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Source link: http://archive.mises.org/10304/goldman-sachs-best-in-the-business/

Goldman Sachs, Best in the Business

July 17, 2009 by

The business of political capitalism, that is. Like Enron, Goldman operates primarily in the nebulous world of public-private interaction. It is the US’s most politically powerful financial firm, skilled at navigating the byzantine regulations governing the virtually nationalized US financial sector. Goldman’s eye-popping $3.4 billion second-quarter earnings shouldn’t surprise anyone; as Craig Pirrong notes, these earnings reflect good old-fashioned moral hazard, with Goldman exploiting its too-big-to-fail status by taking on huge amounts of risk:

Goldman knows it is too big to fail. How does it know this? Well, the government bailed out AIG not so much for AIG’s sake, but for the sake of big AIG counterparties — most notably Goldman. Moreover, given the conventional wisdom that the government’s primary error in the financial crisis was its failure to bail out Lehman — a piker compared to Goldman — it doesn’t take a rocket scientist to figure out that it won’t repeat that mistake in the future, and let Goldman go down. So Goldman knows it can get bigger, and take more risk. It is the classic heads Goldman wins, tails the sucker taxpayer eats the loss gambit. If nobody steps in to rein in the firm, it will continue to add risk, thereby enhancing the value of the Treasury put hiding in the equity entry on its balance sheet.

Somebody should be stepping in — but nobody is. Why not? Partly, no doubt, it is Goldman’s political heft. It is likely too that important policy makers don’t want to crack down on a major source of risk capital to the markets in the fear that this would impede a recovery. Even though in reality, that risk capital is your money and mine, with the exception that we have no chance of capturing the upside, and are left with a good chunk of the downside. This is a piece with the hair-of-the-dog strategy being pursued by Treasury and the Fed.

{ 11 comments }

Fephisto July 17, 2009 at 9:53 am

I hate to talk conspiracy theory but…does anyone else find it strange that A lot of Goldman Sachs employees/former employees/CEOs/etc. chair and head a lot of important chairs in the FED/Treasury/FEC? And how all the competitors of GS were the ones not bailed out? And numerous other odd occurrences?

libertyman July 17, 2009 at 10:14 am

Read this excellent piece by Matt Taibbi

http://trueslant.com/matttaibbi/2009/07/16/on-goldmans-giganto-profits/

GS isn’t so much gaming the system, as it IS the system

Mac July 17, 2009 at 10:14 am

Nah, it’s just your imagination. Goldman execs are all former boy and girl scouts who do public service because they’re too old for merit badges.

I jest.

Cheers

End the Fed July 17, 2009 at 10:36 am

The government didn’t bail them out. They bailed themselves out, since they own a big chunk of the “Federal Reserve”.

Horst Muhlmann July 17, 2009 at 10:57 am

Fephisto,

It’s not for nothing that they are nicknamed “Government Sachs”.

Obama The Saint God July 17, 2009 at 11:46 am

“It’s not for nothing that they are nicknamed “Government Sachs”.”

Just a step away from “Government Sucks”.

Nick Bradley July 17, 2009 at 11:54 am

Libertyman,

Did you read Taibbi’s “Great American Bubble Machine”? It chrinocles GS’s exploitation of fractional reserve banking and regulatory changes/loopholes to create bubble after bubble after bubble.

The Fed creates the credit bubble, but GS directs it. Taibbi is fully convinced that GS is behind the next bubble, “green tech”.

Sadly, I think that GS is able to get away with their practices because THEY ARE SMARTER THAN EVERYBODY ELSE. Combined with their political connections, GS is able to quickly exploit regulatory changes and invent new financial products that nobody quite understands until its too late.

http://forums.somethingawful.com/showthread.php?threadid=3159732&pagenumber=1

Thedo July 17, 2009 at 12:01 pm

I heard about Goldman’s haul yesterday and Bank of America’s haul today on NPR (I listen on my way to work for a bit of laughter to prepare me for the day).

The commentators were happy about the profits these two were reporting (ostensibly to say, “Hey, the gov’t knows what it’s doing with deficit spending!”). Yet aren’t these the same profits (profits are profits, right?) NPR and the left denounces when the economy plummets?

Ireland July 18, 2009 at 3:40 am

“Glenn Beck Explains The Goldman Web”
http://zerohedge.blogspot.com/2009/07/glenn-beck-explains-goldman-web.html

“Stop bashing Goldman, blame yourself”
http://theautomaticearth.blogspot.com/2009/07/july-17-2009-stop-bashing-goldman-blame.html

GS must be really really happy with the attention it gets these days.

one more July 18, 2009 at 3:54 am

“Goldman Sachs in Talks to Acquire Treasury Department”
http://www.ritholtz.com/blog/2009/07/goldman-sachs-in-talks-to-acquire-treasury-department/

Gernot Hassenpflug July 19, 2009 at 4:14 am

Matt Taibbi’s article can be found on Google sites at:

http://sites.google.com/site/disclosuredelta/

Regards,
Gernot

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