Goldman Hatred Is Out of Control

It's easy to hate Goldman Sachs (NYSE: GS  ) . It has connections. It has cash. It has influence. It knows what it's doing. And it uses all of these advantages to pay each of its employees, on average, far more than half a million dollars a year. That we keep a suspicious eye on Goldman is not only expected, but warranted.

But if there's ever been a sign that public hatred has gone too far, it was yesterday's reaction to news that Goldman could receive $1 billion, should troubled lender CIT (NYSE: CIT  ) file for bankruptcy. Meanwhile, taxpayers would lose 100% of the $2.3 billion invested from TARP last year. Nearly every financial news outlet covered the story with undertones of how Goldman has yet again used its influence to unfairly capitalize off others' misfortune.

"If CIT fails, Goldman wins -- with a $1 billion-plus payoff," says one site. "Some times it seems like Goldman Sachs has a single-sided coin that always comes up heads," says another.

Skimmed over, if mentioned at all, is that there's no windfall or special treatment of any sort here: $1 billion is the net present value of what Goldman is contractually owed, spelled out clear as day, from a June 2008 secured lending facility. By "secured," we mean that, in the event of default, Goldman holds collateral it can seize to make itself whole, as is customary in something called "responsible lending." As The Wall Street Journal put it in June 2008:

Given that any investment in financial services these days is a risky one, Goldman took care with the terms of the financing. To address the risk Goldman was taking, the facility was structured as a total return swap, backed by CIT's investment-grade asset-backed securities, such as aircraft leases. Goldman can seize the collateral if it needs to.

Or as CIT's own regulatory filing explained last year:

In the event that [CIT] exercises its right to terminate the Facility early, [CIT] will be required to pay [Goldman] a makewhole amount equal to the discounted present value of the facility fee for the remaining term of the Facility.

That discounted "makewhole" amount is exactly what Goldman will receive if CIT fails -- as was spelled out in clear terms several months before anyone whispered the words "taxpayer bailout." Anyone -- yes, even the government -- could have asked for the same terms to cover their backs. There were no secrets here.

But what makes this uproar seriously pointless is that CIT has more than one secured lender. Wells Fargo (NYSE: WFC  ) , for example, lent CIT $500 million on a secured basis as well. It, too, will have dibs on the lender's assets, even as taxpayers get wiped out. As will the other holders of CIT's $17.6 billion of secured borrowings.

Yet strangely, I couldn't find one story implying Wells Fargo, or any other secured lender, has a "single-sided" coin. Not one, amid dozens of anti-Goldman articles.

Should we be wary of Goldman's influence? Yes. Should we throw up our hands and shout "conspiracy!" every time there's a legitimate business transaction? Please, no.

What do you think? Is the anti-Goldman movement getting out of control? Let me know in the comment section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (17)

Comments from our Foolish Readers

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  • Report this Comment On October 06, 2009, at 12:24 PM, miteycasey wrote:

    Goldman covers their ass better than everyone else.

    Also shrewdness is a level above everyone else.

  • Report this Comment On October 06, 2009, at 12:24 PM, ron153 wrote:

    There has been a remarkable backlash against lenders who followed sound practices. Goldman just happens to be the target du jour. One would think banks are now supposed to forego profits and act as charities. Its gotten a bit silly. Investors in Goldman, JP Morgan, and Wells Fargo will profit handsomely because they acted responsibly in their deal structuring and lending practices.

    Wells Fargo is the largest holding in my personal and client portfolios.

    Ron Beasley

    Investment Advisor

    www.rwbi.net

  • Report this Comment On October 06, 2009, at 12:26 PM, marktreat wrote:

    Goldman Sachs is a fine bank. CIT is a fine bank. The only boogie-man here is the regulator that won't let CIT operate fully. The choking restrictions hanging the bank out to dry is the real problem. People may not like Goldman Sachs, but perhaps it will be GS that saves CIT through this rough time by lending to the asphyxiated bank.

  • Report this Comment On October 06, 2009, at 12:26 PM, patmanley100 wrote:

    Good article. Goldman Sachs is smart to hold collateral on the loan.

    The obvious issue not addressed in any of the new stories is the fact that the last thing they want to do is see CIT file for bankruptcy, not to mention the political fallout for the White House if they allow this to happen.

    CIT, like FNM and FRE may be the sleeper investments of the decade. Their risk is more smoke and mirrors than reality: 100% insured and protected entities guaranteed to succeed by the White House and U.S. Congress. It doesn't get any safer than that.

  • Report this Comment On October 06, 2009, at 12:36 PM, miteycasey wrote:

    Pat,

    What makes FNM and FRE investments of the decade other than they are backed by the federal government?

    They are NEVER going to turn a profit, no dividends, and they admit it!

    SO what makes them a better investment over say KO?

  • Report this Comment On October 06, 2009, at 2:29 PM, yeunganson wrote:

    Goldman Sachs is the poster boy for many that is wrong with Wall Street.

    They work their employees too hard (make us look lazy)

    They pay their employees too much (make us envy)

    They gain when everyone else is gaining (that's fine)

    They gain when everyone else is suffering (that's not fine)

    They have connections to the most powerful - when politicians should be exclusivly care about the people's interest.

    They use their deep pockets to hire the best and brightest of our engineers, mathmaticians in creating things (derivatives) that don't benifit society as a whole when we need these engineers to be building infrastructure.

  • Report this Comment On October 06, 2009, at 3:07 PM, jkipling wrote:

    Here's Motley Fool again distracting from the big story.

    You take 1 easily identifiable red herring and out it as a red herring. Nice Work.

    You happened to ignore that GS issued a rating of CIT the day before.

    There is serious concern about GS and if people cry foul even when there's no foul, with GS I'd say the end justifies the means.

    I have nothing against collateral or responsible lending, I think thats a great idea. But it is true that GS uses its muscle to dodge regulation. GS was a major player in doing away with a limit of 10 to 1 on leveraging. That right there is probably the LEAST responsible thing a bank can do. Yet it does involve creating money out of thin air. Money that GS gets to use, but when the dust settles and we realize that for every 1 dollar that does exist, 30 dollars don't, it's not the GS employees who get their assets seized, nor is it the GS balance sheets that suffer.

    I'm not going to claim to know everything thats going on, but it certainly is a stinky onion.

    I've given up. We're so deep in this doo-doo now there's no way we can feasibly return to sound responsible monetary policy. The only way out of this mess now, is massive global military operations. Reduce global population. Increase spheres of influence. Strengthen the dollar through military intimidation.

  • Report this Comment On October 06, 2009, at 3:22 PM, TMFHousel wrote:

    jkipling,

    Come on: You accuse me of touting red herrings, then immediately fire off something (leverage ratios) that has nothing to do with this article.

    You've solidified my point: That no matter what Goldman does, people will vilify it based on completely unrelated matters.

    Fool on,

    Morgan

  • Report this Comment On October 06, 2009, at 3:37 PM, jkipling wrote:

    Sorry Morgan, the leverage ratios comment wasn't inspired by you. I should have clarified that it was directed at ron153 et al who thinks GS follows sound practices. Leveraging absolutely is relevant against that claim.

    Still, I just read 4 or 5 articles dating back to June that explain plain as day whats going on between CIT and GS, with no cries of foul. So, I still don't see the point of your article.

    What I think the bigger story is here, is what GS is doing to make sure that CIT DOESN'T go bankrupt. I believe they are still on the hook for 2 billion if CIT does.

    If GS comes out in support of 10 to 1 leveraging and normalized interest rates I will certainly stop villifying it, maybe that liquidates your point.

  • Report this Comment On October 06, 2009, at 4:31 PM, DarkOblivion000 wrote:

    I totally agree with you Morgan.

    From my POV, Goldman is very careful about their investments. No wonder they are one of the few banks that rebounded very quickly after the initial hit of the recession, and not due to speculative buying either, as in the case of BAC, etc.

    The same kind of unreasonable anger is commonly directed towards hedge funds, especially if the market is going down, most investors are losing money, but short selling hedge funds are winning big.

    Misery loves company, when I'm losing big at the casino I hate the jerks that are winning big too. Can't help it.

  • Report this Comment On October 06, 2009, at 8:21 PM, jackinverstor wrote:

    Goldman, like many other companies IS out of control. They are being paid handsome salaries to DO A JOB, just like the rest of Americans (who can find or still have a job). A bonus is nice, but 16 BILLION?

  • Report this Comment On October 06, 2009, at 11:37 PM, auberon512 wrote:

    The public's hatred of GS hasn't gone nearly far enough.

    Here you have a company that in addition to directly placing its people in the government, spends millions on lobbying and campaign contributions each year. In return, the government lets its major competitors fail while GS gets TARP money, the FDIC guarantees its debt, and GS is allowed to turn itself into a commercial bank overnight, despite offering no retail banking services. It can borrow basically unlimited funds at close to 0% for what is essentially a hedge fund.

    Meanwhile, any counterparty of GS is also bailed out so that GS can be paid at 100 cents on the dollar while at the same time other derivatives involving insolvent counterparties are settled at pennies on the dollar when it's not GS holding the bag.

    GS doesn't add value to the economy. They don't provide socially useful services. Blankfein basically admitted as much.

    Through various HFT, SLP, flash trading, Sigma X, etc. schemes they have an enormous information advantage that they use to drive prop trading profits. In simpler times we just called this insider trading and front running.

    Companies get added to the GS "Conviction Buy" list right before GS underwrites a debt or equity offering for them. Again, in simpler times we just called this pump and dump.

    And since this is an investing web site, I'll make a comment on the common stock. The employees get a $16 billion bonus pool. Warren Buffett gets a 10% dividend on his perpetual preferred. The lowly common shareholders? In return for GS taking enormous risks with their capital, they get a measly 0.7% yield. Suckers.

  • Report this Comment On October 08, 2009, at 1:00 AM, mbewt wrote:

    Its easy to invest other peoples money you idiots! Markets used to climb slowly with strength after accumulation. When billions are given to a criminal, he spends it quickly. In this case it is "crammed" into the market by those in control. And what will happen in the end? The criminal (GS) will scrape off the top and leave the rest losers. Nothing has changed much except a dimwit called Uncle Sam is the other partner in crime...

  • Report this Comment On October 09, 2009, at 2:35 PM, madhat007 wrote:

    The bottom line Goldman got the tarp money when they needed it! Goldman got fully reimbursed with it's Aig exposure...Cit received 2 billion in tarp and now the government won't come in with additional funds even though Goldman repaid their investment..

    Cit is an important bank that should get the same help that Citi received some 45 billion in aid and billions in guarantees! I guess there is no Robert rubin and other politicians riding the cit wave but I AM SURE THEY ARE ON THE CITI TRAIN.. Bottom line...fix cit...save the remaining shareholder base don,t declare bankruptcy...maybe Hank the tank should put the bazooka to the heads of the nine banks who originally recieved tarp money and tell them to come up with a solution...otherwise the government will damage it's own credibility and have to explaain to an already angry American citizens that the government aid will lose a significant investment for no real reason...look at the money wasted in these other programs...i want to see Uncle save cit and in the process if Goldman makes money so be it!

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