Friday, July 24, 2009

President Obama returns to Chicago

SHAKER HEIGHTS, Ohio - President Obama left the Cleveland area and an afternoon of health care reform events for two Democratic National Committee fundraisers in Chicago, where he struck a defensive and at times defiant tone about his top priority.

After touching down in his home city for the third time since taking office, Obama first attended a $15,200-a-person dinner at the Lincoln Park home his campaign fundraiser Penny Pritzker, where he took a shot at the media for what he deemed its "lack of sustained focus on the facts" concerning health care reform, which he said "makes it very difficult" for him.

Then he moved on to an event at the Hyatt Regency, where he defiantly told a crowd of about 750 donors, "We are going to pass health care reform in 2009."

And he used the backdrop of the street-fighter politics that define his home city to fire back at his Republican critics — one of whom, Sen. Jim DeMint, he said has told the GOP that defeating health care reform would “break” Obama.

Let me tell you something," Obama said. "I'm from Chicago. I don't break."

Obama tried to put the best face on the setback to his reform plans he was dealt Thursday, after Senate Majority Leader Harry Reid's announcement.

"So even though we still have a few issues to work out, what's remarkable about this point is not how far we have left to go, it's how far we've already come," Obama said.

"I understand how easy it is for folks in Washington to become consumed by the game of politics."

He did his fair share of criticizing Washington and "the status quo" on health care, and declared the country to be "at an unmistakable crossroad."

"There's some in Washington who want us to go down the path that we've already traveled for the last decade or so," Obama said, "the path where we just throw up our hands and say, 'Oh this is just too tough.'"

Earlier Obama worked a room of over 100 people and posed for pictures at Pritzker's home, where guests nibbled on gazpacho shooters and watermelon salad.

He told the donors that opposition to his health care reform bill "gets on my nerves. It frustrates me that we'd even be suggesting the status quo is the best we can do."

He also praised his administration, saying that it had "reset relations not just with Russia" but with the world.

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"Anti-Americanism is no longer fashionable," he said.

He made similar statements at the Hyatt fundraiser, where he also credited his administration with being able to "pull the economy back from the brink."

The Hyatt event was billed as a "Welcome Home" reception, where Obama met the coach and quarterback of the Chicago Bears — Lovie Smith and Jay Cutler — as well as retired Chicago Bulls point guard B.J. Armstrong and Tracy McGrady of the Houston Rockets.

"I'm honored to be a part of the welcoming group to welcome home my favorite son," Smith told the crowd. "I have the audacity of hope that the Chicago Bears will someday be visiting the White House giving the president a Chicago Bears football to toss around on the South Lawn."

Obama was basking in a sports glow after his favorite baseball team pitched a perfect game, and said somebody asked him which was a bigger deal: the White Sox's perfect game or the Dow going over 9,000.

"And I said I promise you, I promise you, a perfect game," Obama said. "That's big."

The president wrapped himself in the hometown welcome. Some of the first words he spoke during remarks at the Hyatt were, "It's good to be home."

"It has now been six months since Michelle and Sasha and Malia and Marian Robinson, my mother-in-law, said goodbye and moved into a nice little spot in Washington, D.C.," Obama said. "And we arrived there at an incredibly difficult moment in this country's history."

At one point in his remarks a woman yelled, "Give 'em hell, Barack."

Obama reiterated his pitch that "health insurance reform" is not just about the uninsured — although he said helping them is "a moral imperative" — but about lowering costs and increasing quality for Americans who have coverage.

The two events are expected to raise as much as $3 million for the DNC.

Tuesday, July 14, 2009

Goldman’s Outrage


How the Wall Street giant used your money to make $3.4 billion in profits.

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They will never admit to this at Goldman Sachs (they don’t really fess up to much over there at the Big G) but in the fall of 2008, just after the Lehman Brothers bankruptcy gave the world a lesson in systemic risk, Goldman, the world’s greatest risk taker, was finished too.

That’s right, it was toast. Finished. Kaput. Until, that is, the firm that was built on wheeling and dealing in some of the most esoteric investments the world of high finance had ever seen, needed a government bailout to stay afloat, which included $10 billion in cash from the Treasury Department (granted by its former CEO, then-Treasury Secretary Hank Paulson) and more importantly, full access to the Federal Reserve’s discount window to be a commercial bank.

Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume some of the same risk-taking activity that got it in trouble in the first place.

Goldman, of course, is a commercial bank like no other. You won’t confuse Goldman with the ol’ Bailey Building & Loan. It has no customer deposits—which are what the access to the discount window was first set up to protect—and you won’t be getting a toaster or a debit card from Goldman Sachs anytime soon.

But being a bank has its rewards. With full access to the discount window, Goldman can now borrow cheaply and massively from the Fed in a pinch, and because of that access, it can borrow more cheaply in the credit markets. It’s a loophole that has allowed Goldman to turn back the clock and once again resume much of its risk-taking activities, only this time it’s being financed by the American taxpayer.

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There are, of course, many urban legends about Goldman and how it uses its clout in Washington and in the financial business (both Paulson and another former CEO, Robert Rubin held the Treasury secretary post) to advance its allegedly nefarious corporate agenda.

Recent reports have the firm gaming the energy markets, creating the dot-com bubble, and the subprime-debt crisis that took down Wall Street, and then for a time benefitting from its implosion when it “shorted” subprime-related investments, a trade that allowed the bank to profit from the downward spiral. (Hell, I’m sure there are people who also believe Goldman was somehow behind the swine-flu epidemic to corner the market on drug stocks.)

Some of these stories have a basis in fact and some don’t—I’ll leave it up to the reader to figure this out—but what is true is equally disturbing: Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume the many of the same risk-taking activities that got it in trouble in the first place.

The question I have, of course, is why is the Obama administration, which has decried corporate greed whenever it’s politically feasible, allowed Goldman all the advantages of a bank, when it is really a big hedge fund?

The Treasury Department won’t say and it’s obvious why Goldman is doing what it is doing: Money, and lots of it. The firm announced Tuesday morning that net income for the second quarter was $3.44 billion, while its biggest rival, Morgan Stanley, is likely to announce a quarterly loss.

And it all comes down to risk, or to be more precise, how much risk Morgan is willing to take on the taxpayers’ dime compared to what Goldman Sachs is now taking. Morgan Stanley’s CEO John Mack, chastened by the firm’s own near-implosion last year when it too was forced to become a bank, has radically reduced the amount of borrowing, or “leverage,” Morgan is taking in trading. People inside the firm say it’s difficult to meet client demands without borrowing money.

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“We just can’t get anything done,” said one senior Morgan Stanley executive, speaking on the condition of anonymity. Borrowing to finance trades amplifies gains, but it also amplifies losses when trades go bad. During the first quarter of 2009, Morgan borrowed just $11 for every dollar it had in capital (by comparison during the Wall Street boom, firms borrowed as much as $35 for every dollar in capital), while Goldman borrowed a significantly higher amount—close to $15 for every dollar it has in capital. “Our leverage is the result of risk-taking on behalf of our clients,” Goldman spokesman Lucas van Praag says about the strategy.

And keep in mind this is only for the first quarter. Goldman’s second-quarter leverage is likely much higher given the fact that interest rates have remained remarkably low. Those low interest rates have had another benefit—it has allowed Goldman to make winning bets in the bond markets (bond prices rise when interest rates fall), the same place that decimated Wall Street in 2007 and 2008.

Of course, there are lots of reasons for Goldman’s success. The firm has amazing intellectual capital; some of the smartest people in the world of finance work there. It also knows how to game the system better than any firm on the face of the earth. Case in point: In mid-September 2008, when the world was crashing following Lehman’s bankruptcy, Goldman held $13 billion in highly risky mortgage bonds known as collateralized debt obligations. These bonds were insured by American International Group, which itself was about to go bankrupt.

Without that insurance, Goldman itself would have imploded because the bonds would have been marked down to just pennies on the dollar. The rescue of AIG was supposed to prevent a large-scale crash of the financial system, but it also prevented a crash of Goldman Sachs, which bought those crappy CDOs from Merrill Lynch, which was forced to find a buyer (Bank of America) because it too held the same sludge.

The Goldman purchase of the Merrill CDOs is proof positive that the geniuses at Goldman screw up like everyone else. And I don’t buy van Praag’s spin on the firm’s famous hedges that minimized its losses because the smart money in the markets didn’t at the time. Goldman’s shares were in a freefall, bottoming out at around $50 in the fall of 2008, compared to close to $235 just a year earlier.

Now with all the government help, Goldman is marching its way back up to $235 a share—trading at around $150 Monday—by embracing much of the same risk that nearly led to its demise. It would be nice, though, if the next time Goldman losses money taxpayers didn’t foot the bill.