Street Games

The present is arguably the most crucial period of recorded human history. The stakes have never been higher, but down on Wall Street everything seems to continue just as usual. The name of the game is “Dump the Bedpot on the Taxpayer’s Head.”

The audacity of America’s financial and political elites never ceases to amaze me. Now these moral degenerates have become so confident in their arrogance that they don’t even try to disguise their plunder. Don’t believe me? Then why is Goldman Sachs raising $6 billion in a rights issue to repay $10 billion in TARP funds when just a few months ago, they were so eager to take off the taxpayer’s hands?

Just using 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 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? Don’t be distracted; 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, and Bank of America are taking advantage of discounts on private-equity stakes and the chance to either sell them on the open market for a profit or to off load the crap to the taxpayer – 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 the moral degenerates 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 of this turmoil and risk is 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.

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, in this group of five 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’s purchased from AIG, but AIG would have defaulted on the repayment were it not for the $180 billion taxpayer plunder, which may have taken a bite out of 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 masquerade as the Treasury Sectary is all about in the the first place.

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