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Posts Tagged ‘Goldman Sachs’

The Government Accountability Office has just completed its second audit of the Federal Reserve. The report, a summary available here, focuses on “the enormous conflicts of interest that existed at the Federal Reserve during the financial crisis.”

Some of its findings:

  • The affiliations of the Federal Reserve’s board of directors with financial firms continue to pose “reputational risks” to the Federal Reserve System.
  • The policy of the Federal Reserve to give members of the banking industry the power to both elect and serve on the Federal Reserve’s board of directors creates “an appearance of a conflict of interest.”
  • The GAO identified 18 former and current members of the Federal Reserve’s board affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis including General Electric, JP Morgan Chase, and Lehman Brothers.
  • There are no restrictions on directors of the Federal Reserve Board from communicating concerns about their respective banks to the staff of the Federal Reserve.
  • Many of the Federal Reserve’s board of directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. These board members oversee the Federal Reserve’s operations including salary and personnel decisions.
  • Under current regulations, Fed directors who are employed by the banking industry or own stock in financial institutions can participate in decisions involving how much interest to charge to financial institutions receiving Fed loans; and the approval or disapproval of Federal Reserve credit to healthy banks and banks in “hazardous” condition.
  • The Federal Reserve does not publicly disclose its conflict of interest regulations or when it grants waivers to its conflict of interest regulations.
  • 21 members of the Federal Reserve’s board of directors were involved in making personnel decisions in the division of supervision and regulation at the Fed.

The GAO included several instances of specific individuals whose membership on the Fed’s board of directors created the appearance of a conflict of interest including:

Stephen Friedman, the former chairman of the New York Fed’s board of directors.

During the end of 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap loans from the Federal Reserve. During this time period, Stephen Friedman, the Chairman of the New York Fed, sat on the Board of Directors of Goldman Sachs, and owned shares in Goldman’s stock, something that was prohibited by the Federal Reserve’s conflict of interest regulations. Mr. Friedman received a waiver from the Fed’s conflict of interest rules in late 2008. This waiver was not publicly disclosed. After Mr. Friedman received this waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009. According to the GAO, the Federal Reserve did not know that Mr. Friedman continued to purchases Goldman’s stock after his waiver was granted.

Jeffrey Immelt, the CEO of General Electric, and board director at the New York Fed
The GAO found that the Federal Reserve Bank of New York consulted with General Electric on the creation of the Commercial Paper Funding Facility established during the financial crisis. The Fed later provided $16 billion in financing to General Electric under this emergency lending program. This occurred while Jeffrey Immelt, the CEO of General Electric, served as a director on the board of the Federal Reserve Bank of New York.

Jamie Dimon, the CEO of JP Morgan Chase and board director at the New York Federal Reserve

Dimon served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and while his bank was used by the Fed as a clearinghouse for the Fed’s emergency lending programs. In March of 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns. During this time period, Jamie Dimon was successful in getting the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. Dimon also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.

You can read the the full GAO report here.

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Eric Lipton and John M. Broder pen a story for The New York Times about the Solyndra debacle, calling it “one of the administration’s most costly fumbles.”  Some new details are uncovered by the duo:

  • There was intense pressure on senior Energy Department staff to rush stimulus spending out the door and Secretary Steven Chu was personally reviewing loan applications and urging faster action.
  • While Solyndra spent nearly $1.8 million on Washington lobbyists, employing six firms, none of the other three solar panel manufacturers that eventually got federal loan guarantees spent a dime on lobbyists.
  • Tim Harris, the chief executive of Solopower, which got a $197 million loan guarantee last month to build solar panels in San Jose, Calif., said his company had never considered employing a Washington lobbyist to grease the application. “It was made clear to us early in the process that was clearly verboten,” Mr. Harris said. “We were told that it was not only not helpful but it was not acceptable.”
  • The Bush administration, according to the authors, had started the review of the Solyndra application in May 2008 and were anxious to approve the deal, because members of Congress were complaining that the loan guarantee program, signed into law in 2005, still had not given out its first award.

The article continues, focusing largely on intense and expensive lobbyist efforts and misplaced zeal on the part of the administration.

The authors characterize the bankruptcy of Solyndra — and the likely loss to taxpayers — as merely a failure of execution.  If only the administration had exercised less haste, if only the lobbyists hadn’t interfered and company officials were more honest, if only the price of silicon had remained high, if only the DOE had “followed the rules”.

If only.  These two words are the foundation of the liberal mindset, especially when there is failure.  The New York Times has now set the narrative for President Obama and his main-stream media water boys regarding the Solyndra “fumble”.

But in the newspaper’s rush to blame anything and anyone but the stimulus, and more specifically the loan guarantee program, it inadvertently exposes the program’s fundamental flaws and why many simply call it “crony capitalism”.

  • Through the article’s narrative, it becomes obvious that well-connected companies stand a better chance at receiving government assistance than those which aren’t.
  • Political goals can easily outweigh due diligence and sound judgement when spending investing taxpayer dollars in private enterprise.
  • If the Energy Department hadn’t been rushed, would the loan still have been guaranteed?  Of course it would.  There is absolutely no evidence to suggest otherwise.

Solyndra provides a multitude of examples as to why the government should not be in the business of “investing” in private businesses.  Here are a few:

  • The company’s success or failure depended upon one important commodity and its price: silicon.  Once this dependency is acknowledged, the loan guarantee is no longer investing, but speculation.
  • The price of silicon is a major — if not the major — risk factor the company faced.  But I don’t see in the company’s S-1 filing for its proposed IPO any mention of it.  Goldman Sachs and Morgan Stanley (as well as the attorneys) even missed this elementary point.  Why should we expect the government to recognize the risk?  Moreover, there is no evidence of protective hedging.  By the way, had the company been successful in its IPO and subsequently declared bankruptcy, class-action lawyers would now be licking their chops.
  • Over a half billion dollars’ worth of Factory 2’s assets were highly specialized manufacturing equipment that likely had little use outside its specific purpose, making for very poor collateral, or as junior commercial loan officers would say, “there’s no second source of repayment”.
  • After the loan was drawn, the agreement specified repayment of principal and interest over only four years.  There was no evidence of sufficient cash flow to service this kind of debt.  Banks call this “betting on the come.”
  • The government allowed a restructuring of the debt, placing itself junior to private investors.  A review of the statute makes it clear the action broke the law.  The rationale given was ridiculous.  It’s called “good money chasing bad”.

These simple examples are clear to any junior banker and illustrate how the government failed so spectacularly in its fiduciary duty to taxpayers, who will see over $500 billion in their hard-earned money evaporate.  And it’s likely we’ll see more failed government “investments” in the very near future.

We’re experiencing the worst economic environment since the Great Depression.  In times like these it is especially imperative that our government acts as a careful and thoughtful steward of hard-earned taxpayer money.  It’s bad enough that this ill-conceived program was even launched, but what’s most  insulting is the carelessness in which it has been executed.

Tar and feathers.

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