The Banana Republic of Goldman Sachs

Props to Peking Duck @ Twitter for linking to this article:

The Quiet Coup – The Atlantic (May 2009)
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Obama’s needs to assert operational independence from his Wall Street backers. A great way to start is nationalizing the welfare zombie queen financial institutions and placing a 90% tax on TARP-funded income (salary, bonuses, and capital gains).

5 thoughts on “The Banana Republic of Goldman Sachs”

  1. Non-rhetorical question: What contracts (labor, loans, etc) do you feel should be honored by companies like AIG?

  2. Michael,

    That is a good question, and should be determined in an orderly way by a bankruptcy judge. I find it incredible that an entity which is both the largest creditor and the largest shareholder of an insolvent institution cannot force a bankruptcy.

    Now, at that point, it may be wise to effective ‘bail out’ institutions, though this brings risk and therefore should come with strings attached. [1]

    Fed X.,

    A very good article.

    As most of the students in my structural regression course as future MBAs, I have first hand experience of witnessing business-minded folk using a stat program, and expecting that the number it pops out is the ‘right’ answer because it comes from a computer.

    [1] http://www.tdaxp.com/archive/2009/03/22/the-90-tax.html

  3. I read that article too. Reminds me of my favorite quote from Neil Gaiman: “Tools can be the subtlest of traps.”

  4. Michael,

    I read that article too. Reminds me of my favorite quote from Neil Gaiman: “Tools can be the subtlest of traps.”

    Excellent point!

    The same is true of AIG et al. as well. They are a tool for distributing risk and capital. We have been captured by them.

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