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Sunday, February 28, 2010

Goldman execs stand to profit in FDIC deal

The unfolding mortgage crisis could get a lot worse, for the taxpayer at least. I'm looking back through my history of sites visited under the term "FDIC" and I see numerous articles alarmed by the FDIC's dire fiscal condition.

A few weeks ago, I stumbled across a great video blog entry on how the FDIC was compensating OneWest--a bank owned by major Goldman Sachs players--for every house it sold at less than initial loan value. OneWest acquired the loans from failed lender IndyMac in 2009 based on FDIC assurances that their losses on IndyMac loans would be subsidized.

The revised video entry dated Feb 8th, by thinkbigworksmall.com, contains a thorough accounting of how the OneWest/FDIC deal works. The two fellas at thinkbig provide a real world example of how OneWest profits from their "loss share agreement."

The FDIC responded directly and hotly to the charges, in a press release dated February 12th. It offer a list of Supplemental Facts that explain how much risk and debt OneWest absorbed, as well as restrictions and procedures on receiving FDIC funds.

The FDIC response churned up some mainstream interest. WallStreet Journal's marketwatch brings up a you-tube response to another purchase of a failed lender by OneWest:
Earlier in February, the FDIC responded to a YouTube video that criticized its transactions with OneWest. The video has been removed [not sure if this is that of thinkbig, which remains posted], but FDIC spokesman Andrew Gray said in a Feb. 12 statement that it made "blatantly false claims" about the loss-sharing agreement.
The FDIC may be particularly sensitive about OneWest because it was formed in early 2009 when the regulator sold IndyMac to a group of private-equity and hedge fund investors, including former Goldman Sachs Group Inc. executive vice president Steven Mnuchin, as well as George Soros and J. Christopher Flowers.
John Paulson, who made billions of dollars betting against mortgage securities during the housing crisis, is also an investor.
The MarketWatch article, written by Alistair Barr, goes on to quote one analyst who said it "...was unusual for the FDIC to respond to criticism from outside the mainstream media." In other words, the FDIC tends to ignore criticism, because I doubt the mainstream media dares to criticize it much (accounting for the atypical nature of its response to the blogosphere.)

The thinkbig guys actually use the FDIC response to bring up what they deem a "huge" point: that the OneWest people only get their subsidy if the bank's losses exceed $2.5 billion or so. In other words, OneWest makes money if the homes they got from IndyMac collapse in value; no reward should they be able to sell them at a profit. According to the video, until OneWest "hit(s) that magical $2.5 billion loss mark," they have no incentive to offer loan modifications.

So in a broader sense, the FDIC deal with One West, and others like it, insure that the real estate market won't recover because the banks who take over loans from failed banks only get compensated for losses. OneWest has no reason to try and salvage what it can from IndyMac's mortgage portfolio--instead it can capitalize on the terms of the deal which more fully compensate OneWest if it can't sell the homes at full value, a prospect made infinitely more likely by the FDIC's reward-for-failure guidelines.

Goldman Sachs has been riding the taxpayers' money train for quite some time. They've been able to exchange their political influence at the highest levels of government for favored status as a bank holding company. They experienced record profits and bonus in 2009, in a year which saw their competitors struggle. The Goldman edge: cronyism. Bush Treasury Secretary Paulson was a former Goldman CEO reputed to have made $400 million while there. Former Goldman executives have served as economic advisers for the White House at the top or second highest positions.

Big media has always undersold the nexus between government and private sector, I suppose to further the myth that those who get ahead in our society do so by hard work and a level playing field--a notion the recent crisis (and those who've profited from the response) makes patently absurd. I'm indebted to the excellent work--real journalism--offered by the thinkbig guys and Tyler Durden at ZeroHedge who've exposed the techniques through which Goldman profits by cronyism. These methods are not only insidious but complicated. Easy it is to look at the methods by which financial companies make their money and assume they're simply to hard to understand. As a matter of fact, regulators complicit in the regulatory failures, and the entities that exploit them count on the lack of transparency and complexities of their dealings to keep them secret, a fact we see play out whenever the Federal reserve is called on to explain where the money went.

Now OneWest could argue--or the FDIC, since quasi-government agencies (read implicit guarantee) and Goldman Sachs are so often united in their purpose--that their purchase of IndyMac saved the government millions. Then again, the FDIC letter states that the entity isn't supported by federal taxes, a point which only emphasizes the FDIC's negative $20 billion balance and the impending necessity for a bailout.
Daryl Montgomery at seekingalpha.com explains:
"Its deposit insurance fund is now at a negative $20.9 billion. Despite statements that it has enough cash to keep operating (Bear Stearns and Lehman Brothers made similar claims), it is only a matter of time before the FDIC is bailed out. This will take place before the end of the year and will be done by tapping a line of credit from the Treasury department. Expect this event to be downplayed by mainstream media reports with claims that it is not really a bailout."

Contributions made by banks which supposedly cover the FDIC's costs are wholly inadequate. The consequence will be a massive bailout probably to exceed that of the S&L crisis during the Eighties, which came as the result of risky commercial real estate deals by the S&L's, coupled with inadequate regulations, associated with a group of Senators called the Keating Five.

Add to this the nefarious role GS played in the Greek debt crisis. Apparently several years previous to the crisis, a team of Goldman witchdoctors dispatched to Athens to hawk their derivatives shell game recommended that Greece enter into currency swaps, in a move that delayed budget problems and reduced the debt load in the short-term. As best as I understand it--Goldman simultaneously bought credit default swaps which would pay big in the event of a collapse of Greek debt. In other words, GS played both sides: sell the politicians on a debt proposal which ran counter to their longer term fiscal stability while betting on the higher risk of default through the Credit Default Swaps.

The same pattern played out with AIG. At one point, GS CEO Blankein actually told AIG to default, although GS was owed billions. Few people could figure out why Goldman was willing to let AIG default, being that it was owed so much by AIG, until of course they realized that Goldman had insured their loans to AIG with CDSs which would pay off big if AIG defaulted.

Th regulatory environment has failed for two reasons. First, those in government, particularly those with too-close connections to former employers, must maintain distance and impartiality, in what's known as "arm's length." With a revolving door between Goldman and the White House, not to mention Congressional staff and department aides, this impartiality is impossible.

The second problem areas are what are called fiduciary responsibilities--managing others' money. If Goldman was selling products it knew to be risky, it was violating legal and ethical boundaries. If Goldman saw the broader systemic risks which made the CDSs so appealing, why did it steer clients towards taking on more exposure to debt (and risky, exotic derivatives at that) amid what Goldman knew to be deteriorating market conditions?

There's a pattern to these plays on systemic risk: create volatility, then prosper off it. Goldman's exemplary results in 2009 indicate that the company was either very lucky or had foreknowledge of the pending collapse and took steps to profit from it. The absence of regulatory enforcement either allowed the opportunity to arise through disaster capitalism, or the entities that gained from it set up the conditions that made it happen, a la 9-11.

The Federal Reserve has recently pledged to investigate Goldman's Grecian deal-making gambit. I don't know how effective the Federal Reserve can be, being that its regulatory oversight responsibilities were so utterly ineffective leading into the crisis. It's doubtful that industry self-regulation is possible through the Fed, as it is owned by a group of banks it purports to regulate. The Fed's effort to manage public perception through an internal investigation that won't be made public can hardly force accountability.

Additional source
Robert G's blog explains the math in one example of OneWest's deal management tactics and acumen. In an update dated February 16th, Mr. Hertzog denies he had anything to do with the video, although his figures were used by thinkbigworksmall without his consent.

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  • At 2:39 PM, Blogger jbpeebles said…

    I was just up in Chicago and saw the Goldman Sachs now owns public parking spots along the streets in downtown Chicago. The parking rates for facilities, not surprisingly, have gone up to $33/day, making the public parking garages more attractive. (I'm assuming Goldman doesn't own those-yet.)

    Perhaps the sky-rocketing rates for street and private facility parking have increased demand for the city's parking garages, supplying it with much-needed revenue. This fits a pattern of a quid pro quo like the OneWest deals with the FDIC, bailout provisions through Federal Reserve, and dealings with the White House through Treasury Secretaries Geithner and Paulson.

    We can see how Goldman profited, less clear is how their partners in government did. Perhaps the Chicago parking rate jack up is how the city and Goldman colluded to jack up their profits.

    I've heard it said that the last act of government is to loot the nation. Privatizing city parking can bring in short-term funds, but the city could well be worse off in the long run. We've seen a number of sales of prominent toll roads and other pieces of public infrastructure here in Indiana.

    While conservatives may laud our Governor Daniels for fiscal conservatism, fact is he only balanced the budget via the long term lease of the Indiana State Toll Road to a foreign consortium. In reality, the state now owes over a billion to the Feds for unemployment insurance. And of course the people who use the toll road are stuck with higher tolls for the next 70 years or so until the lease expires. Maybe Chicagoans will get off sooner or not.

  • At 2:57 PM, Blogger jbpeebles said…

    The Wordle for this blog post is available here. [Courtesy Jonathan Feinberg/IBM]


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