American Madness

Intelligent Criticism in the Service of a Better Nation

Cash for gamblers: Government bankrolls hedge fund bets

Posted by Lord Halifax | 1 Comment

Goldman Sachs is not smartThe Wall Street Journal reports today that large banks have resumed lending money to hedge funds and other institutional investors. A closer look at this at this development reveals painful conflicts and new depths of fraud perpetrated against taxpayers.

The Wall Street lending machine, also known as the prime brokerage business, exists because commercial banks that cater to individuals and conventional businesses have little interest in bankrolling high-risk investment schemes. No traditional banker in his or her right mind would give a hedge fund millions of dollars to bet on black or red. Instead, the hedge funds and private equity firms invest money borrowed at high interest rates charged by the prime brokers.

Students of current events remember widespread hedge fund failures largely due to losses amplified by investments placed with borrowed money, also known as leveraged investments. The body on this credit crisis is still warm, and hedge funds are already back at the scene of the crime, placing more high-risk bets with leveraged investments. The market has absorbed a number of high-profile hedge fund blowouts, but the real damage was done by private equity firms that left hundreds of newly acquired companies to drown in debt—that is, after declaring special “dividends” to recover initial investments, and turn profits, by slashing employees’ benefits.

This is, however, the good news. The bad news for taxpayers surfaces when someone examines the money emanating from Wall Street’s prime brokers. The usual suspects, J. P. Morgan Chase & Co., Goldman Sachs and Bank of America were bailed out by the taxpayers through direct loans – troubled asset relief program, or TARP – and other forms of support.

Goldman Sachs, one of the largest prime brokers, received permission change its charter to that of a bank holding company last year. This enables the firm to borrow money at discounted rates – often close to three percent – from the Federal Reserve funds discount window, and apparently loan it out at high interest rates to institutional investors, some of whom played a part in destabilizing the economy. (Conversely, college students pay more than twice that rate to finance their educations.)

At the same time, Goldman pockets the difference by paying itself record bonuses and, as a newly minted commercial bank, makes no loans that go towards creating jobs or reducing crippling unemployment figures. Do the math: The Federal Reserve issues artificially cheap loans for Goldman – a fake bank – to funnel toward hedge funds at higher interest rates. Even worse, the asshole bankers at Goldman ascribe their ill-gotten gains to superior financial knowhow rather than an idiot-proof scheme. My eyes are going to bleed if one more moronic financial journalist writes that Goldman Sachs Chief Executive Lloyd Blankfein successfully “steered” his company through the financial crisis. When one intellectually honest and bright financial reporter equates plundering to steering, I’ll personally write a check to support the publisher that produced this valuable insight.

Wall Street is returning to high-risk ventures without any new regulations to prevent a repeat of recent crash. This time the situation is arguably worse, because the instigators have enriched themselves making the same mistakes with taxpayer dollars. The reality of this situation defies belief, and Congress needs to remedy the problem soon. Blankfein and the heads of several other large banks are due to appear before a Congressional committee next week. How much will it take before someone in government cuts off funding for risky schemes that only benefit a select few, or just hands the Treasury’s four-digit pin code to Wall Street?


One Response to “Cash for gamblers: Government bankrolls hedge fund bets”

  1. Joel Friedlander
    January 10th, 2010 @

    Very insightful; absolutely right. The trouble is that instead of any significant oversight in the future, the Congress has backed away from any change in the system. This teaches us that you get what you pay for.

Leave a Reply

  • Trust us

    As with Anna Karina, we prefer to remember the U.S.A as she was in the 1960s.
  • Archives

  • RSS Matt Friedlander’s Tumblr Feed

  • RSS Josh Friedlander’s Twitter Feed