Street Games

The time is arguably the most crucial of recorded human history, when have the stakes never been higher, but down on the Street the game is still the same and the name of this game is Dump the crap on the taxpayers head, or any other name by which crap still stinks. And this one stinks so bad they don't even try to hide it. Don't believe me, then Batman me this Riddler, why is Goldman Sachs raising $6 billion in a rights issue to repay $10 billion in TARP funds, that they were previously so gracious to take off the taxpayer's hands? Just the word "repay" anywhere near Goldman Sachs calls for inspection of the fine print, but this may be out in the open as the Golden Godfather is first up to snap up private-equity assets on the secondary market for pennies on the dollar from endowments, hedge funds and pensions that have been bit by losses.

Goldman Sachs Group Inc. raised a fund with about $5.5 billion in capital commitments to buy private-equity assets on the secondary market from endowments and pensions that have been stung by losses.

The GS Vintage Fund V, Goldman Sachs’s fifth dedicated private-equity secondary fund, will acquire investments ranging from $1 million to more than $1 billion, the New York-based company said today in a statement.

See how nicely $5.5 billion rounds to $6 billion, but that's not what really stinks here.

Investors are forming nonleveraged buyout funds, including pools dedicated to secondary interests, as financing remains scarce for LBOs amid the global credit crisis. Secondary buyers are taking advantage of discounts on private-equity stakes of 50 percent or more as endowments including Harvard University’s weigh unloading commitments to buyout funds after their overall assets plunged in last year’s stock market rout.

Secondary buyers like Goldman Sachs, JP Morgan, Citigroup, Bank of America are taking advantage of discounts on private-equity stakes of 50 and the chance to sell them on the open market for a profit or to off load the sh!t to the taxpayer, tha'd be you. See, it's the new capitalism of private profits and socialized risk, don't complain.

It has been a little less than two weeks since Treasury Secretary Timothy F. Geithner unveiled the details of his project to restore banks to financial health. But analysts say hedge funds and investment banks are already looking for ways to exploit the complex web of auctions, public-private partnerships, and government guarantees proposed by Treasury to cleanse banks' books of toxic assets. "It's a highly gameable system," says H. Peyton Young, an Oxford University economist and a senior fellow at the Brookings Institution in Washington. "It's very difficult to write rules that are going to prevent self-dealing behavior."

It's a highly gameable system and they are lining up to game it to the limit. The surprise is that it's just five of the biggest banks that hold 96% of all derivatives positions, where the toxic shocking assets live. All turmoil and risk for just five banks.

The "dirty little secret" that Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks that are the source of the toxic poison causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality. The heart of the present problem, and the reason ordinary loan losses are not the problem as in prior bank crises, is a variety of exotic financial derivatives, most especially credit default swaps.
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What Geithner does not want the public to understand, his "dirty little secret", is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global "off-balance sheet" or OTC derivatives issuance.

Today, five US banks, according to data in the just-released Federal Office of Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bankderivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.

The government is spending us into the greatest depression in world history for just five tree house pals. And while Goldman Sachs usually leads the cabal for once, in this group of five at least it is in third place.

The top three are, in declining order of importance: JPMorgan Chase, which holds a staggering $88 trillion in derivatives; Bank of America with $38 trillion, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs, with a mere $30 trillion in derivatives; number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain's HSBC Bank USA, has $3.7 trillion.

Goldman Sachs and the other big banks will declare that they were hedged against losses by CDS purchased from AIG, but AIG would have defaulted on the repayment were it not for the $180 billion taxpayer donation, which may have taken a bite outa earnings.

Gee, you don't think being paid by the taxpayer through AIG's "conduit" for losses that didn't (yet) happen at 100 cents on the dollar might have anything to do with that, do you?

And further (and potentially much worse) there is the repeated statement by Goldman executives that they were "fully hedged" against a potential counterparty default by AIG.

One wonders - was that "hedge" to be short the equity on AIG itself, perhaps?

Why is this important? Because if that's how Goldman hedged they got paid twice and the taxpayer literally got robbed.

Someone in Congress needs to look into this now; there are already rumblings of investigation. Those rumblings need to get a lot louder and turn into subpoenas, not "polite inquiries."

That is exactly what will not happen, that is exactly what having your CEO be Treasury Sectary is all about in the the first place.