Thanks to Matt Taibbi’s wonderful article “The Great American Bubble Machine,” I was inspired to do some more bailout math.
It looks to me like Goldman Sachs won big on the bailout. They got a $13 billion windfall from the AIG bailout. They got a $10 billion bailout in TARP that they paid back when they were ready. They got to become a bank holding company so they can raise capital using the FDIC credit. Can you imagine how cheap your borrowing rates would be if you could offer your creditors a federal guarantee? So your credit card rate would be 2% instead of 36%.
OK, the Fed lent the big banks $8.7 trillion. However, it is secret where that went. So we will not even count how much Goldman got from that or how much they made lending that money back to the U.S. government to finance the deficits that are increasing daily, in no small part thanks to Goldman.
And we are not counting how much Goldman made on shorting the housing market or on the take down of Bear Stearns and Lehman. We bet it was a lot, though.
Now, it turns out relative to the 2008 period that Goldman paid out $4.7 billion of compensation, of which their CEO got $42.9 million. During the same period—are you ready—their total US tax bill was $14 million.
OK, so let’s compare this to a potential California bailout. California needs $24 billion to balance their budget. If the federal government gave California $13 billion and loan them $10 billion, like they did Goldman, California would have to make $1 billion in cuts. However, if California refinanced their debt with the federal credit, as Goldman has been authorized to do, that would sufficiently reduce California’s cost of borrowing, that they should then have no deficit at all.
California would not pay out $4.7 billion in bonuses. They would also not pay $14 million in taxes to the federal government. However, if California does experience a real shock doctrine budget balancing exercise, the result will be a spiral down in the economy, leading to significant cuts in tax revenues to both California and the federal government. So figure the savings for federal revenues could be substantial.
The advantage of letting California hit the wall, is that then Goldman, their partners and their syndicates can buy up lots of land and businesses for cheap. Meantime, Californians can be busy working to pay the taxes to fund the billions gifted to Goldman so they can buy California. Californians will also have to work harder to make up for their losses on their defaulted California municipal bonds.
Think of this as a neighborhood leveraged buyout — except this time it could be an entire state. Indeed, another year of this and it could be an entire country.
Ever wonder how much money could be made shorting the California municipal bond market? Surely, there is a derivatives play…