BP versus GS - spot the difference
By Hossein Askari and Noureddine Krichene
BP and Goldman Sachs have been going through existential crises. One is
arguably as strong as it was before its crisis, while the other has a
questionable future. The major reason for their differing positions today is
their respective treatment at the hands of the White House, a differential
treatment that has received no media attention.
A number of Goldman Sachs "accomplishments", from its leading role in packaging
mortgage-backed securities, trading practices, to incomparable access to
Washington and global insiders, may have contributed significantly to the
financial-economic crisis that has enveloped the world.
This is a crisis that has resulted in millions joining the ranks of the
unemployed, children going hungry even in affluent countries
such as the United States, families pulled apart at the seams, social upheaval,
unprecedented loss of wealth, retirement prospects threatened and destroyed for
millions, unprecedented economic and financial uncertainty with gloomy economic
prospects for current and future generations, and an unprecedented peace time
increase in public debt in a number of advanced countries.
BP for its part has been party to the worst ecological disaster in US history.
Wildlife and the environment along much of the US Atlantic coast will not be
the same for the foreseeable future. Thousands have lost their livelihoods, be
it in tourism, fishing or the oil industry.
As bad as the BP episode has been, its economic impact is not expected to
exceed US$100 billion, a figure that this is dwarfed by the fallout of the
global financial crisis that has been with us for over two years. BP has been
called onto the carpet and has agreed to set up a $20 billion fund, suspend
dividends and accept full responsibility for its actions. This is as it should
be. All companies must be held accountable for their actions.
Did Goldman Sachs get similar treatment at the hands of the White House and
from the rest of the US administration? The answer is a resounding "no".
Goldman has gotten away almost scot-free. It has been saved and enriched at the
taxpayer expense, and its special treatment by the George W Bush and Barack
Obama administrations is becoming more offensive with every passing day and
with every new revelation.
In the aftermath of its life-threatening rescue by US taxpayers, Goldman agreed
to contribute $100 million per year for five years to help small business.
That’s it! BP has pledged $20 billion and there will probably be more to come.
But now Goldman is under investigation. In April year, the US Securities and
Exchange Commission filed a civil suit charging Goldman with deceiving
investors into investing in mortgage-backed securities that it knew would fail.
A few days later, the Justice Department disclosed that it had started a
preliminary criminal investigation to determine whether the firm had committed
securities fraud. We have to wait and see if anything comes of this. But
remember, BP is already paying.
Just consider what the White House rightly did to BP and look at what it did to
Goldman. Nothing. But there is more. BP received no handouts from the
government and the taxpayer that we are aware of. But what did Goldman get from
Uncle Sam?
When Goldman was in danger of collapsing, Uncle Sam saved it from almost
certain collapse. Goldman received a $10 billion loan (which it has since paid
back with interest); government guarantees for $30 billion of debt; a
government waiver for Goldman to become a bank holding company and receive a
variety of government guarantees. It received $12.9 billion from AIG - and
let's not forget that the government paid AIG, and AIG then immediately turned
around and paid Goldman, 100 cents on every dollar for insurance it had
provided for Goldman's asset-backed securities, which could still turn out to
have been insured under false representations by Goldman Sachs.
Reportedly, another bank received AIG payments that were also intended for
Goldman. What other bankrupt company has paid out 100 cents on the dollar? How
often are creditors made whole both directly and indirectly through third
parties? How could the New York Federal Reserve and the US Treasury have
possibly agreed to this? Are they officials who guard America's national
interests or are they simply businessmen and businesswomen collaborating with
Wall Street?
All this occurred under Hank Paulson, a former chairman of Goldman Sachs, as
the secretary of the Treasury, and with other former Goldman figures in other
powerful public positions. This is the same Paulson who as chairman of Goldman
was reputedly as tough as steel and a no-nonsense negotiator.
If the main reason for the AIG funding was to protect the financial sector, why
didn't the Fed and the Treasury give direct loans to Goldman and other banks
instead of handing cash to AIG to hand right out to these financial
institutions with no strings attached? Then at least the payments would not
have been outright gifts.
While BP suspended its dividends, guess what Goldman did? Goldman Sachs put
aside $16.7 billion in bonuses for 2009 as Americans continued, and continue,
to suffer.
But possibly the cruelest jokes of all are in the revelations contained in a
lengthy article in the New York Times on June 30, 2010. AIG, or more accurately
the US taxpayer, gave up most of its legal rights in dealings with Goldman
Sachs; the government adopted a policy of making Goldman Sachs whole; and a
former Goldman employee with continuing financial interest in the firm was the
point man in the Treasury. It is simply breathtaking how the White House has
toed the financial sector's interest at our expense. The quotes from the NYT
are self-explanatory:
When the government began rescuing it from
collapse in the fall of 2008 with what has become a $182 billion lifeline, AIG
was required to forfeit its right to sue several banks - including Goldman,
Societe Generale, Deutsche Bank and Merrill Lynch - over any irregularities
with most of the mortgage securities it insured in the pre-crisis years.
The documents also indicate that regulators ignored recommendations from their
own advisers to force the banks to accept losses on their AIG deals and instead
paid the banks in full for the contracts. That decision, say critics of the AIG
bailout, has cost taxpayers billions of extra dollars in payments to the banks.
It also contrasts with the hard line the White House took in 2008 when it
forced Chrysler's lenders to take losses when the government bailed out the
auto giant.
For its part, the Treasury appeared to be opposed to any options that did not
involve making the banks whole on their AIG contracts. At Treasury, a former
Goldman executive, Dan H Jester, was the agency's point man on the AIG bailout.
Mr Jester had worked at Goldman with Henry M. Paulson Jr, the Treasury
secretary during the AIG bailout.
How could the New York Fed
and the US Treasury have agreed to such a deal - full payment and an agreement
not to sue? It is simply amazing that this could be done with public funds. The
same Timothy Geithner who as president of the New York Fed negotiated so
"magnanimously" with Goldman was picked by the Obama administration as the
secretary of the Treasury to succeed Paulson.
So why such different treatment of BP and Goldman Sachs by the White House and
the US government generally? Is it because one was nominally American and the
other nominally British? Is it because one had its former employees (some with
continued financial interest in Goldman's future) running the US government,
with powerful positions in the White House? Is it because the financial
industry has become so powerful in the US that it has tentacles in every corner
of power in Washington?
At this point what may be of more interest to Americans is not the answer to
the "why", but the answer to the "if" and "when" - when will the White House
take meaningful action, if at all, against financial institutions that may have
benefited while America bled and continues to bleed? It is depressing to see
Goldman Sachs and other financial institutions paying a special tax to
taxpayers across the Atlantic, while Americans who paid, and continue to pay
for their bailouts, get nothing and suffer.
Hossein Askari is professor of international business and international
affairs at George Washington University. Noureddine Krichene is an
economist with a PhD from UCLA.
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