How The Fed Gave Goldman Millions In Exchange For Defaulted Bond Collateral

Tyler Durden's picture

While it is no surprise that the day after Lehman failed, every single bank scrambled to the Fed to soak up any and all available liquidity after confidence in the entire ponzi collapsed, what is a little surprising is that of the 6 banks that came running to papa Ben, and specifically his Primary Dealer Credit Facility, recently upgraded, or rather, downgraded to accept collateral of any type, two banks (in addition to Lehman of course which at this point was bankrupt and was forced to hand over everything to triparty clearer JPM), had the temerity to pledge bonds that had defaulted (i.e. had a rating of D). As in bankrupt, and pretty much worthless. Now that the Fed would accept Defaulted bonds as collateral: or "assets" that have no value whatsoever is a different story. What is notable is that the two banks that did so were not the crappy banks such as Citi or Morgan Stanley, but the two defined as best of breed: Goldman Sachs and JP Morgan. It is probably best left to the now defunct FCIC to determine if this disclosure is something that should also be pursued in addition to recent disclosure that Gary Cohn may have perjured himself by not disclosing truthfully his bank's discount window participation. However, we can't help but be amused by the fact that of all banks, the ironclad Goldman and JPM would be the only ones in addition to bankrupt Lehman to resort to something so low.

PDCF collateral as of September 15, 2008.

And further analysis indicates that a few weeks later, this practice became pervasive, with virtually every banker pledging defaulted bonds in exchange for money good cash with which to pretend these banks were doing just fine (not to mention that $71.7 billion in collapsing equities represented nearly half the total collateral of $164.3 billion pledged to receive $155 billion in cash.)

At some point people will inquire, perhaps not in the most peaceful of terms, just why this travesty of fiduciary responsibility was happening when it happened. But not yet. And certainly not while the Chairman continues to successfully levitate the market singlehandedly.

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hedgeless_horseman's picture

...not disclosing truthfully his bank's discount window participation...

Gary should have known better.  You suck just one cock, and you are forever a cocksucker. 

hedgeless_horseman's picture

It is a truth of nomenclature, not a personal experience.

Fish Gone Bad's picture

So just like Tollbooth Willie (, Goldman is just another bunch of pathetic losers.

Harlequin001's picture

How can GS have zero loss trading days in a quarter when their investment calls are so bad...

Answer: go see uncle Ben and more so if he's a bit busy trying to stuff banks with money so they don't fail.

None of these profits are real. It is taxpayers money.

In Fed We Trust's picture

Here is the skinny.

The money leant to these foriegn banks was enough to have saved Lehman.

The money leant to GS and JP for D bonds, also was enough to have saved Lehman.

Hank Paulson could have saved Lehman, but instead saved everyone else.

As if they didn't compute, that letting Lehman fail, would cause a crash.

They had to have known that fact, yet they all wanted Lehman to fail.

Proof: They wanted/planned/ profited from the crash.

Non dare call it conspiracy. Just smart Investment bankers.

In Fed We Trust's picture

In addition, Goldman Sachs, and it's client Paulson(Hedge Fund) where the only ones able to spot the black swan better known as sub prime.

Each to the tune of a $10 billion profit betting against subprime. 

Whey Hank Paulson, didn't see the same black swan as he was just CEO of Goldman.

Probably because he had become Treasary under Bush.

Why didn't Goldman call Hank Paulson and say "we see a black swan on the horizon?"

I guess because they wanted the $10 billion apiece.

Could/should they have known, that their collective bets were enough to turn the market south?

No worry, because Goldman would get another $10 billion from TARP after Hank Paulson stopped crying about how the markets were getting spooked!

So Goldman was smarter than everyone else in spotting the subprime problem, but not smart enough to know that letting Lehman failure would tank the market, and also the sheer size of their bet against subprime was enough to get the markets to tank.


In Fed We Trust's picture

In the circus better known as teh US Judical system, an Honorable Judge refered to the crime as "the BIG short" and scolded the head of Goldman for 5 minutes about collasping the economy.

Then, the honorable Judge fined Goldman $500 million for the fraud.

They made $10 billion on the fraud. Fine is half a billion.

Cost of doing business, i mean fraud in America.

5% is the cost to do fraud. Not to shabby!

In Fed We Trust's picture

Not to dig up the past, but the feds been muggin on me lately, so I be muggin back!

full the full skinny on Goldman   what i call Conspiracy 101 or macro   what I call conspiracy 102 or the MICROS


LostWages's picture

Lloyd gave a pinky promise he would pay it back. 

All good....nothing to see here.

apberusdisvet's picture

Under the rule of law, Bernanke would have already been given a choice as to preferred method of suicide; swan dive from a helicopter over the Grand Canyon or exile at Fukishima.

unununium's picture

It is theft.  Actually, it is worse than theft.  This is treason.

Harlequin001's picture

I'm not convinced there is a problem here at all...

When you look at how money in the US is created it usually begins with Congress demanding money from the Treasury.

The Treasury creates a T Bill for say $1 billion which it takes down to the Fed. The Fed writes itself a check for cash to pay for it and accepts the T Bill in exchange. The Treasury can now give the cash to Congress to spend into the economy.

Perhaps my understanding is wrong here, so any pointers are gracefully accepted.

During the converse, where the Fed wishes to remove liquidity from the economy the Fed takes said T Bill back to the Treasury and asks for its cash back. The Treasury would normally sell the T Bill into the market, the proceeds of which it then pays back to the Fed. This assumes that the money supply remains constant with the Fed acting as a sponge.

Now lets suppose that the Fed chose to reduce the money supply it would simply shred the currency being returned from the sale, the Treasury would shred the T Bill and the Fed's balance sheet would once again read zero. In the converse to how money is created from thin air it is returned to thin air i.e. there is no loser of money.

Consider this. Supposing the Fed wished to dispose of its defaulted CMBS which was worth actually zero but has a face value and was being held on the Feds balance sheet at the value of $1 billion. It could simply take said CMBS to the Treasury and ask for the money. The Treasury could  agree to accept the CMBS at full face in return for $1 billion in cash, which it pays to the Fed.The Treasury then shreds the CMBS and the Fed shreds the currency.

Of course the Treasury would then need to replace the currency by offering the Fed another brand new T Bill, which the Fed then writes itself a check against and takes as collateral on its balance sheet.

Et voila, the Fed just disposed of $1 billion of CMBS losses to the same people it takes its money from. No one. It simply has to wait for the collateral to expire on the Fed's balance sheet because it can't return brand new T Bills to the banks if it took defaulted crap in its place.

ergo the taxpayer is not utimately funding this or any other bailout.

Comments please?


falak pema's picture

maybe he likes sizzling saunas...swan dive is truly black swan...if no golden parachute...all these guys have golden parachutes...hidden inside their coats or wallets...

Sudden Debt's picture

I wonder if I would be able to collect my losses from those days if I wrote Benny a letter asking for my money back... most where bank loses, so I think it could work...

hugovanderbubble's picture

In my humble house...this is " help the big ones to avoid failure..."---- Thats free market ...that competitive?


And most of this banks (executives) has taken bonus during 08-10...........THats ethical? YES of course¡¡¡¡ Call Daddy Government and give free money to solve problems...




Thanks for posting, and whole zH readers have a nice Wkend

Milton Waddams's picture

"Your kids have any baseball cards maybe? Used chewing gum? a paper clip? Anything. Just mark the value to internal mndels *wink* and bring it down to the window. Tell'em Ben sent you."

Cursive's picture

Where the fuck os A99? Bring Dimon and Blankfien to their knees.

RobotTrader's picture

Another huge day for stock bulls.

Consumer names like Under Armor continue to outperform.

Same thing for REITS

Casino stocks going wild:

lieutenantjohnchard's picture

and of course you made nothing off these investments. your widows and orphans portfolio of mo and vz were down for the day. lol, as you would bray.

meanwhile, those metals foiled you again.

the old scroomer as you call him, gentleman jim sinclair, sends warm regards, and hopes your view of the jam packed los angeles freeway from your 3rd floor apartment window is nice today.

bania's picture

a lot of folks here seem to get their backs up every time Robot posts.  However he does highlight an extremely important point that the system has much more resilience than you'd expect - kind of in the 'staying irrational longer than you can stay solvent' way.  Whether or not the charts he cherry picks represent his investments is irrelevant.  The numbers in those charts don't lie, and there has been a tremendous surge in stocks in general, and certain stocks in particular, these past few years.  To block this reality out of your investment philosophy because you think a market isn't right or fair or right, is a huge opportunity lost.

Everytime I see a Robot post is a reminder the 'incumbent' system isn't going to be replaced without a long, drawn-out fight.

PS. i forgot to add... Robot, please include the ladies with your posts!

lieutenantjohnchard's picture

but do you need a robot post to tell you what you already know?

robot grates because he talks out of both sides of his mouth, and then claims he was right all along. the list is too long to recite at this point.

as i've said before. if you are new to zh please research his back posts for yourself. at that point you will know exactly what i'm talking about.

Harlequin001's picture

bania, whilst  agree with your sentiments the fact remains that if you don't understand a market there is no way you can get out ahead of the field. You exist to be stripped of your assets which is the ultimate result for Robot.

Bottom line is that with the gains I have made already in PM's I am not interested in short term moves in socks, or currencies or anything else for that matter.  I have no need of them.

As governments the world over will come to realise, precious metals investors have no need of fake markets because their assets cannot be devalued. The more money governments create to manipulate markets in the short term is fodder for the longer term trend. Neither they nor Robot can win.

or perhaps I should say that gvernments can win because they can simply take it from you, but Robot is on a no win ticket, because he can't.

JohnG's picture


How the hell does this relate to the topic of this posting?

strannick's picture

I think JPM and GS should be flying used-car multi-colored pendant flags outside their Wall St. digs with 'Honest Jims' and 'Lloyd's for Less' flourescent blinking signs. They should be dressed in plaid, so people dont misconstrue the true motives of their businesses based on the fancy digs and threads.

Harlequin001's picture

how about just tarred and feathered...

Widowmaker's picture

How about dragged behind a truck in their pinstripes.

Lying, cheating, and fucking the taxpayer with their own congress - the Goldman Morgan way.

The rest of us called this with the record bonus bonanza bullshit.


When I [ever] cross paths with any NY GS JPM bankers you will get a complimentary broken face -- and you will never see it coming.  Speaking of, where is that spineless fuck Chemba who is always defending GS's pillaging?  I'd love to meet you first, pussy.

Cdad's picture

" will the MSM keep Tyler Durden's representatives from asking questions when the Chair Satan has his first press conference?  Report.  

Computer...extrapolate why is hull integrity breached in Cdad's skull?"

Hello, giant martini [with your futures rising].  

MsCreant's picture

I remember at one point no shorts were permitted on like 18 or 20 banks or so. Wonder how that hooks up with this?

If you were short, and the Bernank bailed them out and you lost your money, well, just sayin'...

Milton Waddams's picture

799 banks.  And perfectly timed too- on an option expiration day.

Rick64's picture

How many TBTFs made money off this inside info?

DaveyJones's picture

Only 1 area of law is practiced here anymore, criminal defense

Harlequin001's picture

plea bargaining, the law doesn't even get that far...

lizzy36's picture

2x in 2008.

1st time was in July 2008. That is the 18 -20 number.

2nd time in September 2008. That is the 800 number.

The interesting thing about the DW 25,000 page dump is that one can see in real time how things were spinning out of control. Then one superimposes official rhetoric and non action by regulators (paulson/geithner/bernanke, to name 3) and one knows for sure that there will NEVER be a perp walk associated with this mess. Regulators (mostly promoted or in the case of politicians on the take in their current jobs) are as culpable as any financial actor.

Odd that anyone honestly expects this time will be different.

Yen Cross's picture

Don't Fed me. What is your point?

whatz that smell's picture

feel sorry for the pigmen, bitchez. maybe a blind date with roboTrader's mom will cheer them up.

praise be the bernank! may he favor roboTraders stock charts forever!

Quinvarius's picture

Robot Trader's mom is a selfish lover. 

agrotera's picture

The privately owned Federal Reserve system included supported expenses of most highly acclaimed economic chairs in the country--in addition to droves of another machine of academics to "support" the idea that what they do and have always done is all for our own good and for the good of the order and the least harmful, etcetera etcetera...this is what i call a monumental (since the fall of 2008 when i saw the whole thing in operation implemented by the tag team leaders HANK &BEN)



All the while, the Fed balance sheet has tripled, and their 6% on 1% of all reserve "expense" charge just gets bigger and bigger, and all those on their payroll as support of this GROUPTHINKTHINKTANK just get busier and busier justifying the massive gutting of AMERICA...

RobotTrader's picture

My former employer has been acting very strong.

They are a Inland Empire bank, still choking on massive CRE exposure.

They just sold their biggest non-performing loan to its largest borrower to some "enterprising speculator".

The company has paid a cash dividend for 86 consecutive quarters, and will probably pay dividends every quarter for the rest of my life.  Unless they get bought out.

lieutenantjohnchard's picture

i guess you'll need those dividends since capital appreciation of your investments is lacking. lol. so sorry your portfolio was down today. but you can still buy boxed wine with your dividends. $2 buck chuck might be appropriately priced for your dividend oriented portfolio of widows and orphans stocks.

then again you're welcome to live vicariously off the gains of real investors. 

knukles's picture

Let's see....
First it was loans, those loans.. "Oh, we don't have any record of those loans."  Remember?  Fed book entried the money, but no records....  LOL  Not born last night.  What about Fed wire numbers?  Assholes.

Then it FOIA request was fought tooth and nail for those loans that didn't exist.  Ah-hemm.  

Then they had to release the details of those loans... which they did in redacted form on a bazillion discs, technology which nobody has used in years.

And did not release the details of the collateral.  Because there was not enough fucking eligible to be Fed wired collateral in the world to securitize all those loans.... so some of it had to be bogus (as in bullshit, bad, inferior, lousy, not good) collateral.  As I've said for days, right?


Now, if a bank loans money against shit collateral, then perhaps they shouldn't be lending money at all.
In fact,  maybe they ought not be creating moneys let alone lending it, as another no no. 

And maybe they shouldn't have been caught lying (er sorry, obfuscating or just kidding around) about it.... 
Someting about a Credibility Trap

If I were a really serious politician, I'd sure as hell be lining up my populist guns (you know, against the banks, et al) to start scathing the Fed.  Not that it's the right or wrong thing to do, and not that it'll get anywhere.... as in don't bite hands that faciltiate feeding. Just gonna be the next vote garnering trend in DC.


Cdad's picture

If I were a really serious politician, I'd sure as hell be lining up my populist guns (you know, against the banks, et al) to start scathing the Fed.

Exactly.  This one needs aggressive forwarding.  As DC prepares to commit fiscal suicide for the entire  nation, the time to write letters is now, anyway.

It continues to be the case that we, as a nation, cannot heal from this economic crisis until these banks are broken up, the vast majority of these fellows released from their jobs, the system purged of leverage, and integrity of banking is restored by revealing clean books.  It is the simply fact about capital formation.  Capital cannot and will not form in a banking industry this corrupt.  

So as Bernanke continues to print dollars via QE2 and stuffs them into preferred banks, he is specifically delaying our recovery. How many Americans are accumulating gold and silver?  How many no longer trust the banks?  How many have left the stock market?  How many are selling bond because there is not enough of a return on them to justify the risk?  

HOW LONG IS BEN BERNANKE GOING TO KEEP THE PRETENSE OF ECONOMIC RECOVERY UP IN THE AIR by printing and destroying our currency to fill the void where real capital once was?

Getting the word out on this specific nonsense will only help the cause of ridding the nation of this bloated  and corrupt financial services industry.

bbaez's picture

How long?


Until his buddies can no longer make money from it....

InconvenientCounterParty's picture

shame has no place in Capitalism.

NotApplicable's picture

Why do you keep referring to this as capitalism?

Are you really that thick? Or is this just a troll attempt?

Oh wait, you used a capital C, that means something...