Fed Keeps $2 trillion secret, Goldman Sachs shorted its sales
Much of high finance lately has not been legal
This policy of socializing risk and individualizing profit may be getting out of hand. To update the Wall Street bailout, we trim, blend, and append five 2008 articles from: (1) Bloomberg about the secret recipients on Nov. 10 by Mark Pittman, Bob Ivry, and Alison Fitzgerald; (2) the Los Angeles Times about Goldman’s duplicity on Nov 11 by Sharona Coutts, Marc Lifsher, and Michael A. Hiltzik; (3) the Washington Post about bank tax breaks on Nov 10 by by Amit R. Paley; (4) USA Today about AIG by Barbara Hagenbaugh on Nov 10; and (5) Reuters about Fannie on Nov 10.
by Jeffery J. Smith, November 2008
Fed Refuses to Tell Whom It Gave $2 trillion
The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or what assets the central bank is accepting as collateral.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. In a Sept. 22 campaign speech, Obama promised to ``make our government open and transparent,” yet he as remained aloof so far.
Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.
Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.
Mark Cuban, an activist investor and owner of the Dallas Mavericks professional basketball team, created the Web site BailoutSleuth.com; in a possible move of retaliation, he has recently been charged with insider trading.
JJS: The loans reached two trillion pretty fast. How big will the bailout be before it’s over? Already, two trill is about $15,000 for every registered voter. Rather than bail out Big Banks and Big Business then hope for trickle down, we could pay citizens a dividend then not even worry about trickle up.
Goldman Sachs urged bets against California bonds it helped sell
Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds despite having collected millions of dollars in fees to help the state sell some of those same bonds.
The giant investment firm did not inform the California Treasurer what it was doing. Goldman's strategy would tend to drive down the price of California bonds which would raise the interest rate the state would have to pay to borrow money, thus costing taxpayers more. An increase of a single percentage point on a $1-billion bond issue would cost taxpayers an additional $10 million a year in interest. Gov. Arnold Schwarzenegger has warned that the state could run out of cash as early as February.
Goldman stood to profit from several aspects of California's sale of bonds. First, it collected millions of dollars in fees for bringing the bonds to market and finding buyers. Then it sold a credit default swap (CDS), that is essentially an insurance policy against a bond default.
In a CDS, the buyer pays a fee in exchange for a promise of a full refund of the bond's face value should, for example, California refuse to pay back what it owes. While California has never defaulted, the swaps' prices rise as states or municipalities slide deeper into debt. If a bond issuer does default, the swap sellers might not be able to pay the swap buyers.
When the prices of default swaps on Lehman Bros, Bear Stearns, and American International Group soared, it signaled to investors that the firms were in trouble; then the three collapsed. Investigations continue into whether insiders manipulated those prices to undermine confidence in the firms and drive them out of business and out of competition with the survivors, such as Goldman Sachs, which provided Washington with Hank Paulson, now Secretary of the Treasury.
With Attention on Bailout Debate, Treasury Made Change to Tax Policy
In the midst of the late-September bailout, the Treasury Department issued a five-sentence notice creating a sweeping change to two decades of tax policy, giving banks a windfall of as much as $140 billion. Until the financial meltdown, it was impossible to revamp this section of the tax code because this would look like a corporate giveaway, according to lobbyists.
No one in the Treasury informed the tax-writing committees of Congress about this move. Some congressional staffers privately concluded that it was illegal. But they did not say so publicly, since a repeal could unravel several recent bank mergers made possible by the change.
Over the next month, two more bank mergers took place with the benefit of the new tax guidance. PNC, which took over National City, saved about $5.1 billion from the modification, about the total amount that it spent to acquire the bank, Robert L. Willens, a prominent corporate tax expert in New York City, said. Banco Santander, which took over Sovereign Bancorp, netted an extra $2 billion because of the change.
Treasury will give AIG another $40 billion
T he Federal Reserve and Treasury Department upped the government's role in American International Group (AIG) to more than $150 billion with a restructuring of its loan package that includes $40 billion from the financial rescue package and other measures.
As a result, the Fed is cutting a previously announced loan to AIG to $60 billion from $80 billion. A previously announced $37.8 billion loan from the New York Fed Oct. 8 will be repaid and ended because of the new program.
AIG is now the largest recipient of tax revenue during this bailout. The Federal Reserve in mid-September said it would provide AIG with an $85 billion emergency loan, putting the government in control of the flailing insurance giant. Less than a month later, the Fed added $37.8 billion to the deal.
AIG spent $443,000 on a week-long celebration. AIG had a net loss of $24.47 billion or $9.05 per diluted share, in the third quarter.
Fannie Mae posts record $29 billion loss
Fannie Mae lost a record $29 billion in Q3. Their quarterly loss is their fifth consecutive.
Fannie Mae's loss equaled $13 per share, compared with a loss of $1.4 billion, or $1.56 per share a year earlier. Stockholders equity fell to $9.3 billion from $44 billion at the end of 2007. The figure may be negative by December 31, the company said.
Fannie Mae and rival Freddie Mac own or guarantee nearly half of all US residential mortgages.
Jeffery J. Smith runs the Forum on Geonomics.
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