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Goldman Sachs, America’s Unofficial Welfare Queen?

April 14th, 2009
Wall Street received the news from Goldman Sachs as though a gift from the gods above. The former investment bank, now deemed a “bank holding company” so as to qualify for Federal bailout money under the TARP program, exceeded the expectations of analysts in reporting first quarter profits of $1.66 billion. This follows the first ever loss for Goldman Sachs in the final quarter of 2008, when the red ink amounted to $2.3 billion. The iconic Wall Street firm also let it be known that it would raise billions of dollars through a stock sale so as to repay the U.S. Treasury the $10 billion in TARP funds that Goldman Sachs had received.
However, when one looks deeper at the details surrounding Goldman Sachs and its interactions with the Federal government as the financial world built by Wall Street began to implode, it appears that an essential component in the survival of this illustrious firm is missing from the most recent quarterly report; specifically, the lifeline to Goldman Sachs that runs through AIG. For it is clear that without that lifeline, there would be no Goldman Sachs.
Back in September, former Goldman Sachs CEO Hank Paulson, now serving as Treasury Secretary in the Bush administration, made two fateful decisions. He decided to let a principal competitor of Goldman Sachs, Lehman Brothers, go bankrupt, resulting in a systemic meltdown that brought the global financial system to the edge of the abyss. Simultaneously, Paulson also decided to save AIG, which he deemed as being “too big to fail.” He and Fed chairman Ben Bernanke immediately provided an $85 billion taxpayer funded loan to AIG; in the months since, that public stake in AIG has increased by another $100 billion. Participating in a crucial meeting involving the Federal Reserve Bank of New York and the U.S. Treasury Department on the fate of AIG was only one CEO of a major Wall Street firm; Lloyd C. Blankfein of Goldman Sachs.
As it turned out, the Treasury and Fed have merely been using AIG as a pass through to funnel tens of billions of dollars in taxpayer money into the coffers of major Wall Street banks and financial institutions. The largest recipient of these payments to AIG counterparties has been Goldman Sachs, which reportedly had received $12.9 billion in Q4 of 2008. Strange coincidence indeed that a former Goldman Sachs CEO serving as U.S. Treasury Secretary “invites” his successor CEO at Goldman Sachs to participate in a meeting that decides to put the U.S. taxpayer on the line for payment to AIG counterparties, in which that same company has been the most significant beneficiary.
Allegations have already surfaced regarding the payments to AIG’s counterparties, and the inspector general for the TARP program, Neil Barofsky, is currently conducting an audit of the payments. The question being raised is why the American taxpayer should be accountable for 100% of the obligations AIG had on insuring the derivative contracts held by firms such as Goldman Sachs. As with the recent controversy over AIG bonuses, the major financial firms maintain that they had a contractual relationship with AIG. Of course, if AIG had been permitted to go bankrupt, as was the case with Lehman Brothers, those Credit Default Swaps would have become worthless. That appears to be the sole rationale for maintaining the zombie existence of AIG on life support; to pay out derivative contracts to firms such as Goldman Sachs.

If Goldman Sachs were not the recipient of AIG pass through money in the last quarter of 2008, it is clear that this firm would be facing the serious prospect of liquidation. It is therefore somewhat odd that after a catastrophic last quarter, the firm can gleefully announce a return to profitability in Q1 of 2009. To set the record straight, Goldman Sachs should come clean on any funds it received from U.S. taxpayers, passed through AIG, in the first quarter of 2009, and provide a precise accounting on how those payments affected their Q1 bottom line. Absent this transparency, Congress should demand full disclosure on any continuing payments to Goldman Sachs through the corporate corpse called AIG. In the final analysis, if it transpires that AIG payments are what is keeping Goldman Sachs alive, then the Obama administration should explain why General Motors and Chrysler should not be wards of the state, while Goldman Sachs is anointed as the nation’s unofficial welfare queen.

 

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