Monday, May 10, 2010

Break Up Goldman and The Rest

Today's WSJ:

NEW YORK—Goldman Sachs Group Inc., facing securities fraud charges leveled against it by the government, on Monday warned that future litigation costs could cut into profits


Analysts have estimated that a settlement of the SEC's current complaint could range between $1 billion and $5 billion.
"We are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our businesses," the company said in a filing with the SEC. "Given the range of litigation and investigations presently under way, our litigation expenses can be expected to remain high."

It sounds as though Goldman is assuming that the current SEC charges will not be the only ones, and that evidence turned up during the course of this current investigation could lead to new charges.

Goldman said the challenges would not be material to the overall business, but that legal costs and potential settlements could trim operating results. The company spent about $500 million on legal costs in 2009.

What this means is that they expect to pay the fines as a business expense, and don't have any real expectation of having to do anything differently in the future.

Lloyd Blankfein, Goldman's chairman and chief executive, said Friday during the company's annual meeting that the investment bank will look into ways the company can confront the current scrutiny over its business practices. He was re-elected to the board, and shareholders voted down a proposal to split the chairman and CEO posts.

"The last few weeks have been ... difficult and disappointing," Mr. Blankfein told shareholders on Friday. "Questions have been raised that have gone to the heart of our most fundamental value: How we treat our clients."

Well, the evidence coming out in this case seems to provide an answer to that question. Apparently, they treat their customers like shit. They use them like chumps by selling them crappy products designed to fail so that they can collect insurance payments when they do.

He has been criticized for not disclosing the SEC investigation sooner. The company, which was hit by the government complaint last month, said it did not originally believe the SEC investigation would have a material effect on business.

Right. Why would having the SEC formally charge you with defrauding your own clients have any material effect on your business?

Goldman, which emerged from the financial crisis with record earnings in 2009, also disclosed in the regulatory filing that its traders did not lose money during the first quarter. The firm reported that it made more than $100 million daily for 35 days during the quarter.

Let's talk about these profits for a minute, and look at the big picture. How could anyone who believes in the efficiency of markets possibly defend a company making these kind of profits? Forget about whether you think they're obscene, and never mind the fact that most of that money will go towards buying private planes and yachts for the Goldman folks.

Think about this: in an efficient market, these kinds of profits simply wouldn't be available. In an efficient market, other firms would move in and offer the same services for far less, and still make a decent profit. In fact, in an efficient market, these profits would be approaching zero, as Goldman's competitors continued to undercut them.

This is obviously not happening, and this is obviously not an efficient market. There are many reasons why Goldman's competitors cannot compete with them, and it's not just because of some special technical skill or ability that Goldman has that they don't. Those kinds of edges never last long in that kind of business.

But Goldman has other advantages, some of which it shares with a few other huge banks that are making similar profits.

It has much cheaper funding through the Fed discount window than smaller banks do. This cheaper funding is directly paid for by taxpayers.

It has much cheaper funding from institutional investors. This is because those investors realize(even if taxpayers don't) that if Goldman fails, taxpayers will rescue it, as they've already done. Smaller banks, of course, are simply put into receivership.

Goldman acts as a member of a oligopoly, and so has very little competition. And with no competition, you get obscene profits and inefficient markets.

Goldman does not have to worry about long-term profitability. Goldman is concerned with making money today; if it makes money today, its traders and executives make millions. It can do this by making extremely risky bets. Like betting on Russian Roulette, these bets will eventually turn catastrophic. But at that point, the people at Goldman will have already been paid. And the gun is pointing at the taxpayer's head anyway.

Goldman owns the government, along with the rest of Wall Street. This means that they don't have to worry about the government passing any pesky laws that would prevent them from destroying the global economy for the sake of some bonuses, or of declining to bail them out with taxpayer money when they fail. The US Treasury department and the SEC, in fact, are full of people who used to work for them, and who are planning to go back to work for them once they've finished their little stint of infiltrating the enemy camp.

All of these are reasons to require that Goldman and the other top five banks be broken up. There is no advantage to having banks with more than $100 billion in assets, and the disadvantages become more glaringly obvious every single day.

Breaking these banks up would not be anything radical or unprecedented. It was done with Standard Oil, and it was done with AT&T. Last time I checked, this didn't result in the end of the oil or phone industries.

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