Posted By John Berlau
Today, the SEC charged giant investment bank Goldman Sachs with more than $1 billion worth of securities fraud for its dealings in the subprime mortgage market.
Ironically, at the same time the SEC is seeking justice for Goldman’s alleged victims, President Obama and Senate Banking Committee Chairman Chris Dodd (D-Conn.) are pushing a bill would reward the firm with potentially billions of dollars by instituting a so-called “resolution authority” that would, in practice, be a permanent bailout fund. Supporters of Dodd’s bill maintain that it does not create bailouts because the failing firm’s shareholders would be wiped out and its managers would be fired. But what they don’t say is that the money from the $50 billion resolution fund would be used to frequently give creditors of this firm a better deal than they would have in bankruptcy.
Recall that during the financial implosion of late 2008, Goldman was not bailed out directly by taxpayers, but instead received tax dollars as a creditor of AIG. Goldman received [1] $12.9 billion in the “backdoor bailout” of AIG because of the credit default swaps it owned that AIG had insured. Goldman and other of AIG’s counterparties were paid by the government 100 cents on the dollar in this bailout, whereas creditors in bankruptcy court often get less than 50 cents on the dollar.
So as American Enterprise Institute scholar and Financial Crisis Inquiry Commission member Peter Wallison puts it [2]: “That act—paying off the creditors when the government takes over a failing firm—is a bailout. It doesn’t matter that the management lose their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout.”
To top it off, the fees for the Dodd bill’s resolution fund that would pay off a failing firm’s creditors would come not just from banks but from a broad array of Main Street businesses. Stable life, auto and home insurance companies would have to pay into this fund to subsidize the failure of the next high-roller, and the fees they pay would likely be passed on in the premiums their policy holders pay. And the bill’s definition of “nonbank financial company” is so broad that it could cover manufacturers only tangentially involved in extending credit, such as those that lease equipment to their customers. This would raise prices and cost Main Street jobs.
All in all, the Goldman indictment should serve as a wakeup call to those who want to ram a bill through Congress without looking at who both its victims and beneficiaries would ultimately be.
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_Reed S. Wilson, M.D.
show details 4:29 PM (40 minutes ago)
This is a follow up to the last Goldman Sachs Email I sent, make sure to read that one first so you have background info. Check this out.
--The SEC approved the Goldman suit in a vote that split along party lines – a rare occurrence for approvals of enforcement litigation.
--Before the Commission had released its announcement, the New York Times published on its website a story describing the suit.
--Less than half an hour after the Times story’s publication, Organizing for America, the successor organization to Obama for America and now a project of the Democratic National Committee (“DNC”), sent millions of supporters an e-mail message from President Obama urging support for “Wall Street Reform.”
--Within hours, the Democratic National Committee had purchased AdWords advertising from Google, Inc. The DNC’s Google campaign fundraising advertisement, headed “Fight Wall Street Greed,” appeared whenever a user ran a Google search for the phrase “Goldman Sachs SEC.” It read, “Help Pres. Obama Reform Wall Street and Create Jobs. Families First!” and included a link to www.BarackObama.com, the website of Organizing for America.
--Democrats in Congress and the Administration have heralded the Commission’s suit against Goldman as a welcome boost to their case for the legislation.
--Members of the media have already begun to question the timing of the Commission’s suit and the actions of the Democratic National Committee.
Read more: http://www.politico.com/news/stories/0410/36097_Page2.html#ixzz0lgZoHoji
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