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Uncle Sam’s banking shell game

April 14, 2009

4/15 Update: Tyler Durden over at Seeking Alpha got an interview with Blackrock’s Peter Fisher. He pointed out that the GS profits are basically a 1-time occurance, courtesy of AIG unwinding assets (and cutting some big checks to its investment partners).  I like Tyler’s choice of download services, too. There’s some sober reality on Wells Fargo’s profits, too.

Goldman Sachs is poised to announce major profits, as well as a plan to pay back $10 billion (bn) it got from the US government.  They’re planning a stock offering of $5 bn in order to raise enough money to pay back the government. According to the WSJ article,  “There is increasing discomfort with the ability of Congress and the Treasury to rewrite the rules as they go along.”  Fair enough. As Rick Newman at seekingalpha points out, banks have good reason to get out of Uncle Sam’s bed as quick as they can.  But tell me how GS made these profits in a down economy?

They got $10 bn from Uncle Sam, and $12.9 bn from AIG, who got it from Uncle Sam. They invested that money wisely. I’m glad they were able to turn a profit with that money, but it just shows how TARP funds were misspent.

GS still has the bad loans on its books. The underlying problem (failing mortgages) wasn’t addressed with this money. we instead hid the problem by creating an easy money environment and giving banks more money to lend. But that money came from debt, and the good news we hear today will be mirrored by bad news down the road. But hey, I’m sure none of the NEW loans that Goldman Sachs made will default, right? I mean, that would just be making a bad problem worse.

Ian Welsh at HuffPo points out a similar situation at Wells Fargo. Wells Fargo got a bunch of money ($25 bn) from the government, and, coupled with the very low interest rates, earned a bunch of money with it. Oh, they also bought Bank of America. Yippee! Umm, how does that help solve our problem?  Not only are the banks NOT cleaning up their toxic mortgage mess (which ultimately depends on consumers with good credit buying homes), but they’re raking in money with new fees:

While the Fed cuts the banks slack, the bankers are busy turning the screws on their debtors by raising credit card rates and fees, and harassing distressed borrowers with all the zeal of the Roman army sacking Palestine.

Wells Fargo is also forcing American workers to train their foreign replacements.  Don’t forget, Wells Fargo was basically forced into taking TARP funds. And their CEO is pretty annoyed at government’s handling of the whole situation. So it’s quite possible that all of these steps are being taken to make balance sheets that are pretty enough in the short term to get out from under the government’s thumb. Will it work? The White House hasn’t seemed very interested in taking back TARP funds.

So, thanks to government intervention, big banks got bigger, Americans are being laid off, bank fees are going up, and the underlying loan problem hasn’t been fixed. That’s government in action!

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