Too Big to Fail - Andrew Ross Sorkin [289]
Because Goldman Sachs was the largest single recipient of the AIG payments, receiving $12.9 billion, much of the anger quickly settled on it, as theories proliferated about what strings the firm might have pulled behind the scenes given its ties to Paulson and Treasury’s cast of Goldman alumni. In particular, the Goldman connection to AIG suggested to some that it was the reason that Treasury—or what people had started calling “Government Sachs”—had chosen to rescue the insurance giant, and not Lehman. Goldman disputed claims that it benefited from the AIG rescue, contending that it had been “always fully collateralized and hedged” in its exposure to the insurance company. (In fairness, it does appear that the firm had been so, despite a lingering whisper campaign to the contrary. And the $12.9 billion headline number is somewhat misleading; $4.8 billion of the amount transferred to Goldman was in exchange for securities that it had been holding.) That’s not to say Goldman did not have a vested interest in seeing AIG rescued, but the facts are slightly more complex than have often been presented by the media.
The news reports, however, kept feeding off one another and therefore missed the underlying truth: Paulson himself had had very little to do with the rescue of AIG; it was, rather, orchestrated by Geithner (and executed, in part, by Treasury’s Dan Jester). While the fact has often been overlooked, Geithner, by his very nature—as has been demonstrated throughout this book and in his subsequent policies as Treasury secretary—is as much a proactive deal maker as Paulson, if not more so.
Still, the conspiracy theories kept coming, and the narratives grew more elaborate. “Is Goldman Evil?” asked the cover of New York magazine. The writer Matt Taibbi created a new popular metaphor for the firm, describing Goldman in a Rolling Stone article as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Months after the TARP infusion, Goldman reported a profit of $5.2 billion for the first half of 2009. In June the firm paid back the $10 billion of TARP money, and in July paid $1.1 billion to redeem the warrants that were issued to the government as part of the TARP infusion. For Goldman, even as a bank holding company, it was back to business as usual.
The real question about Goldman’s success, which could be asked about other firms as well, is this: How should regulators respond to continued risk taking—which generates enormous profits—when the government and taxpayers provide an implicit, if not explicit, guarantee of its business? Indeed, in Goldman’s second quarter of 2009, its VaR, or value-at-risk, on any given day had risen to an all-time high of $245 million. (A year earlier that figure had been $184 million.) Goldman’s trades have so far paid off, but what if it had bet the wrong way? For better or worse, Goldman, like so many of the nation’s largest financial institutions, remains too big to fail.
Could the financial crisis have been avoided? That is the $1.1 trillion question—the price tag of the bailout thus far.
The answer to that question is “perhaps.” But the preemptive strike would probably have had to come long before Henry Paulson was sworn in as secretary of the Treasury in the spring of 2006. The seeds of disaster had been planted years earlier with such measures as: the deregulation of the banks in the late 1990s; the push to increase home ownership, which encouraged lax mortgage standards; historically low interest rates, which created a liquidity bubble; and the system of Wall Street compensation that rewarded short-term risk taking. They