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Home Publications Blogs Beat the Press Goldman Sachs Did Not Just Survive, It Was Rescued

Goldman Sachs Did Not Just Survive, It Was Rescued

Friday, 16 July 2010 04:14

In its report on Goldman Sachs $500 million settlement of its case with the SEC, NPR described Goldman as a "survivor" of the financial crisis. While Goldman obviously did survive the crisis, it only did so with massive assistance from the government. This included loans through the TARP, loans and loan guarantees from the Federal Reserve Board and the FDIC, and the payment of $13 billion in obligations from AIG. However the most important form of assistance stemmed from the Fed's decision to allow Goldman to become a bank holding company in the middle of the crisis, giving it the explicit protection of the Fed and the FDIC. 

Describing Goldman as a "survivor" may imply that it managed to get through the crisis by its own ingenuity and mastery of finance. In fact, Goldman survived in the same way that an earthquake victim survives when the rescue squad digs them out from the rubble and rushes them to the emergency care ward. Its ingenuity in this context was only in its ability to get its political allies to come to its aid with enormous amounts of taxpayer dollars while demanding almost nothing in return.

Btw, it would be interesting to know how much Goldman made on the deal for which it is paying this fine. If the fine is not many times larger than the profit, it is not sending much of a message. The probability of getting caught in this sort of fraud is very low. It is a safe bet that the SEC never would have brought its case if the participants at Goldman had not been incredibly foolish in leaving a substantial paper (e-mail) trail. Had they been somewhat smarter, the SEC would have had nothing with which to make their case.

Given the low probability of detection, a fine has to be very large relative to the potential gains from fraud in order to provide an effective deterrence. This, and other pieces on the settlement, never even discuss this issue.

Comments (10)Add Comment
written by Queen of Sheba, July 16, 2010 7:50
The difficulty with Dean's analogy comparing Goldman Sachs's survival to that of an earthquake vicitim is it's a good bet that the earthquake victim didn't cause the earthquake.
The comfort of the rich
written by Scott ffolliott, July 16, 2010 8:23
"The comfort of the rich depends upon an abundant supply of the poor" - Voltaire
the sky may still fall
written by frankenduf, July 16, 2010 8:54
whoa Dean, ur way off on this one- of course the SEC can't levee an exorbitant fine, or else Goldman might go belly up which would cause a chain reaction of bank failures, a nuclear meltdown of the financial industry, an armageddon on the economic front, a ... (your Paulsonesque scare propaganda here)
Goldman wins again
written by Hospital Administrator, July 16, 2010 9:28
While I have grown to despise Goldman Sachs, I do admire their ability to always win. Even after being levied a $550 million dollar record fine, their stock is up today. I assume that is because the market realizes what a great deal this was for them. Nothing has changed. The too big to fail firms have only gotten bigger. The casino is rigged and Goldman Sachs is reaping the rewards. Hats off to Goldman.
Fines, effective penalties or the cost of doing business?
written by MB, July 16, 2010 9:51
The issue of inadequate fines comes up in another poorly regulated part of the American economy, casinos. Similar to the big banks, casinos are also subject to fines for behaving badly (serving minors, etc) but in order to be effective the fines must be set at a significant percentage of revenue, rather than an arbitrary fee, because the casinos regard such fines as the cost of doing business. The casinos will respond, as in improve bad behaviors, when penalties show up as significant hits on revenue. But the typical penalties are so low that it's more like theater rather than effective regulation. I learned about this in an article about casinos which I read just prior to the global econ crisis, and which has influenced my perspective throughout the crisis: Kindt JW. The failure to regulate the gambling industry effectively: incentives for perpetual non-compliance. Southern Illinois University Law Journal, Winter 2003, p 243. There are many parallels between the predatory behaviors of casinos and the banks. The similarities, including the close relationships between the industry and government, are very striking.
written by skeptonomist, July 16, 2010 10:49
High tax rates on capital gains, especially over a reasonable time (longer than 1 year) would replace a low probability of getting caught with a certainty. It would require entrepreneurs to work consistently over a period of years to amass a fortune rather than through a big coup which may or may not be fraudulent. The probability of detection increases greatly with time.

This version of the role of tax incentives is consistent with tax-rate history in the U.S. The moronically simple version which claims that lower tax rates always provide constructive incentives is not.
written by Brett, July 16, 2010 2:41
I'd like to know not just how much they made on this particular deal but all similar types of deals. The SEC sued them on this single ABACUS deal, but we know there were hundreds perhaps thousands of similar deals/arrangements that Goldman set up. Did they also mislead on those? If so then the fine should be many times the total profit from all those transactions combined. I'm guessing it is not.
Structured Settlement Loans
written by Jehnavi, July 28, 2010 4:38
U.S. government decided that AIG's failure represents a risk to the stability of the financial system as a whole, which intervened to save the company. By definition, this means that the bailout funds are used to allow AIG to meet its obligations, including the obligation to Goldman. But AIG had failed, direct exposure to loss of Goldman was actually close to zero - because of the cash collateral of the company has declared itself against credit default swaps and additional coverage I had done.
Structured Settlement Loans
Money Saving tips
written by Jehnavi , August 25, 2010 7:57
Money Saving Tips =-By definition, this means that the bailout funds will be used to help AIG meet its obligations, including obligations to Goldman. But AIG had no direct exposure to the loss of Goldman was very close to zero
timberland shoes store
written by timberland for you , September 11, 2010 4:37
Tucked away in our timberland for you subconscious is an idyllic vision. We see ourselves on a long trip that timberland 6 inch spans the continent. YQ

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.