On the face of it, this might seem just like what the financial sector is supposed to be doing – channeling money into productive enterprise. The Securities and Exchange Commission is reportedly looking at the way private investors will be involved, but there are more deeply unsettling factors at work here.
Remember that Goldman Sachs is now a bank-holding company – a status it received in September 2008, at the height of the financial crisis, in order to avoid collapse (see Andrew Ross Sorkin’s blow-by-blow account in “Too Big to Fail” for the details.)
This means that it has essentially unfettered access to the Federal Reserve’s discount window – that is, it can borrow against all kinds of assets in its portfolio, effectively ensuring it has government-provided liquidity at any time.
Any financial institution with such access to such government support is likely to take on excessive risk – this is the heart of what is commonly referred to as the problem of “moral hazard.” If you are fully insured against adverse events, you will be less careful.
Goldman Sachs is undoubtedly too big to fail – in the sense that if it were on the brink of failure now or in the near future, it would receive extraordinary government support and its creditors (at the very least) would be fully protected.
In all likelihood, under the current administration and its foreseeable successors, shareholders, executives, and traders would also receive generous help at the moment of duress. No one wants to experience another “Lehman moment.”
In other words, because Goldman is too big to fail, and can borrow as much money as it wants to in order to play Big Casino games, it's busy creating the next bubble to try to profit from: Dot-Com, Part 2.
Take a look at stocks like Netflix and Apple. Apple stock has nearly quadrupled since its March 2009 lows, from $85 to almost $340. Netflix has gone from $20 a share two years ago to nearly $200 in the last month or so. Now Goldman Sachs may make a nearly $2 billion investment in Facebook in order to keep the social networking's potential profits all to itself as a private company.
It's the biggest Big Casino game in the world, and Goldman just bought the high rollers room all to itself. And in case this new rush in internet companies goes south again, guess who's picking up the check?
Gotta love it.
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