Connecting the dots: Goldman Sachs and the PROFIT act

Goldman Sachs and its ilk, who received billions in taxpayer money through TARP to keep them in business, have recently posted high quarterly profits. But what do the taxpayers get for our largesse? This is not a non-sequitur, as a post in naked capitalism today makes clear; and at least 6 House Democrats want to do something about the situation. That is the PROFIT act, which Mary Jo Kilroy (D-OH) and six others (Reps. Brad Sherman, John Boccieri, Betty Sutton, Jackie Speier, Marcia Fudge and Alan Grayson) introduced to little fanfare last week.

Some argue that those who complain about Goldman Sachs (and others) reporting huge profits recently, are just denying those worthies the right to earn a profit for being good at what they do.

Yves has given us part of Denninger's superb takedown of this claim. The guts are here:

Over the last several years Goldman Sachs entered into a metric ton worth of credit default swaps with AIG, even though AIG was incapable of paying off on those swaps. They did so as the "brightest people in the room", that is, either knowing that AIG was incapable of covering the bet or simply not caring that AIG could not cover the bet.

These transactions allowed Goldman (and the other banks who engaged in them) to hold "assets" on their books at intentionally-inflated values - that is, at demonstrably more than those "assets" were actually worth in the market, under the rubric that should their value fall Goldman would be able to "recover" under their insurance policies (the CDS.)

But in point of fact these transactions were never any good, because AIG didn't have the money to pay.

When this became evident Goldman (and others) managed to connive the government into "saving" AIG by throwing more than $100 billion dollars of taxpayer money into the firm. About $13 billion of that went directly to Goldman Sachs to "pay off" those contracts. Billions more went to other institutions, including banks in Europe.

In doing this, Goldman and these other banks forced the taxpayer to eat their bad bet - that is, their loss. That $13 billion was in fact unearned - they had no right to it, as AIG was in fact insolvent and they would have collected zero had the firm gone into bankruptcy. Goldman and these other banks were either unable or unwilling to rescue the firm themselves, so through the use of political influence peddling they got the taxpayer to do it for them, thereby collecting on a transaction that they either knew or should have known had no chance of being paid off at the time they entered into it.

Having done this, they placed yet more bets. This time they won those bets, and made a "profit." But they would have never had the capital to place the bets but for the taxpayer bailing them out in the first place, as they would have likely gone under last fall.

[...]

No, the real objection of Taibbi and others (myself included) is that Goldman managed to steal $13 billion dollars of American Taxpayer money, without which they would not exist today. Having stolen that money through claims of imminent financial collapse made by their former head, Henry Paulson, at their urging, they now have speculated with that taxpayer money and kept the proceeds.

Nobody would object were Goldman to return not only their "TARP" money but also the entirety of the "passthrough" benefits they have received, specifically but not exclusively the $13 billion dollars that was funneled through AIG to them.

But if Goldman had done that, they would have posted a huge loss, and in addition would not have had the money to repay TARP.

Nobody I am aware of cares if a firm is able to turn a legitimate profit through their actions in the market. We object not to profit, but to blatant chiseling of the taxpayer after a company or individual makes a bad bet due to their own incompetence or willful blindness, then demands that the taxpayer cover it, yet when their bets turn out well, they keep the money and hand it to their "associates."

The PROFIT act proposes to increase the taxpayer's share of the profits while making the repayment of TARP funds more transparent.

In 2008, Congress passed the TARP and included provisions to ensure the taxpayers benefit from a turnaround in the financial sector. Banks were mandated to give stock options to the American people equal to 15 percent of the total loan provided by the taxpayer. These stock options, or warrants, are agreements for the taxpayer to purchase stocks at a preset lower price so when the companies’ stock prices rebound there would be higher returns for the taxpayers.

Kilroy’s bill would also remove a loophole that allows banks to choose whether they want to negotiate with Treasury or open the process to a public auction. The PROFIT Act would mandate the public auction process that the Congressional Oversight Program (COP) said “would be more likely to maximize taxpayer returns …”

Barry Ritholz's unnamed Hill correspondant reported that

Mary Jo Kilroy, a freshman Democrat from Ohio, introduced [this bill] to compel an open auction of these warrants with six cosponsors: Brad Sherman, John Boccieri, Betty Sutton, Jackie Speier, Marcia Fudge and Alan Grayson.

All of these members except Brad Sherman are in their first or second term in Congress, and all are Democrats. Sherman was the leader of the little noted but important ‘skeptics caucus’ that attempted to stop the $700B bailout in September.

I didn't know there was a "skeptics caucus". Did you? I'm cautiously optimistic about these younguns in Congress.

Too late for Goldman Sachs**, but this bill seems to be something we should support wholeheartedly.

Or, to paraphrase the snark of Mark Thoma (he was commenting on something else, but you should go read it):

"See, the anti-regulation types are right. A PROFIT act might stifle valuable innovation like this*** and prevent these companies from giving investors* the value that they pay for.

I might have that backwards."

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* i.e., us, the taxpayers

** I'm starting to call them Goldman Sucks The Blood Out Of Everything. What do you think?

*** and this, which I still don't know what to make of.