost from other companies negatively affected by AIG's failing.

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