Two years ago, the Economist magazine called the worldwide real estate boom the “biggest bubble in history.” Suddenly the bubble isn’t so bubbly.
So it is the nanny state to the rescue of Wall Street and Nanny says “don’t worry Goldman, JP, Robert, and the rest of you about the nice profits from the last few years – that’s your money and you earned it. But now it is a little socialism tonic and the banker’s safety net for your losses and Uncle Ben is on the way.”
That said, Fed Chairman Ben Bernanke and the nanny state went to the rescue of the hedge fund – investment bank high-rollers offering loads of cash and a 50 basic point cut. There was no mention by Ben or Nanny to the public of how profitable up to now the game had been for Wall Street, in particular Goldman Sachs, Bear Stearns, Lehman Brothers, J.P. Morgan Chase, Merrill Lynch and Robert Rubin’s Citibank.
Here is what Uncle Ben and the Nanny State have done for Wall Street.
The Fed’s loans are being handed out through what it calls its “overnight discount window.” These loans have traditionally been overnight loans given to banks to smooth the flow of commerce on weekends and holidays. But the loans the Fed approved a few days ago turn out to be 30-day loans.
There’s more. If, at the end of that 30-day period a bank claims it can’t pay the money back, the Fed says the banks can renew them for another 30-days. And then another and another renewal can be had and at no additional charge or late fee. How would you like to have a credit card that worked like that?
And any bank endlessly renewing these Fed “loans” is not required to prove they really need the money in order to remain solvent.
And since there was suddenly no market for the $billions in mortgages and mortgage backed securities the big investment banks and select friends made an estimated near $trillion on, Nanny and the Fed, for the first time in history, are allowing Goldman and friends to use those now nearly worthless assets as collateral so they can borrow even more cheap, easy term money as a courtesy and convience..
As you can see, the solution to the easy and cheap credit problem is more cheap and easy credit but only for those at the top
of the totem pole
But look at the bright side. It is doubtful that any masters of the universe will get behind on the yacht upkeep or miss the Gulf Stream jet payment.
And if you have been listening, Goldman Sachs is hollering for help as loud as anybody else. if not more. And for good reason.
Goldman is the colossus of hedge funds and the equity trading business..Last year, the bank reported making $8.5B from its percentage cut on the racket and that is 25% more than its nearest rival Merrill Lynch which returned $6.7B.
And because of the crisis we got a rare peek into the Goldman rackets. One of its hedge funds, Global Equity Opportunities is rumored to have lost $2 to $3 billion in less then a month.. Another rumor is this is why Ben and Nanny decided on the Thursday night bailout. We will probably never know the amount but it obvious there are some problems on Wall Street and at Goldman Sachs.
Now Goldman’s Global Equity is really a club for well-connected wealthy investors ($5 million gets you a seat at the table), many of which are Goldman executives who also knew a lot more then they should about what stocks were going up or down on the New York Stock Exchange For these privlieged elite, the Goldman fund pumped in $6 of cheap borrowed money for every dollar raised from the members for a very small percentage fee on profits. Also, as they say on Wall Street, the leverage was a very sweet 6 to 1.
And what does that mean. Let me explain it like this, a hypothetical if not typical situation.
If you buy a stock for $36 and sell it for $72 four months later, you’ve made 100% on your money. If you add $30 of borrowed money to $6 of your own to buy the stock at $36 and sell the shares at $72, your profit is $36, but you’ve made 600% on your $6 of which the hedge fund takes a percentage, roughly 2 percent or 72 cents, so your profit is now $35.24 on the $6 which is 587% and you can live with that.
Multiply that transaction times billions and you are talking not billions but a trillion or more in profits and which is why offshore tax havens like the Cayman Islands and the Bahamas are booming.
But the worm turned as we have been reading.
So now, let’s say you put up $6 and borrow an additional $30 to buy a stock at $36. The stock falls to $18. You have lost $18 on the stock but still have have a stock worth $12 after subtracting your $6. But all of a sudden, becase of the panic that came with this crisis, you have to pay back $30 and quickly for that $2 stock. Your loss is now 300%.
Multiply that little transaction times billions and you understand why Wall Street is close to a nervous breakdown..
Now some people think that since so much money had been made in this business, the wealthiest of the capitalists can ride out the storm. Are not such losses a normal part of the free market as it is for other people?
Not really. If you were a Wall Street executive and started talking like that they would think you were ready for some mental help or and you might suddenly find yourself working in the corporate cafeteria..
P.S. Remember, these are the people that not long ago were pushing for the privatization of your Social Security program.
JACKIE CORR lives in Butte, Montana. He can be reached at: jcorr@bigskyhsd.com