Monday, July 11, 2011

Goldman Sachs' Secret Fed Bailout Becomes Public

Last Thursday's Wall Street Journal contained some of the detailed information recently released by the Fed under FOI filings by various business media involving previously-undisclosed emergency loans to large US financial services firms during the financial crisis of 2008-09.

Prominently appearing was Goldman Sachs, for a $15B loan for a month at a laughably low rate. Also included were a few foreign-domiciled banks and various US entities, as well.

This sort of activity and inexplicably fickle discretionary lending is precisely why some call for an end to the Fed.

Why, for example, was AIG never given the opportunity to access these loans? How about Countrywide, WaMu and Wachovia? On what basis were they less deserving than Goldman Sachs?

I suppose Bear Stearns' failure to attract Fed loans would be excused on the basis of it being so early in the crisis. But the others are legitimate questions.

This is the type of selective, subjective government intervention to save favorites and punish those it didn't favor, which upsets investors and causes them to shy away from risking capital when government behaves so punitively with public money and unlimited credit.

Personally, I would have loved seeing Goldman Sachs forced into Chapter 11 protection, its trading units continuing to function to support prices of its inventories of instruments in their markets, while bids for the profitable units were entertained and the management which allowed Goldman to become overextended on unrenewable short-term funding were dismissed.

The ultimate penalty to those senior managers, and the investors who so unwisely trusted them, would have been a deserved loss of jobs and equity investments.

Markets would have continued to function, and useful units would have continued to operate, as well. But those who bet foolishly on a constant ability to fund the firm short-term would have suffered appropriately.

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