The American Spectator

Bob| 7.13.09 @ 7:21AM

GS hires the smartest people from the business schools who have sales skills. They have done better than anyone else because they recognize opportunities sooner. They are the first investment bank to recognize the housing bubble and shorted the CDO market (something that is difficult for us to do). That way, they gained on everyone else's losses. Furthermore, I don't believe cap-and-trade is the next bubble. I think treasuries are the next bubble and GS already has a shorting plan enabled for treasuries.

But here's the dilemma concerning the hiring of GS people -- if they are the smartest on Wall Street and recognize trends before their competition aren't they the ones you want managing our government?

Paulson didn't do well at treasury because he had little macroeconomics background. Similarly, Geithner is lacking Wall Street trading experience and the knowledge of how financial institutions really make money.

I don't think anyone likes the job rotation between GS and government, but would you rather have someone who didn't recognize the housing bubble?

JRD| 7.13.09 @ 9:39AM

Madoff made unrealistic profits also. If it looks like a duck, walks like a duck and, acts like a duck-IT`S A DUCK! Reality check time.

Mike| 7.13.09 @ 9:44AM

Bob,
I think you are right on in this post, although I do think the groundwork has been laid for another bubble in the cap and trade legislation. The real story here, however, is how seamless the connection is between the Federal government and Wall Street regardless of which party is in power.

Bob| 7.13.09 @ 10:28AM

Mike, I am not as yet convinced that cap-and-trade will be a "bubble". Bubbles require irrational behavior and herd mentality. The question is what is going to cause these credits to be overvalued and who is the herd? Will cap-and-trade derivatives be developed for average investors or will it be some sort of index? The primary reason I don't think it will be a bubble is that only knowledgeable institutions will be the primary investors. This is different than the housing market and dotcom shares where average, unknowledgeable people were involved. Furthermore, the chance that default swaps against cap-and-trade derivatives without adequate reserves will exist is extremely small. Can it happen? Yes. Will it happen? The probabilities are very small.

JP| 7.13.09 @ 10:34AM

Everything is set for a new bubble. The Fed has interest rates set at 0%, and the Treasury is pumping anywhere from $2-3 trillion of money into the economy, of which the Fed is buying via Treasury Notes. Congress has borrowed an additional $1.5 trillion for TARP and the so-called stimulus.

So will the American consumer go on another bender? Probably not. Like the consumer of the years 1928-1929, the US consumer today is pretty well tapped out. Huge amounts of consumer debt still has to be paid down, mortgages need to be refinanced, and confidence needs to be restored. In 1928, the consumer faced pretty much the same thing (debt, rising inflation, and stagnant wages), but the stock market was still going along. By mid 1928, then Fed Chairman Ben. Strong saw that the US economy was beginning to stall, and as a consequence he shot another injection of credit into the markets (following similar ones in 1923, 1924, and 1926). However, the consumer didn't have he means or desire to take out anymore debt, so all that credit flowed into the margin houses of Wall St, which enjoyed its last wave of speculation. The 1929 Dow sky rocketed as investors kept borrowing through margin trading to buy in. By September, with the first bad news concerning jobs, the big boys began to sell off.

Today, energy, commodities, and the international currency market could be the next playground for investors. Who knows where the Bubble will form. But with so much credit available at 0%, it will come.

Also, what is of interest is TARP. With Congress removing the Mark to Market accounting rules, banks are now reluctant to sell off thier "toxic assets"at bargin bin prices, as those assets are not nearly as toxic as investors once feared. I guess the market collapse in part was caused by the change in GAAP rules included in Sarbanes Oxley. Go figure. Now the Treasury has all that money to play with. Talk about a slush fund.

Sean| 7.13.09 @ 10:57AM

The best and brightest at GS should be without a job right now, but instead they are making billions off TARP and other government guarantees to them. To bad we can't have a free market system and let these failures fail. Goldman Sachs is probably the biggest winner in the bailout of AIG.

Tim| 7.13.09 @ 11:24AM

Feel the love:

The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased.

Bob| 7.13.09 @ 12:07PM

Tim -- playing the ups and downs of the economic cycle has been done by Wall Street for many decades. The reason this hasn't been the cause of many bubbles is that they had regulation preventing the crossing of lines between types of financial instrument. The deregulation of GLB allowed these non-bank financial institutions to play this game highly leveraged without adequate reserves. And it is worse than you stated. GS played the derivatives game and made most of its money on the bundling of these derivatives -- not on the derivatives themselves. When they saw the bubble coming, they played the other side and shorted the mortgage market through vehicles created in their hedge fund. With deregulation, we obliterated the regulations that prevented them from doing this.

I'm with you that the bailouts were bad policy. I believe that GS would have weathered this without the bailout money but took it because it was "cheap money". But the notion that deregulation helps free markets is clearly flawed. Capital reserves and leverage requirements are essential to protect investors. We have these with insurance and with banks -- and they work. Now they need to be extended to ALL financial institutions.

Tim| 7.13.09 @ 12:16PM

Bob I was really just wowed by the five pages of sustained vitriol. By the time I was done I was readyto kill somebody. Which may have been the point, to manipulate emotions, not inform or analyze.

ds80| 7.13.09 @ 12:50PM

If you're happy being a clam or an ostrich, skip this. If you're an independent, informed self-thinker, then look up this word.

Then please explain how Goldman Sachs, Citigroup, Wells Fargo, Bank Of America, JP Morgan Chase are not "the few" ?

ds80| 7.13.09 @ 12:59PM

Robert Stacy McCain - please keep pounding away at this and related issues. Anyone who considers himself part of "We the People", governed by Constitutionally granted consent, should view the following short videos, then act accordingly in November 2010 (if that's not too late) ...

Ben Bernanke

Tim Geithner

The arrogance!