Goldman Joins JPMorgan On The PR Offensive Against The US Middle Class, As Americans Find A Surprise Champion In The Face Of Fed's Tom Hoenig
The campaign by the big banks against the people of the US is getting louder by the day. First, it was JP Morgan' Jamie Dimon, who segued into the Goldman "god' banker" refrain that all megabanks are not just critical but need to get even bigger in the form a 36-page lament to shareholders (in which among other things he repeats that even though JPM was bailed out, and even though it was handed Bear with Maiden Lane I left to pick up all the crap he did not want, none of those activities by the US taxpayers were necessary), and today it is none other than Goldman Sachs, which after prudently keeping a low public profile for a few months, is about to remind everyone who runs the world. And with the US public comprised of phlegmatic sheep, or morts as Michael Lewis put it very graphically, it appears that nobody is willing to stand up to those who run not just the markets, the economy and the administration, than the Fed's contrarian Tom Hoenig. In an exclusive interview with HuffPo's Shahien Nasiripour, Hoenig indicates that even among members of the Fed, there are people who not only think rationally, but realize that should the big banks/hedge funds (really just JPM and GS at this point) get their wishes to continue the status quo, the next leg of the crisis can't be far behind.The only problem: this time America itself will go down with the big banks: remember - all negative swap spreads indicate is that the banks insured by America, are now perceived as less risky than America itself.
Key highlights from Narisirpour's interview:
In a 45-minute interview this week, Federal Reserve Bank of Kansas City President Thomas M. Hoenig, who's emerged as one of the few influential voices calling for a fundamental redesign of a broken U.S. financial system:
- Lambasted the tilted playing field that benefits Wall Street banks over Main Street banks;
- Called the idea that the U.S. needs megabanks to compete globally a "fantasy";
- Said Congress should mandate simple, easily understood and
enforceable rules -- rather than guidelines -- so regulators can
restrain financial firms and rein in the financial system;
- Prodded the Senate to get tougher on permanently ending Too
Big To Fail by enacting laws that would take away much of the
discretion currently held by policymakers (who bailed out financial
firms when confronted with these decisions in late 2008);
- And criticized the Federal Reserve's ongoing policy to keep
the main interest rate near zero because it "guarantee[s] a spread to
Wall Street", enabling unearned profits and "encourag[ing] speculation."
Among the key matters discussed, most of which we have discussed previously extensively on Zero Hedge, were the hot topic of Megabanks and their worthlessness (but don't tell Dimon or Blankfein). It is no secret that should all the US megabanks be forced to mark their assets to market, all of them would be immediately insolvent.
One of the effects of Too Big To Fail, Hoenig said,
"has been that the concentration of financial resources in this country
has nearly doubled over the last 15 to 20 years. That's what we have to
The banks owned by the four largest financial firms in the U.S. --
Bank of America, JPMorgan Chase, Citigroup and Wells Fargo --
collectively account for about 43 percent of all assets in the U.S.
banking system, according to a HuffPost analysis of Federal Deposit
Insurance Corporation data.
The top 12 banks in the U.S. control half the country's deposits. By
comparison, it took 25 banks to accomplish this feat in 2003 and 42
banks in 1998, according to a Jan. 4 research note by Jason M. Goldberg
of Barclays Capital.
Those four megabanks collectively hold about $7.4 trillion in
assets, according to the most recent regulatory filings with the
Federal Reserve. That's equal to about 52 percent of the nation's
estimated total output last year.
"The fact that they needed to be supported by TARP tells me that
they're too big," Hoenig said. "I think that that's a very clear signal
that they're too big. The fact that they had to be bailed out under
those circumstances suggests they are too big, and that needs to end."
In response, he says policymakers should simply break up the megabanks and split them off into their component parts.
"I think they should be broken up," Hoenig said. "I think there's no
reason why as we've done in other instances of [sic] finding the right
mechanism to break them into their components.
"Without the fear of loss to creditors, these large firms can use
higher leverage, which allows them to fund more assets with lower cost
debt instead of more expensive equity," he said.
That allows them to get even bigger, leaving their smaller
competitors behind who need to worry about raising equity before they
can fund more loans.
"If the top 20 firms held the same equity capital levels as other
smaller banking institutions, they would require $210 billion in new
equity or reduced assets of over $3 trillion, or some combination of
both," he said.
...The need for MegaBanks:
"That is a fantasy -- I don't know how else to describe it. Our
strengths will be from having a strong industrial economy. We will have
financial institutions that are large enough to give us influence in
the markets but not so large that they're too big to fail.
"The outcome of that is that strong banks [and] strong economies
bring capital to themselves, and they are by themselves competitive.
"The United States became a financial center not because we had
large institutions but because we had a strong industrial economy with
a good working financial system across the United States -- not just
highly-concentrated in one market area," he said in an apparent
reference to Wall Street.
JPMorgan Chase Chairman and Chief Executive Officer Jamie Dimon defended megabanks in his annual letter to shareholders this week, arguing for the economic benefits of outsized financial institutions.
...Glass Steagall and its return:
The U.S. should revive parts of Glass-Steagall, the Depression-era
law that long prohibited banks from underwriting securities and
engaging in other Wall Street-like activities, to break up megabanks,
Hoenig told HuffPost.
"At the moment I would be inclined to break them up along those
lines of activities, and then let the market define what the right size
is, and it will be, I suspect, smaller, much smaller, given our recent
experience," he said.
"When Glass-Steagall was set aside and Gramm-Leach-Bliley [the law
that repealed it] was introduced, I gave a speech which raised the
concern that we would encounter mega-institutions," Hoenig said.
"People would say... 'They're not too big to fail', but when the crisis
came they would be too big to fail, and that's what we've gotten.
'So I am partially in favor of re-establishing elements of
Glass-Steagall that separates the very important commercial banking
that is so critical to our economy and our payment system from what I
call high-risk activities in investment banks and hedge funds. I have nothing, nothing at all against high-risk activities in
hedge funds and so forth, but they should not be part of our commercial
banking payment system."
...On the ZIRP-fueled carry trade and why it should be immediately abolished before the next asset bubble become too untenous:
Popularly known as the lone dissenter on the Fed's policy-making
panel who twice this year has voted against the Fed's decision to keep
the main interest rate "exceptionally low" for "an extended period," Hoenig said part of the problem with near-zero rates is that it guarantees Wall Street profits.
"When you guarantee a zero rate, you guarantee a spread to Wall
Street or to others, and you encourage speculation, and that's what you
want to avoid," he said. "If we've learned anything from the last
episode, we want to avoid encouraging speculative activity and zero
rates, I'm afraid, have the effect of encouraging it."
On Wall Street, "industry profits could exceed an unprecedented $55
billion in 2009, nearly three times greater than the previous all-time
record," according to a Feb. 23 report by New York State Comptroller Thomas P. DiNapoli.
The national unemployment rate, meanwhile, is nearly 10 percent. Hoenig calls that "unfair."
Low interest rates enable banks to make a killing because they
borrow at near zero yet lend or invest at much higher rates. They also
can trade in securities. For banks facing debilitating losses on
consumer lending products like credit cards, auto loans and home
mortgages -- something that happens in every recession -- low interest
rates are an easy way to make money and protect against losses.
But while Hoenig acknowledges that low rates were necessary in the
immediate aftermath of the crisis, he said they should now be steadily
And much more, the full highlights from the interview, as well as the full 45 minutes interview can be heard at the following link.
Yet none of this makes an impression on Goldman, which is the topic of BusinessWeek's cover story: "Goldman Sachs - Don't Blame Us" - as the title implies Goldman makes a concerted effort to make its core role in the financial collapse essentially non-existent, and a non-issue. From the article:
The real story of what Goldman did is so much simpler than the
conspiracy theories, says [CFO David] Viniar. Faced with a crisis they didn't
foresee,[but helped create] Goldman bankers merely did their jobs, no more and no less.
The firm had no subprime agenda, no motives that were at odds with
those of their clients. If they were half as smart and devious as the
public believes, Goldman would have done far better than it did in
More to the point, Goldman is now taking its fight to the masses (of QIB billionaires):
Now, Goldman has shifted tactics. On Apr. 7 it will release its 2009
annual report with a letter to shareholders that will, for the first
time, explicitly defend its conduct during the mortgage bubble and
The story goes on to show how Goldman was merely a scapegoat, and how it had no involvement in the bailout of AIG, or every other Fed and Government action which over the past 2 years has done nothing but benefit Goldman almost exclusively, its trading platform, its funding structure, its balance sheet, and, most relevantly, its compensation practices. Once again, Goldman, just like the BLS, assumes the US public is stupid and will buy whatever garbage is presented to it. Well, the US may be generally very, very lazy and unwilling to become an activist for its convictions, but it is hardly stupid (or at least of the magnitude the powers that be wish it was), and is very aware of the difference between right and wrong. Which is why we have a tough time with this explanation:
In the end, Goldman asserts, the secret to its success was not that it
was smarter than AIG or could divine the future any more clearly or
that it had all those government connections that enabled it to get
paid in full. Rather, Goldman's advantage, it says, was that it did the
dull, unglamorous work of repricing its securities at true market
value, a Goldman hallmark since its days as a tight-knit partnership,
when screwups came right out of partners' capital. Although that's not
the case anymore, Viniar, the CFO, says the approach he takes is the
same. "I personally see the profit-and-loss statement of each of our 44
business units every single night," says Viniar. At a now-legendary
meeting on Dec. 14, 2006, he says, Goldman executives, jittery after 10
straight days of losses in their mortgage portfolio, "literally went
through almost every position we had on the mortgage desk."
That's when the decision was made to pare back Goldman's exposure to
the housing market. Contrary to popular belief, the firm did not make
an about-face and short the market. Rather, the decision was to take a
neutral position. "I wish we knew as much as people are giving us
credit for knowing," says Viniar. "Nobody—certainly not us—knew the
depths of the financial crisis we were going to face."
Yet it found out soon enough, and invoked every single governmental connection it had ever made to assure that it would continue its parasitic existence. The firm would have now been a distant memory (whose stock the daytrading algos may or may not be gunning to $1-2/share levels, but which would for all intents and purposes be worthless) had it not been for the actions of the top three men in the US: Paulson, Bernanke, and Geithner: there is no way that Goldman can refute this. None. Which is why Goldman's stock is pushing on $200.
What Goldman should do and should have done long ago, is sincerely apologize for what everyone knows it has done (and continues doing). The US is far more forgiving than even GS' PR department can imagine. Instead, the firm continues to blindly pushing on with the "glove does not fit" defense, further antagonizing the general population, and retrenching itself as the world biggest financial leper (and a suitable scapegoat to deflect attention from JP Morgan, which over the past 2 years may have very well surpassed Goldman in administrative and regulatory capture).
One last point:
Viniar won't say that Goldman never took a short position on securities
it sold to clients—"I could never use the word never," he says.
Viniar's point is that it wasn't standard practice, that Goldman didn't
tell clients to do one thing while it did the opposite.
And that's all you need to know about Goldman Sachs: market maker for the billionaires, in which Goldman always takes the other side of the trade, and pushes the market to that point where everyone but itself is stopped out. Just observe the massive beating on the EURUSD trade that Goldman put its clients through, and which made Goldman a few billion dollars richer.
One thing is certain, the flames of anti-Goldman hatred will soon be fanning high again, as soon as the Goldman letter is made public.
Talking to top Goldman executives, I couldn't resist asking the obvious
question: If the firm could just write a multibillion-dollar check to
erase the outrage—deserved or not—over the AIG payout and be done with
the public agony, wouldn't it just do it? The question elicited sighs
of exasperation and created some tension; I just wasn't getting it. No,
was the answer. The executives all agreed that would be an implicit
admission of guilt, and Goldman Sachs isn't guilty of anything.
Perhaps. What Goldman is surely guilty of is that the next time Wall Street implodes, which is as certain to happen as that the Fed is run by a few Wall Street cronies who care nothing about Main Street and just want to see America's uberwealthy transfer ever more wealth away from the middle class, taxpayers will say no: if the administration, Treasury and Fed goes against their decision yet again, we are confident that there will be a revolution. We agree with BusinessWeek's Roben Farzad who asks: "The question is: Has Goldman Sachs shorted itself?" In continuing the charade of ignorance, Goldman has certainly planted the seeds of its own destruction. One can hope the seeds won't grow to also bring the destruction of America itself.