Goldman Sachs was not bailed out

Great Debates
1

There seems to be the mistaken belief here that certain banks received bailouts when they did not. The one that I see referenced most often is Goldman Sachs; however, I believe this also applies at least to JPMorgan Chase, Bank of New York, Morgan Stanley, and State Street. The facts are that these banks were forced to take funds from the treasury and then repaid them as soon as they were allowed to with interest/dividends and with an equity kicker.

On October 13, 2008, Henry Paulson called a meeting with nine large investment and commercial banks. Those nine banks were: 1) Bank of America, 2) Bank of New York, 3) Citigroup, 4) Goldman Sachs, 5) JPMorgan Chase, 6) Morgan Stanley, 7) State Street, 8) Wells Fargo, and 9) Merrill Lynch. Also present at the meeting were Fed Chairman Ben Bernanke, soon to be Treasury Secretary Tim Geithner, and FDIC Chairman Sheila Bair. At this meeting, the banks were told in no uncertain terms that they would not be leaving the room until they agreed to participate in the TARP program. Henry Paulson’s talking points from the meeting were obtained under the Freedom of Information Act and are shown here.

Per this supporting article, these initial nine banks were clearly forced to participate.

Now, five of these nine original banks have since repaid the funds: Goldman Sachs, JPMorgan Chase, Bank of New York, Morgan Stanley, and State Street. They were given the following amounts all on 10/28/08 and repaid the in mid-2009.

Bank of New York $3,000,000,000
Goldman Sachs $10,000,000,000
JPMorgan Chase $25,000,000,000
Morgan Stanley $10,000,000,000
State Street $2,000,000,000

Each paid significant interest/dividends on the preferred stock per the TARP terms. For example, Goldman Sachs paid approximately $318 million. Each of the firms was also required to issue the Treasury warrants in a market value amount equal to 15% of the preferred stock investment. Cite For Goldman Sachs, who repurchased the warrants today (7/22/09), the amount of the purchase was approximately $1.1 billion. That means that Goldman Sachs was forced to take $10 billion, as soon as they were allowed to repay, did so, and then also paid the government $1.418 billion for the privilege of doing so. They government made a pretty good annualized rate of return of 23% on their investment in Goldman Sachs. Similar rates of return will be experienced on these other banks.

How can anyone in their right mind call that a bailout?

Further, these companies are now being stigmatized for having supposedly received a bailout. For example, JPMorgan is being criticized for not accepting the California IOUs because they took a federal bailout. Cite

I’ve also seen these banks, particularly Goldman Sachs, lambasted on this board for taking bailouts. Cite

Finally, there are certainly many other banks that were TARP recipients that have since paid back such as U.S. Bank and BB&T. However, the facts are that they at least applied for the funds. They may have been somewhat pressured or coerced to do so, but they nevertheless entered into the agreement voluntarily. I personally don’t think they should be considered bailed out; however, I can see why someone might disagree.

2

However, Goldman was by far the largest beneficiary of the AIG bailout – if AIG had gone under, it would have cost Goldman billions. Does that count?

Also, you may want to consider that Goldman benefited greatly from the added confidence that the government was behind them (and the whole financial sector). Their net worth on the books is really only as a going concern – if their counterparties started to worry they couldn’t pay and pulled their lines, I doubt GS would have survived the deleveraging process. If the government didn’t pump liquidity into the sector, only the very strongest, most liquid banks would have survived the massive deleveraging. The whole system is based on trust and confidence and GS was certainly bailed out of that loss of confidence that the financial sector was reeling from.

3

I’m curious - what forced the banks to take the money? Did the law passed by Congress that set up TARP give the feds the power to require them to take the money? That’s not clear from the linked articles.

In other words, could Goldman have said “no, thanks”?

4

I’m curious about this as well. If Goldman had said “No”, then what happens? The CEO goes to jail? The feds throw stacks of $100 bills through the front door of corporate headquarters?

5

I wonder about that too. If Goldman Sachs didn’t want that money, the Feds would have been welcome to throw it at my place.

6

I think that counts as a bailout to AIG. Goldman was among dozens of large financial institutions (domestic and foreign) to receive contractually owed payments following the AIG bailout. Also, they weren’t by far the largest beneficiary. There were several others in the same ballpark including Barclay’s Soc Gen, and Deutsche Bank.

I think that there would have been additional confidence if TARP was an application process only. That way healthy financial institutions like Goldman or JPMorgan that did not need the funds would have looked better by not applying for them. That might have added more stigma to the banks that did need the funds, but so what, they were the ones that truly needed a bailout.

7

If there were a stigma associated with accepting bailout money, any bank that applied for it would pretty much experience a run on it, prompting the need for more bailout for that bank. By “encouraging” all the big banks to accept bailout funds, the government may have reduced the total need to bailout money, and it is lending to healthier banks at a high rate. Every bank benefited from the bailout of the financial system.

Regarding AIG, GS was a beneficiary of taxpayer money, the largest of any of AIG’s counterparties. They were foolish to have such a large unsecured position with AIG (or any counterparty) and would have lost billions due to that stupidity, if not for the bailout by taxpayers. So what if the bailout money was laundered through AIG – if the feds hadn’t done that, would they have had to bail out GS directly? Likely, if you ask me.

8

The first quote says it clearly

Bank regulators have extraordinary power over banks and can force banks to do all sorts of things. (They can actually seize the banks if they think things are dire enough.)

So Paulson was telling these guys either deal with me or your regulators will impose it on you.

The key question is whether Paulson believed these banks were genuinely in trouble and that the regulators would impose it on them because they needed it (& the line about them being “healthy institutions” was just to avoid a run on the banks), or did he want them to take the money to help his broader financial goals (i.e. unfreeze credit markets) and used the regulators as leverage?

9

Because “bailout” isn’t a fixed, specifically definable term–it is a vague handy catchall that is being used to describe anyone who took the government’s shilling, voluntarily or not.

Anyway, why does this matter? Considering that Rolling Stone just called Goldman Sachs a “great vampire squid wrapped around the face of humanity,” I’d say that “ooooh, Goldman Sachs was bailed out,” isn’t even going to make them flinch.

10

They were told that if they did not accept it at the meeting that their regulator would require them anyways. Bank regulators have the authority to require the institutions that are under their watch to raise capital.

Also, here is another article talking about how they were forced.

11

Fighting ignorance is one reason. Also, I think educating about what the government did is important and about the true shape of some of our largest and most important financial institutions.

12

Increasing the FDIC insurance coverages significantly reduced the risk of runs on banks. That’s why there can be zombie banks existing right now that are increasing their deposits. People aren’t afraid to put money into well known imminent failures because the funds are insured.

13

The money that AIG paid to their counterparties was primarily for margin calls meaning that it was in order to post collateral once the trades went out of the money. Saying they were stupid to have large unsecured exposures is ill-informed. Once they became large exposures is exactly when the counterparties required collateral. You typically don’t require collateral if the trade is not out of the money.

14

Further, according to Goldman Sachs, prior to AIG’s insolvency, they had already received $7.5 billion in collateral and had hedged the majority of the remaining exposure with third parties. It is their contention that they had immaterial exposure to AIG.

Link

15

They had wrong way risk to AIG – if credit markets deteriorated, spreads would widen and AIG would have to post. That’s exactly when AIG would have trouble posting. AIG was trading on its rating, but the Street knew that its rating was binary – AAA or bust. I was frankly shocked that GS had so much single-party exposure.

The other “bailout” for GS was letting them become a bank pretty much instantly, much quicker than it normally happens. That wasn’t a monetary bailout, but it was definitely federal assistance for them.

I’m happy as a taxpayer that they are giving back the bailout money, but I think it looks terrible that they are doing that to get past the pay restrictions when they were the beneficiary of the taxpayer bailout of the entire industry. Had the tax payer not stepped in, they would have gone under, along with most of the rest of the industy (and the economy). They are as tone-deaf as the car company execs who flew down in their jets to talk to congress.

They are doing the industry no favors with their behavior. As usual, it’s GS for GS, even when the Feds come in to bail out their counterparties and their industry.

16

And it’s their contention that they had immaterial unsecured exposure due to collateral already posted and hedges.

First, I’d like a cite that the process occurred much quicker than normally permitted. Second, how in the world is this a bailout? They would have been permitted to become a bank holding company at any time, not just during a financial crises. Further, in doing so, they subjected themselves to tighter regulations and capital requirements.

They never needed the TARP funds to begin with. It was forced on them and they paid it back along with an additional $1.4 billion as quickly as they were permitted. I think the taxpayer got a pretty healthy return from them.

17

Here’s a cite that they received expedited approval: Goldman could shed "commercial bank" charter | Reuters

From that article:

“Goldman and Morgan Stanley received expedited approval to become bank holding companies as some of their longtime competitors, particularly Lehman Brothers, collapsed or disappeared.”

Having that status gives them access to the Federal Reserve window, further boosting confidence in them, another type of federal assistance.

It’s easy enough for them to say, now, that they didn’t need the bailout and all that, but at the time, their stock price was sinking fast, and no one knew which financial institution would be the next to blow up.

According to AIG, Goldman received $8 billion of the bailout funds it (AIG) received. That amount is not immaterial for GS. Of course, GS continues to benefit from the government backing of AIG.

Can you cite where GS claimed at the time that they didn’t need the money? I don’t recall that.

Anyway, I’m done for the day, so maybe someone else can take on the mantle of beating up on GS. There should be lots of takers.

18

But that was available to them at any time. They could have done so 5 years ago if they wanted. Because they were willing to accept the additional regulation and capital requirements of a bank, they had access to the liquidity sources that banks have including the Fed window as well as deposits.

I’m not saying that Goldman didn’t receive material dollar amounts from AIG (it was greater than $8 billion by the way); I’m saying they had immaterial net exposure to AIG. Please read the following interview.

I’m not aware that Goldman did anything other than be a good soldier for the government. It’s really a moot point though as they had no ability to turn down the TARP funds. I think the fact that the moment that they were allowed to pay the funds back they did speaks volumes.

19

Even though I agree with you that Goldman wasn’t “bailed out” (at least, not as I understand most people to use the term), the above doesn’t address the claim (bolding mine):

For which you were given both a Reuter’s cite and a specific quote from it in support.

20

Part of the reason solvent banks took bailout money was so that people wouldn’t know which banks were insolvent.

But to say that Goldman and JP Morgan weren’t bailed out is kind of ignorant as a lot of things they held stock in were bailed out and they were the primary beneficiaries of the buyouts of insolvent properties.