Greece, Goldman Sachs and The Outrage at Bailouts

* General market comment – Sovereign bonds of Greece have rebounded smartly over-night, as the EU has been rallying around the rescue plan to provide bridge financing for the country. I suggested as much in yesterday’s blog. However grand the positive mood is in today’s market, the avoidance of the current crisis is only going to postpone the true day of reckoning. So the stock market rallies in response, and I think the stock market has another few days of rallying in it, as investors are just looking at the recent correction as another opportunity to buy the pull-back. The Federal Reserve concluded their meeting yesterday, and kept the unusually easy monetary policy in-tact. Some market participants were speculating that with the Greek crisis front and center, that the Fed was not going to pick yesterday as the day to announce any shift in policy, although they did acknowledge a pick-up in economic activity.


* Greece – Yesterday, it came out that Germany’s parliament was going to debate and then vote on their support for the pending Greek financing package. This will start next week, and conclude by Friday with a vote. My guess is that at the end of the debate, they will vote AGAINST a package, and that is when the fun will begin. In the meantime, the consensus is that the EU and IMF will make a significant package available for Greece, and is currently negotiating additional austerity measures for Greece, so that they can lower their deficits. I have heard glimmers of what these austerity measures will entail, and it sounds to me that the solutions will only serve to further depress the Greek economy. And this sort of solution usually has a negative feedback loop which results in an economic contraction, which in turn increases the deficits. In other words, austerity will only breed contempt and not reduce the deficit as much as they are hoping. Rather, Greece should be doing something structural to alter the way in which the state spends its money, and collects taxes.


I read a sobering piece by an musician who migrated to Greece 20 years ago, who describes the lax environment by which the state spends their money. Most state sponsored jobs come with large benefits, including massive pensions, and in many cases, it is possible that state workers to not show up, get paid, and work other jobs. This writer’s contention is that Greece has been living off of borrowed money for years, and there are structural changes which need to be made. I can send you this piece if you are interested. Greece sounds like Vallejo, California, where the local government does not want to do anything to alter the pension benefits they are promising the police, even though the city is in bankruptcy. Bankruptcy, which is what Greece is going through, is a reason to change the way the state conducts its affairs. Just cutting wages and raising taxes will not do the trick.


A reader of the blog reminded me that the off-balance sheet transactions which Greece did with Goldman Sachs and other Investment Banks, would demand an $8 billion collateral call if Greece is downgraded to junk by Moodys and S&P. That leaves Greece hanging on the edge of a cliff, while it awaits the EU/IMF approvals to send them money. Right now, the markets are mostly focused on the May 19th debt maturity which Greece has coming up, but I have heard next to nothing on this potential disaster, if Moodys joins S&P with a junk rating for the debt of Greece. Additionally, I have read reports by other commentators that deposits are leaving the Greek banking system, because if the government goes bust, then there will be concerns about their deposit guarantees, which might no longer be valid.


Another reader puts a very interesting spin on the Greek situation:


“Too Big too Fail (TBTF) is meaningless.  We are watching it play out with Greece. While our congressman may think no one should be TBTF, they don’t stop funding the IMF who will never let Greece or the other PIIGS fail. Eliminating TBTF is a great political sound bite when things are stable, but goes right out the window in crisis mode (as we are seeing now).”


What a great point that reader makes! What influence does our government have over the affairs of the IMF? The IMF’s austerity approach will fail with Greece, because there will not be a currency devaluation to counter act the affects of austerity. I think the IMF is an independent organization, although the US is the organization’s largest benefactor. Meanwhile the US just looks on as if the Greek situation has nothing to do with the US, IMF bailout notwithstanding. 


I will conclude this section with the idea that there is a very good chance that Germany will not pass their approval of the EU package to Greece, and even if they do, then the austerity package which Greece will try to implement is just sowing the seeds for a future problem.


* AFL – CIO president, Alan Trumpka was on CNBC this morning, as he plans to lead a protest march against Wall Street banks today. The thrust of his point is that Wall Street should be paying for the recession. The guy came off angry and confrontational. Trumpka went on to blame Wall Street for causing the economy to go into a recession and for the 11 million jobs which have been lost to date. He said Wall Street needs to be regulated, there needs to be special taxes on excessive bonuses, there should be a tax on every financial transaction, they need to lend money to small businesses, (something Wall Street never has done), and that Wall Street should not be lobbying against financial reform in Congress. The guy was not able to explain how penalizing Wall Street was going to solve the problem of joblessness.


When Erin Burnett asked him about how the unions were part of taking down GM and Chrysler, he wrongly stated that they paid all the money back. (GM only paid back a small portion of it, and only the debt portion, as opposed to all the debt which was converted into equity). He clearly avoided any of the issues leading up to the collapse of the car companies, for which I blame the unions as much as I do the management.


While I am on the subject of what Wall Street’s involvement was in the cause of the financial crisis, let me ask, what part of the financial crisis did Wall Street cause? They created securities out of loans which never should have been made? And while I am on it, who told these poor dopes to borrow money they could not repay? And what about the many banks, not Goldman, but Citi and others, who lost tens of billions of dollars? And what about the thousands of companies who fired the millions of workers? Shouldn’t they have kept their staff at higher levels, and give up making a profit?


The point I am making in mentioning this is that we are on the verge of class warfare. The sharp rhetoric from this joker underscores these sentiments. WHIle I might disagree with what he says, he is leading millions of other equally ignorant union members, who are just plain pissed off. It does not matter who is right or wrong, just that the lines of division are growing sharper and deeper. Along these same lines, let me share a couple of readers comments to yesterday’s Goldman Sachs write-up I did:


“Rick–Ordinary people have a kind of innate revulsion at the idea of someone profiting big time from the decline or failure of a group of assets. They see people losing their jobs and homes and the decline in the value of their 401k’s, while a relatively few traders make a “killing”. Perhaps there is a touch of envy too; why can’t we gain from GS’s expertise and inside knowledge of the game?  The financial part of the market has become too big. Loses are not perceived as being confined to those who trade. The bail-outs pushed people to this opinion, even if they suspected that with no bailout, it would have been even worse.”


This reader, who is not in the financial business, expresses an important viewpoint, and one which I believe is not a lone voice. Another reader writes in with:


“Rick, I’m very cynical about this: it was all a charade. Goldman (and the other money center banks) are getting exactly what they want out of this bill: the enshrinement of “too big to fail.”  They’ll endure a little pseudo public humiliation in exchange for the federal guarantee of their investments.   It’s no accident that over 70% of Goldman’s corporate and personal political donations went to the Democrats (not a typo).  I wouldn’t be surprised if the Goldman execs and their Senate tormentors got together for a drink and a good laugh after the hearings about how they put one over on the rubes out there in fly-over country. I think the Goldman hearings were meant to facilitate the passage of the financial reform bill. I am cynical about the faux-outrage expressed by the Senators at these hearings.”


Let me say that I do not think the Goldman executives were expecting anything as contentious as they were treated to. Nor do I think that Wall Street is looking at TBTF as being good for them. If anything, legislation which eliminates TBTF will cause a down grade in the credit ratings of these institutions, because the legislation will insure that debt holders are allocated losses when a failing institution is closed down. As for the Senators being in cahoots with the Goldman crew, I take the under on that as well. 


Another reader writes in with this comment:


“I agree with you about the GS stuff; it was a witch hunt, the Senators do not understand the business. They should be going after Countrywide, WaMU who those who falsified loan information which is underlying the financial crisis. The investment banks were not selling this stuff to individuals, they were selling to professional investors who understood the risk.  I would have walked out too.”


And lastly let me add that another reader pointed out to me that in one of Goldman’s transactions, (Hudson), they did the transaction so they could unload their own inventory. I agree with the criticism of Goldman and other Investment Banks, when they undertake a new issue securitization, and do not disclose material information, such as where the collateral was coming from, they could are likely violating SEC new issue securitization rules. The rules on a new issue are completely different than when a dealer is a market maker. And if Goldman is guilty of anything, it is because the lines between these two activities were too blurred to differentiate where one activity ended, and the other began.