28 April 2010
Lessons of S&L Crisis Not Learned
The Junk Bond heyday of the nineteen-eighties thrived on the insatiable appetite of Savings and Loan Banks for the high returns promised by low-grade corporate securities floated to finance speculative mergers and acquisitions. Drexel Burnham Lambert, the king of that market, was forced into bankruptcy by political crusaders.
Now Goldman Sachs has become the favorite whipping boy of misguided Congressmen, White House officials, and others pandering to economically devastated voters and customers across the country. It was an error to force Goldman and other private investment banks to convert into commercial banks with access to nearly free loans from the Federal Reserve at the onset of the “Great Recession” in late 2008.
The Goldman executives who testified before a U.S. Senate investigations committee on April 27, 2010, were reminded how expensive those Federal Reserve funds really are. In point of fact, Goldman, not to mention BankAmerica, Citibank, JPMorgan-Chase and others probably did not need government loans and equity investments in order to survive the collapse of the sub prime mortgage market. However, panic-stricken White Hous, Treasury and Federal Reserve officials used their power to stuff that liquidity down their throats as a palliative for concerned investors abroad, on whose credit the whole U.S. economy ultimately depends.
What appeared to be a serendipitous opportunity to access cheap loans to fund increased trading activity has become a trap for Goldman Sachs in the morass of fiduciary duty to its supposed banking customers. In fact, Goldman’s customers are not widows and orphans—they are institutions who know that Goldman offers them complicated financial products that they can use to manage their speculative financial portfolios under the rubric, “Buyer beware.”
The Junk Bond heyday of the nineteen-eighties thrived on the insatiable appetite of Savings and Loan Banks for the high returns promised by low-grade corporate securities floated to finance speculative mergers and acquisitions. Drexel Burnham Lambert, the king of that market, was forced into bankruptcy by political crusaders.
Now Goldman Sachs has become the favorite whipping boy of misguided Congressmen, White House officials, and others pandering to economically devastated voters and customers across the country. It was an error to force Goldman and other private investment banks to convert into commercial banks with access to nearly free loans from the Federal Reserve at the onset of the “Great Recession” in late 2008.
The Goldman executives who testified before a U.S. Senate investigations committee on April 27, 2010, were reminded how expensive those Federal Reserve funds really are. In point of fact, Goldman, not to mention BankAmerica, Citibank, JPMorgan-Chase and others probably did not need government loans and equity investments in order to survive the collapse of the sub prime mortgage market. However, panic-stricken White Hous, Treasury and Federal Reserve officials used their power to stuff that liquidity down their throats as a palliative for concerned investors abroad, on whose credit the whole U.S. economy ultimately depends.
What appeared to be a serendipitous opportunity to access cheap loans to fund increased trading activity has become a trap for Goldman Sachs in the morass of fiduciary duty to its supposed banking customers. In fact, Goldman’s customers are not widows and orphans—they are institutions who know that Goldman offers them complicated financial products that they can use to manage their speculative financial portfolios under the rubric, “Buyer beware.”
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