My list of examples of the unintended consequences of government intervention in the marketplace gets longer and longer. This time, I’m going to point out the latest irony: Investment banking’s profitable last quarter.
This would be wonderful news if it were genuine, but looking a little deeper reveals the truth. First, in one of Barron’s feature articles by Andrew Bary, we learn about a little-discussed fact: Goldman Sachs has only been able to issue low-cost debt due to the backing of the FDIC through a program called the TLGP, or Temporary Liquidity Guarantee Program.
This week has featured a lot of discussion on AIG. There is widespread outrage over the payments of bonuses to employees. There is finger-pointing and flip-flopping regarding who knew what and when in regards to the bonuses. We have the House and the Senate proposing and passing legislation to address the bonus issue. AIG CEO Edward Liddy testified before the House Financial Services subcommittee on Capital Markets. Obama and team have been making statements which appear, at times, to be inconsistent… I’m pretty much spent on the issue, but will offer my thoughts.
The Federal Housing Finance Agency announced Friday that it was suing several financial institutions for risky loans made in the lead up to the 2008 financial crisis:
The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.
The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.
Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.
Of course, there is much more to the story than banks making bad loans. As Jon Berlau notes over at Market Watch, the government is complict just as guilty as anyone since it was involved in crafting the loans and mandated them on mortgage companies:
A more apt description would probably be that Fannie and Freddie are suing the banks for selling them the very loans the GSEs helped designed and that government mandates encourage — and are still encouraging them to make. These conflicted actions are just one more of the government’s contributions to the uncertainty that is helping to keep unemployment at 9 percent.
I was twenty-eight years old before I had even heard of Goldman Sachs. In retrospect, I suppose that’s a bit of surprise considering they are one of the largest and most influential companies in the world. On the other hand, I never had much interest in the financial markets when I was younger nor any sort of fascination with Wall Street.
Since the beginning of the height of the financial crisis last September, I have become much more aware of both the markets and Goldman Sachs. I’ve noted before on this site that Goldman Sachs has not only been the recipient of taxpayer largess via AIG but also has a network of former employees in influential government positions. The so-called mainstream media has been relatively quiet on these facts, but the chatter is beginning to pick up.
What a weekend. We have been hearing about the troubles with Merrill Lynch and Lehman Brothers for months, with intense focus over the last week, but the bankruptcy of Lehman and buyout of Merrill have radically altered the investment banking landscape more in one day than we have seen in the previous few years. With the bailout of Bear Sterns this spring by JP Morgan, visa-vis the Federal Reserve, 3 of our nation’s top 5 independent investment banks either do not or are soon to not exist in their pre-2008 form. This news is on top of the recent Treasury Department takeover of Fannie Mae and Freddie Mac that occurred earlier this month.
While the actual problems that led to what is essentially the collapse of Bear Sterns, Merrill Lynch, and Lehman Brothers have been brewing for decades the string of public bad news in regards to their balance sheets has come to light mainly within the last year. The problems and the ensuing financial chaos that resulted will be analyzed and discussed in the financial and policy circles for years, but the news that will be dominating today began with the Sunday morning breakdown of negotiations between Lehman Brothers and other top Wall Street firms, who were attempting to find funding to solve Lehman’s capital crisis.