What Happened In December At Goldman?

By Big Tent Democrat, Section Economy
Posted on Tue Apr 14, 2009 at 10:40:26 AM EST
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Floyd Norris (see also Krugman) on the Goldman Sachs conference call this morning:

7:25 a.m.| A.I.G.: Guy Moszkowski of Merrill Lynch wants to know if they made money from the now-famous government-financed American International Group transactions. The answer is cautious. Most of the impact was in December. For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero. So what was the A.I.G. effect in December? They did not say. Is it possible the loss then would have been larger without the A.I.G. bailout? We’ll see if any analyst asks.

[MORE . . .]

7:15 a.m.| December Write-Offs: They did discuss December up front (unlike in the news release). It sounds as if they took write-offs everywhere, including commercial real estate and private equity. They took more write-offs in both of those areas in the first quarter.

. . . 6:50 a.m.| Where’s December?: Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can. How did it do that? One way was to hide a lot of losses in not-so-plain sight.

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored.

. . . The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

This does not inspire confidence.

Speaking for me only

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What Happened In December At Goldman? | 45 comments (45 topical)

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Must read on Finance (5.00 / 2) (#1)
by ruffian on Tue Apr 14, 2009 at 11:01:20 AM EST

Bill Black, via Lambert at Corrente

I have not seen it explained any clearer anywhere. The government is covering up for the banks. The missing December is the least of it.

Bill Black should stop pulling his punches (5.00 / 4) (#2)
by lambert on Tue Apr 14, 2009 at 11:26:54 AM EST

Not.

From a policy perspective, the first thing we need a "Pecora-style fact-finding mission." Just like FDR. The Finance Democrats currently running the show have no interest in this. Naturally.


Two Questions That Come to Mind... (2.00 / 1) (#3)
by santarita on Tue Apr 14, 2009 at 11:46:39 AM EST

when I read Prof. Black's critiques:

How does he know which banks are insolvent and which aren't? What facts does he present? The only fact that I've seen is a guess that legacy assets are valued at less than what the banks are booking them at. But those aren't the only assets that a bank has. Black is not only assuming insolvency but hopelessly irremediable insolvency. He may be right but he present precious few facts. Both the regulator and the megabanks have said that they are well-capitalized. So there appears to be a dispute of the fact of insolvency.
How does he know that the regulators have not taken supervisory actions in accordance with the mandates of the prompt corrective action requirements? As a former bank regulator he must know that not all regulatory actions are taken with public fanfare.

Black could be right that the government and the banks are conspiring to cover up the insolvency of some or all of the largest institutions for nefarious purposes. But without more facts, he seems to be producing a lot of smoke.


RTA (5.00 / 2) (#5)
by reslez on Tue Apr 14, 2009 at 12:36:55 PM EST

Black does not state which particular banks are insolvent. That's the job of regulators who can demand access to the books. And that's something we would know if the stress test were anywhere on the level. Black bases his argument on Geithner's claim: the banks need an additional $2 Trillion in capital vs. the banks who protest they are fully, nay, excessively well capitalized. Black bases his loss estimate on the banks that have been allowed to fail so far:

We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar.

As for "how does he know they haven't done it already", receivership is mandated by law for insolvent banks and that's not something you can do on the sly. The determination of whether a bank is insolvent is the fudge factor on which the Obama administration has staked its fate.


Two Thoughts in Response... (none / 0) (#9)
by santarita on Tue Apr 14, 2009 at 01:03:42 PM EST

The fact that the US Government has provided $2 trillion (or more) in guaranties, subsidies, and direct investment is indicative of a serious problem but is not irrefutable evidence of irremediable insolvency. In order to proceed to receivership, the government would have to make a determination of irremediable insolvency. That determination had better be based on sound evidence and it better be so strong that it would deter the "insolvent" bank's shareholders from pursuing litigation either to unwind the receivership or to seek money damages after the fact. Geither and other regulators have characterized the situation as a temporary problem. If you read the Warren April Report she characterizes the government's assumption as a temporary liquidity issue. So the Government's actions have been consistent with that assumption. In other words, the government doesn't believe at this point that the banks are insolvent within the meaning of the act cited by Black.

Secondly, Black is making an assumption that the assets of the failed institutions are similar to the assets of the large institutions. There should be a much more rigorous analysis of the assets and liabilities.

You are right that it is up to the government to determine which institutions are insolvent. It is also up to the government to determine if any institutions are insolvent.

I think it is fair to suggest that the government may be reluctant to recognize that some banks are hopelessly insolvent. I just don't know that anyone outside the government and the institutions themselves knows for a certainty that that is the case. And at this point I still trust that the government is managing this crisis in a manner that is prudent and is not taking unduly drastic steps. That trust can change with additional facts. But Black isn't making his case.


I think that the onus is on Treasury (5.00 / 2) (#10)
by inclusiveheart on Tue Apr 14, 2009 at 01:22:17 PM EST

to make their case to the American people and the financial markets that this is a liquidity crisis with some facts that support their theory. Insisting that Black make a better case than he has is a diversionary tactic. The only reason that he can offer an alternative theory is because Treasury has not done their job in proving their case other than stating that they believe their theory to be correct. That's a far cry from the kind of data they should be presenting. Furthermore, if indeed their case really was rock solid, I do not think that they would be withholding details such as the specifics of the stress test models from everyone including people like Elizabeth Warren.

It is not up to Black, Warren, Krugman or anyone else who is sounding alarm bells to prove that the banks are insolvent. It really is up to Treasury and the banks to prove that they are solvent. Thus far we've seen little of the proof of that - and in fact we've pretty much only seen evidence that they are in distress.


I Agree That... (none / 0) (#16)
by santarita on Tue Apr 14, 2009 at 02:21:19 PM EST

the government has not communicated well.

I attribute this to the following: strong culture of confidentiality in banking, some of what is going on is difficult to explain in detail so the various representatives have spoken in generalities, there is a lot of behind the scenes pushing and shoving and the government cannot lay all of its cards on the table at this point, and finally the government doesn't have a complete handle on the problems.

I believe Warren is doing a valuable service because she is putting out good questions to which Treasury and the Fed should give some thought in responding. That will aid in communicating.

The only reason I place a burden on Black to make his case is that he is the one making the allegations.


I guess you didn't see (5.00 / 1) (#22)
by inclusiveheart on Tue Apr 14, 2009 at 02:37:52 PM EST

Warren's rather damning remarks about how Treasury is operating then. She's really not all that far from Black on this issue.

Treasury could set the record straight if they wanted to. As it stands now, they're just feeding the rumor mill with their void of information.


I Read the Report... (none / 0) (#28)
by santarita on Tue Apr 14, 2009 at 02:51:25 PM EST

I thought that she was more positive about the way Geithner is proceeding than Paulson. Her January report was scathing. She did offer criticism on transparency, assertiveness, accountability and clarity.

But for me the money quote from the most recent report is "If its assumptions are correct, the current approach may prove a reasonable response to the crisis." She then recognizes that the government's assumptions may not prove to be correct and then Treasury will need to take very different actions.

She did an interview with (5.00 / 1) (#30)
by inclusiveheart on Tue Apr 14, 2009 at 02:59:41 PM EST

The Boston Globe a couple of days after the report was released.

Warren Interview


: Read It. (none / 0) (#37)
by santarita on Tue Apr 14, 2009 at 03:14:34 PM EST

My impression is that she is blasting Paulson and cautious about Geithner.

Remind me again why you would trust the government (5.00 / 1) (#11)
by lambert on Tue Apr 14, 2009 at 01:24:53 PM EST

I missed that part.


Who Says I Trust... (none / 0) (#17)
by santarita on Tue Apr 14, 2009 at 02:22:02 PM EST

the government?


Er, you do? (5.00 / 1) (#23)
by lambert on Tue Apr 14, 2009 at 02:41:28 PM EST

Show me where I misread. Bolding is mine:

I think it is fair to suggest that the government may be reluctant to recognize that some banks are hopelessly insolvent. I just don't know that anyone outside the government and the institutions themselves knows for a certainty that that is the case. And at this point I still trust that the government is managing this crisis in a manner that is prudent and is not taking unduly drastic steps. That trust can change with additional facts. But Black isn't making his case.

(Which reminds me of Bush claiming state secrets privilege and then asking for the case to be dismissed because the plaintiffs didn't have the facts.)

As I read it, your position, and your default position, from where you put the burden of proof, is trust.

Do you support a Pecora commission to determine the facts? Or would you prefer, with Geithner and the Obama administration, no transparency?


Of Course I Support... (none / 0) (#29)
by santarita on Tue Apr 14, 2009 at 02:56:17 PM EST

a Pecora Commission. I support shareholder lawsuits. I support SEC fraud investigations and Justice Department investigations. A lot of people signed solvency certifications. They need to be looked at.

Trusting that this government is proceeding in a prudent manner doesn't mean that I have blind trust in the government. And I remain open to facts that show the contrary.


: It's chicken and egg (none / 0) (#43)
by lambert on Tue Apr 14, 2009 at 05:15:02 PM EST

You support these things in theory, but if the facts you want are only available to insiders, then then you'll never get the chance to support these things in practice.
So, yes, your default position is trust. Against the history (in the S&L crisis), I might add. And human nature, too, given the incentives. La la la...

Sure, (none / 0) (#13)
by reslez on Tue Apr 14, 2009 at 01:38:50 PM EST

Black could be wrong about the banks, but he's calling for investigation and disclosure. You might trust the government is taking prudent action, but until we have the facts it is irresponsible to take anyone's word for it.

Treasury's approach has been shrouded in secrecy and convolutions. There's nothing trustworthy about it.


Let's Put It This Way.. (none / 0) (#18)
by santarita on Tue Apr 14, 2009 at 02:25:47 PM EST

I haven't seen anything to date that suggests that the new government isn't proceeding in an orderly fashion to address the various issues. If we are at the same point in a few months, I might change my thinking.

I'm not sure that it is the correct way. And I hope that if it becomes clear that it is not correct, that the government can change.


I think that you should consider (5.00 / 2) (#25)
by inclusiveheart on Tue Apr 14, 2009 at 02:46:06 PM EST

the incontrovertible fact that Black is advocating for applying a trusted, tried and true framework for dealing with distressed banks that has been employed for nearly eighty years. While Geithner, on the other hand, is employing an untested model - at least in this country - which could even be said to be "radical" given how little we really know about how well it might work - or even how it will work if it works.

So it seems to me that all this push back against Black much of which attempts to make him look radical, is rather disengenuous.

Again, the onus is on Treasury to explain why and how this is a superior route to take and why they believe it offers the best chance for success in the current situaton - supported by evidence-based empirical data.

Black is the one who has the data supporting the success rate of his approach. Treasury offers none with regard to their plan - and the only similar plan anyone can seem to think of created a lost decade in Japan - that's not good.


Since Black Was a Regulator, ... (none / 0) (#32)
by santarita on Tue Apr 14, 2009 at 03:08:05 PM EST

I assume he knows that putting a bank into receivership or taking similar action is not usually the first action that a bank regulator takes against a bank. There are usually an escalating series of actions taken over a period of a year or more. Often it starts with an oral warning to the board. Then a written warning, if corrective action is not taken. Then if corrective action (like raising more capital or discontinuing a line of business) is not taken after that, the actions could include cease and desist orders, removal of management and/or the board, and civil money penalties ($1,000 a day for each day that the bank is in violation) are some of the more common actions. And at each step there is usually a regulator in phone communication with the CEO. And the first few steps are behind closed doors. Eventually if other avenues are exhausted, the FDIC comes in. and closes up shop.

Now, in some cases, the action can be more swift - as in obvious embezzlement situations. In some smaller banks one or two big loans suddenly downgraded could be enough to put the bank under water.

In the current situation, it is not clear what has been going on behind closed doors. it is also not clear that some or all of the banks are insolvent beyond hope. They might be.


Citi has been in trouble (5.00 / 1) (#38)
by inclusiveheart on Tue Apr 14, 2009 at 03:18:29 PM EST

since the Fall of 2007 and subjected to corrective action since the Spring of 2008.

I think that's just the kind of ongoing situation that the "Prompt" Corrective Act was meant to prevent. We are coming up on two years since this all started to unravel.


I Don't Know Enough About... (none / 0) (#40)
by santarita on Tue Apr 14, 2009 at 03:42:59 PM EST

Citi's situation but a two year corrective plan is not out of the question.

I want the government to take appropriate prompt corrective action and I don't want the government to take arbitrary and capricious actions. Whatever actions (or non-actions) occur I want to them to be reasonable, intelligent and fair.


: Here is a timeline of the crisis. (none / 0) (#41)
by inclusiveheart on Tue Apr 14, 2009 at 04:03:42 PM EST

Well worth taking a look at:
Bank Crisis Timeline

What's "orderly"... (none / 0) (#24)
by lambert on Tue Apr 14, 2009 at 02:45:51 PM EST

... about the greatest transfer of wealth in American history, with no transparency, no accountability, not so much as a Congressional hearing, and the only oversight body Warren's COP, which doesn't even have subpoena power?

From a Constiutional perspective, it's about as disorderly as you can get.


So everybody's agreed on policy, right? (none / 0) (#12)
by lambert on Tue Apr 14, 2009 at 01:26:13 PM EST

We need a Pecora commission to determine the facts?


: I agree, fwiw (none / 0) (#34)
by ruffian on Tue Apr 14, 2009 at 03:09:50 PM EST

Where has Geithner said the banks (none / 0) (#14)
by Green26 on Tue Apr 14, 2009 at 02:18:23 PM EST

need an "additional $2 Trillion in capital"?

The failures of Lehman and IndyMac, and the sale of Bear Stearns, are not good examples of what the assets of the big banks are worth. I doubt that they are good examples of what the big banks would be worth in liquidation either. Apples to oranges.

First, Lehman and IndyMac were failures, and were much worse off than the reamining big banks. That's why they failed. Bear Stearns was sold, so I'm not sure how Black thinks he knows what their assets were worth.

Second, Lehman and Bear Stearns were engaging in practices and businesses more risky than the other banks and investment banks.

Note that Lehman and Bear Stearns were primarily investment banks and traders. They were not traditional banks.

Third, I don't know much about IndyBank, but my impression is that it was nothing like Citi or BofA.

Fourth, my belief is that takeover, receivorship, nationalization, liquidation are and would be much more expensive than bailing out the banks with investments in the banks, loans and guarantees.


Does anyone actually know the (none / 0) (#19)
by Inspector Gadget on Tue Apr 14, 2009 at 02:29:21 PM EST

real numbers anymore?


: If You Read the Warren Report, She... (none / 0) (#21)
by santarita on Tue Apr 14, 2009 at 02:32:08 PM EST

has put out a number of tables with numbers.

: Bloomberg: Lent or spent $12 trillion (none / 0) (#27)
by lambert on Tue Apr 14, 2009 at 02:50:38 PM EST

Here.
I believe the "spent" part is only $4 trillion.
Of course, since there's no transparency or accountability for the program, it's hard to be sure. So far, the figures have never turned out smaller than predicted...

That's why he wants fact-finding (none / 0) (#6)
by ruffian on Tue Apr 14, 2009 at 12:46:54 PM EST

to find out what the assets are worth before we buy them.


I liked the quote in one article, (2.00 / 2) (#15)
by Green26 on Tue Apr 14, 2009 at 02:20:52 PM EST

perhaps a recent NY Times article, that said some of what some of you are proposing, would be like asking fireman on the way to a four-alarm fire to stop to evaluate safety code violations that may have caused the fire.


I'm sure you did, because that quote is so stupid (5.00 / 1) (#26)
by lambert on Tue Apr 14, 2009 at 02:47:29 PM EST

The critics are a lot more like people trying to make sure the surgeons know what's wrong with the patient before they cut them open and start slicing.


Sure, let's wait for another Pecora (none / 0) (#42)
by Green26 on Tue Apr 14, 2009 at 05:14:06 PM EST

commission. The Pecora commission lasted from 1932-1936.

I was thinking we might have to take action before that.


: Why not start now? (none / 0) (#44)
by lambert on Tue Apr 14, 2009 at 05:15:42 PM EST

Then you don't have to wait.

The bailout fact (none / 0) (#7)
by NealB on Tue Apr 14, 2009 at 12:49:26 PM EST

The big fact everybody knows is that these banks have received hundreds and hundreds of billions of dollars from the US government. If they were solvent, they wouldn't need the bailout. What other facts are necessary?


That is not an established fact (none / 0) (#8)
by ruffian on Tue Apr 14, 2009 at 01:02:53 PM EST

believe it or not. The banks and Geithner are claiming it is primarily a "liquidity" problem, not a "solvency" problem. Geithner hopes to make that true by pumping in enough money to make them solvent before the populace wakes up.


If Geithner Succeeds ... (none / 0) (#20)
by santarita on Tue Apr 14, 2009 at 02:30:29 PM EST

then it will have been worthwhile, no? Presumably success would mean full repayment of taxpayer investments with interest and no further need for subsidies. And a whole new set of regulations and enforcement mechanisms.


Not if it covers up any fraud that got us here (5.00 / 1) (#31)
by ruffian on Tue Apr 14, 2009 at 03:03:13 PM EST

I'll temper that (none / 0) (#33)
by ruffian on Tue Apr 14, 2009 at 03:08:50 PM EST

with a non smart-a** response.

Do I want the Geithner plan to succeed even if it means fraud and malfeasance by the banks is covered up, and the people that got us here are still in place and as rich and powerful as ever? That is a tough call. I don't think the Geithner plan will succeed, so what I want hasn't entered into my calculations.

If the Geithner plan succeeding really means that people get back to work and can suppor their families, I guess I will have to accept the bankers getting away with it.


: Geithner Won't Succeed Unless (none / 0) (#36)
by santarita on Tue Apr 14, 2009 at 03:12:31 PM EST

he can identify the causes and come up with ways to prevent them.

: Problem is that if the system stays (none / 0) (#39)
by inclusiveheart on Tue Apr 14, 2009 at 03:20:37 PM EST

"as is" which is likely under the current scenario, then we'll be doing this collapse thing all over again in 10-15 years - maybe less.

Agreed. n/t (none / 0) (#35)
by santarita on Tue Apr 14, 2009 at 03:10:58 PM EST

Boils down to (none / 0) (#4)
by TeresaInSnow2 on Tue Apr 14, 2009 at 12:08:08 PM EST

Same books, different, more innovative gourmet chef!

Traditional "Big Bath" accounting (none / 0) (#45)
by RonK Seattle on Tue Apr 14, 2009 at 10:03:48 PM EST

Incremental profits quarter after quarter, punctuated by a humungous "non-recurring" loss every 10th quarter or so.