Tales of the Vampire Squid

Great illustration of the classic movie The Sting by Francesco Francavilla

Matt Taibbi of the Rolling Stone spells out why Goldman Sachs is making all that money in a piece called “Wall Street’s Bailout Hustle”. The contents shouldn’t be new for any reader here because it basically spells out what we’ve been talking about for some time. Also, any avid reader of Yves over at Naked Capitalism or Karl Denninger at the Market Ticker will have also followed the heist of taxpayer monies. The good news is that the Rolling Stone has a much bigger audience. The bad news is that I don’t know at this point if what any of us say will really matter. The fix is in and has been in for some time.

We’ve talked about how by allowing the investment banks to become commercial banks,the FED opened the discount window to institutions that normally cannot borrow money there or for that matter borrow any where that cheaply. Having your marginal cost of capital suddenly go to close to zero lets you invest in a lot of projects whose net present value would not be positive otherwise. Unfortunately, these ‘projects’ weren’t things like inventory loans or loans for new equipment which are items that generally are funded by commercial banks. The proceeds of the Fed loans were used to buy up deep discounted (by the Treasury) financial assets from the remnants of a failing AIG.

So the scam–as we’ve talked about in several posts–was pretty easy. First, you borrow from the FED at close to zero per cent interest. Then you get inside information on what’s going to be stripped out of AIG by then NY Fed chairman Timothy Geithner (who sees to it that the price is discounted to Filene’s Basement-levels) and you buy. Then, the NY Fed pre announces a program to buy whatever bad investments you may have on your book (including those deeply discounted AIG assets that you just bought at giveaway prices) so that you and your competitors can shift the assets around several times from place to place and run the price up. Just when the price goes up to an unreasonable level, you sell it to the FED. Then you stand in line for your huge bonus check in a few months for being a Master of the Universe when just about any freshman who took an investments course at the local community college could’ve figured out the same thing. La voilà! Fait accompli!

It would’ve been much cheaper for all of us if they’d have just bought the AIG assets directly but for some reason a bunch of folks in Washington D.C. insisted that the ‘market’ set the price. So, instead of having a phony price set by the FED directly, we had a scammed price set by investment banks. Was all this so Obama could say he’s a good capitalist and not a socialist or was it just away to dance with them that brought you? As we’ve also talked about before, Goldman Sachs and the FIRE lobby invested heavily in the Obama campaign.

So, if you want it spelled out a little bit more completely–with some much better prose than I can come up with–you can visit the Taibbi article and weep for your hard earned tax dollars. Here’s a great example of that.

Fast becoming America’s pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles.

No really. It’s a quote from the first paragraph. I swear I didn’t make it up. Nor did I make this up.

The only reason such apathy exists, however, is because there’s still a widespread misunderstanding of how exactly Wall Street “earns” its money, with emphasis on the quotation marks around “earns.” The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street’s eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its “performance” was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?

The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.

So, it explains pretty clearly how Wall Street made that money in a sort’ve pulp fictionish way which hopefully will bring some attention back to culprits like Timothy Geithner who basically was the “loan arranger” of the sting on taxpayers. If that’s what it takes to wake folks up to the scam behind the masters of the universe, then so be it. WAKE THE FUCK UP FOLKS!