Links 2/6/10

Climate change causes wolverine decline across Canada BBC

Physicist Discovers How to Teleport Energy MIT Technology Review

Hubble Sights Strange Spaceship-Shaped Object Traveling at 11,000MPH The Daily Galaxy (hat tip reader John D)

Macmillan Books Return to Amazon Wall Street Journal. Hhhm, e-books still in limbo, though.

Blankfein to get $9m stock bonus Financial Times. One has to wonder if this level was chosen in part as a result of the hue and cry that resulted from the rumor that he was set to get $100 million. While readers pointed out that the story strained credulity, the flip side is one has to wonder if the rumor-mongers had specific reasons for sporting with Blankfein. And has the New York Times become a Wall Street PR machine? Goldman Chief Gets Bonus of Only $9 Million in Record Year. I object to a $9 million bonus being deemed “only” for ANY CEO, and particularly a CEO of a firm that exists only due to bailouts and subsidies. By contrast, Morgan Stanley’s John Mack has taken no bonus for three straight years.

Should Guy Hands be barred from Britain? FT Alphaville (hat tip reader Scott)

Pravda on 401(K)s Independent Accountant

Monetary Policy and the Housing Bubble Adam Levitin, Credit Slips

Random Fiscal Factoid: Alt Universe U.S.? Paul Kedrosky

My big fat Greek conspiracy theory Charles Wyplosz, Financial Times

Unemployment number decline is all about seasonal adjustments Ed Harrison and Non Farm Payrolls Benchmark Revision and the Unemployment Rate as Cruel Farce Jesse

Greece Gets The Green Light, But Will It All Work? Global Economy Matters

Never short a country with $2 trillion in reserves? Michael Pettis. I’m a bit late to this, which is a must read.

Antidote du jour. The Telegraph has a photo series on Oolong, “the rabbit that became an internet hit by balancing things on its head”:

Oolong became an internet sensation thanks to its patience while owner Hironori Akutagawa took pictures of it balancing things on its head.

The personal blog caught on as word spread about the quirky images and, despite being entirely in Japanese, over 2.5million people visited the site.

Akutagawa started what he called Oolong’s “head performance” in 1999, shooting lo-res images of his pet in the same pose – apart from the range of objects on its head.

But nature took its course for the seven-year-old bunny and perhaps the most heart-breaking image is of a snowy mound with a pair of carrots representing ears – it depicted the legendary Oolong’s grave after his death in 2003.

Print Friendly, PDF & Email


  1. Richard Kline

    Regarding the MIT Review article, the process is called ‘teleportation’ but that is a bit of a fudge; mirroring or dubbing would be a better verbal analogy. by whatever signifier, though, it is a fascinating avenue of inquiry.

    “There is a growing sense that the properties of the universe are best described not by the laws that govern matter but by the laws that govern information.” I have been waiting for this particular light bulb to go in in the world of theoretical physics for twenty years. ‘Bout time. Matter is an exceptional state in the physical universe, really a peripheral and in many ways trivial condition of universal interations (if one most meaningful to us, mortal humanity). Yet our conceptions of the physical universe are excessively leverage upon this state for descriptive reference. Kind of like translating what would be computer machine language into structures which simulate Akkadian because that is a human language which is historically ‘basic.’

    1. Dan Duncan

      You’ve been waiting 20 years for theoretical physicists to catch up with your conception of the Universe???

      “Matter is an exceptional state in the physical universe, really a peripheral and in many ways trivial condition of universal interations (if one most meaningful to us, mortal humanity).”

      OK, what about dark matter?

        1. bob goodwin

          Tesla transported energy many miles in 1888. But we don’t know how many cancers he created in the intervenging humans.

    2. MyLessThanPrimeBeef

      I thought I read about information governing laws in Arthur C. Clarke’s End of Childhood?

      In any case, is the ‘governing’ consensual or dictatorial? Do those things or information being governed have any say in it?

      We know we are not born free, but enslaved. I mean our planet Earth. It was born enslaved to the sun. It can’t go where the sun doesn’t want it to go. Never free to wander the universe like a curious hippie can.

      1. aet

        No, no: the earth can be said to be free, for it is falling “freely” around the sun.

        The Earth is truly in a state of “free-fall”.

        Exhilarating, is it not?
        Accelerating, it is not.

  2. DoctoRx

    Re Dr. Harrison’s post, whilst I am a non-economist, I don’t see anything fishy here. The table he uses shows that from Dec 2008 to Jan 2009, there was a 3 M drop in employment on the NSA data. From Jan 2009 to July 2009, NSA there was increased employment when obviously there was a worsening of the labor market when properly seasonally adjusted and as confirmed by yoy comparisons.

    My conclusion is that a combination of normal cyclicality, money printing and population growth have led to an improving labor market for the nonce. Why fight it even if you believe, as Ed Harrison does, that this up-cycle is but part of a chronic depression?

  3. Andrew Foland

    Just to be clear, the “energy teleportation” paper is a theoretical one, the effect has yet to be demonstrated. I’m not competent enough to judge whether the theory is right, but I have no particular reason to doubt it. It sounds like the sort of thing that is probably true.

    The original paper, if anyone is interested, is here. (My favorite bit–a completely gratuitous acknowledgement of Nambu.) The energy transfer putatively occurs at the speed of light, not instantaneously. The comments at the linked technology review are a sewer of confusion, beware!

  4. joebek

    Interesting question raised by Charles Wyplosz in the FT article, “My big fat Greek conspiracy theory”. Why Greece, why now? His answer seems to get us only part of the way there. The real question is: Is someone gaming the CDS rates on Greek sovereign debt in order to benefit from either a default or an EMU guarantee? The rising CDS rates drive up the yield on Greek sovereign debt so if someone is gaming the rate to play the this highwire risk arbitrage game they would be simultaneously loading up on Greek sovereign debt. Once the EMU guarantee comes through they would have a tremendous capital gain. So maybe some of the NakCap readers have an insight into whether or not there is a suspect.
    The other question is who is providing the financing to play the game. Here the answer is basically clear. It is one or another of the major central banks. They may not knowingly be doing it but this is one of the consequences of ultra low interest rates.

    1. IF

      Greece is one of these stories being told to make money off. The question is who and how? I find it peculiar that the prophets are calling for a blowup. This is a US and 3rd world country outcome. The European way to deal with such problems is to drift into stagnation. I see the market trying to game either default (by going to shorten larger Spain etc as next, profitable step) or rescue (Germans paying for higher premiums). But there could be intermediate reactions, like ECB accepting junk rated bonds (hereby continuing liquidity to Greece), or in case of near default an exchange offer for Greek bonds from the rest of Europe. (Par put, not make whole put.) This is a game of politics, and the European politicians have some experience with it. I don’t think Germans mind somebody to roast for a while to close the ranks and move on with unification. European decision making has been disfunctional for a while, due to many members being able and willing to veto. Now that money is talking loudly the CA surplus countries have a chance to reform the EU. Being hungry will focus the mind of the CA deficit countries on the essentials.

  5. LeeAnne

    Yves, sorry to say that your Antidote du jours lately haven’t been very antidotal in an otherwise wonderful blog recording and commenting on the grim end of empire.

    Let’s get back to something cute and witty without the grim endings.

    The poor bunny, yesterday’s ugly, and I haven’t gotten over the eaten little antelope yet. That image doesn’t go away easily; pawing the little thing followed by the biggest slurp of a kiss of death captured on camera ever.

    If grim is what you’re up for, have a look at Zero Hedge’s recounting in detail US clandestine’s involvement with 9/11 details prior

    Its very grim indeed.

  6. Independent Accountant

    I read the Friedman piece referred to by Pettis. I am of the Chanos school, i.e., China is a good short. The PBOC has been inflating bubbles all over China for about two years. I see China as being in a position similar to 1989’s Japan.

  7. MyLessThanPrimeBeef

    Is there no limit to the depth of depravity Homo Not-So-Sapiens Not-So-Sapiens will sink to humiliate and corrupt animals?

    Keeping them as pets with handouts when they should be free to struggle in nature is corrupting enough, now this humiliation?

    By the way, if it looks like a spaceship, quacks like a spaceship, then it must be the galactic cavalry coming to our financiial rescue @ 11000 Mph with lots of cash onboard. Normally they cloak themselves but by revealing themselves now, they are signalling to us that relief is coming soon. I think I will terminate all my short positions Monday morning.

    Richard Kline, that’s a good one, Hobson’s choice for unilemma.

  8. Hugh

    It was a good catch by Ed on the job numbers.

    “In December 2009, there were 15.267 million people unemployed on a seasonally-adjusted basis. This ticked down to 14.837 in January 2010, a fairly large drop of 430,000. Meanwhile the unadjusted numbers go the other direction – massively. In December 2009, the number of unemployed persons was 14.740 million. This rose 1.4 million to 16.147 million. Therefore, we saw a swing of over 1.8 million between what the unadjusted and the seasonally adjusted data are saying about who’s unemployed. The number of people employed increased by over 500,000 on a seasonally-adjusted basis, while it decreased by over 1.1 million on an unadjusted basis. That’s a swing of 1.6 million”

    The numbers had gotten really bad and first projections were off by 50% from final numbers. The various yearly and long term revisions only magnify these errors. It brings into question how reliable the numbers are, which is Jesse’s point. There does appear to be a real disconnect between the December 2009 and January 2010 data. The January 2010 data does seem to be going in opposite directions at the same time. The BLS should do a much better job in explaining when there are contradictory data or whenever there are sudden major changes and ther reasons for them are less than apparent. Then too there is the question why the U3 is stressed over the U6 as the leading indicator of unemployment or why “quality” of jobs gained or lost receives so little emphasis.

  9. rudy

    All the Oolong (rabbit) photos are collected in a book published by KesselsKramer in the Netherlands. You can order the book from them online for 40 USD which includes shipping. The Oolong book is number 8 in a series by KesselsKramer; each book is comprised of photos taken by an amateur photographer with a particular obsession. On animals, besides Oolong, there is a book about a beloved family dog, and another about animals in the wild. The rest of the books, my favorites, are about people: a wife, twin sisters, a grandmother with a gun.
    Does anybody else invest to buy photo books?

  10. bob goodwin

    ebooks still in limbo?

    I was the software director at Amazon for the kindle content, website and distribution for the first 4 years of the Kindle program. There are 300,000 titles on Kindle, and for those titles there are now more ebook sales on Amazon than print books. This exceeds (by far) the upper expectations that Amazon had for this program.

    Publishers fear ebooks because of loss of control. And of course potential competitors (Google, Apple, Microsoft) pooh-pooh the accomplishment. But unit sales of Kindle have outstripped iPod sales for the same stage of production for each of the comparable quarters.

    There are many problems with the technology, as there was at this stage with music, internet, computing, etc.

    I guess Limbo is in the eyes of the beholder. (BTW I am no longer Amazon, now on solving sleep apnea…)

    1. Yves Smith Post author

      MacMillian’s ebooks are still in limbo, had you read the article, Amazon is not selling them (one presumes “yet”).

  11. Steve

    Maybe I’m missing something obvious, but what’s the theory behind the statement that Goldman Sachs “exists only due to bailouts and subsidies”?

    1. Yves Smith Post author


      As of Oct, 2008, a run on Morgan Stanley was about to begin. It was held off only by Treasury and Fed intervention. Lloyd Blankfein has stated that if Morgan Stanley went down, Goldman would have failed IMMEDIATELY thereafter.

      Of course, Blankfein now pretends he never said anything like that.

      1. Hugh

        There was the original AIG deal negotiated on September 13-14, 2008 with Blankfein present. There was the acceptance of its application to become a bank holding company on, I believe September 21 which gave it access to Fed and FDIC credit lines. And of course there was Geithner and the NY Fed’s moves in November 2008 to get Goldman paid at par by AIG.

  12. Steve

    Goldman’s stock never dropped below $47 and their CDS never went wider than 620bps: this shows GS was never very close to failure nor did people perceive it to be.

    With those objective facts in hand I am skeptical of a quote from a Blankfein-Paulson phone call which relies on Paulson’s memory.

    Even if the quote is accurate it doesn’t even mean Blankfein believed it to be true. It could simply be a dramatic/hyperbolic statement intended to convince Paulson to act.

    The quote is attributed to be “If they go, we’re next”. Which doesn’t say “IMMEDIATELY thereafter” at all. Further, it is a true statement in the sense that after Bear failed all eyes were on Lehman to be next. If MS failed after that, Goldman would likely have been slated to be “next”. In that context, being next doesn’t imply “likely to fail”.

    It’s better to look at objective facts instead of that quote which depends on accuracy, context and intent. And based on the objective facts it is unwarranted to declare that GS would have failed.

    1. Yves Smith Post author

      The quote I am referring to is not Blanfein to Paulson, it’s Blankfein to Mack, hence not possible manipulation of regulator motive. See this:

      After Lehman Brothers collapsed, Sorkin says, there was a widespread fear on Wall Street that Morgan Stanley would be the next to go under. Goldman Sachs CEO Lloyd Blankfein was reportedly so spooked that he called up Morgan Stanley chief John Mack and urged him to “hang on, because I’m thirty seconds behind you.”

      Sorkin says that Hank Paulson, who was Treasury Secretary at the time, and then-New York Fed President Timothy Geithner — nicknamed “e-harmony” for his matchmaking efforts — spent the weekend brainstorming potential mergers for the vulnerable banks. One possibility called for the absorption of Goldman Sachs by Citigroup; another for the marriage of Morgan Stanley to JPMorgan.

      Notice that. Goldman was seen to be enough at risk of failure that there were discussion of merging it into Citi.

      And I consider 30 seconds to be immediate.

      Roger Ehrenberg, a former derivatives trader, also agrees with the Goldman-was-toast-without-a-rescue thesis:

      The US taxpayer has been systematically looted out of hundreds of billions of dollars….Goldman Sachs is posting record earnings and will invariably be preparing to pay record bonuses, not nine months after the firm was in mortal danger? Whether anyone will admit it or not, without the AIG (read: Wall Street and European bank) bail-out and the FDIC issuance guarantees, neither Goldman nor any other bulge bracket firm lacking stable base of core deposits would be alive and breathing today.

      Goldman….stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities….In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm….. Lloyd Blankfein smartly paid the full $1.1 billion requested. He looked like a hero for doing so, a true US patriot repaying the US Government in full for its lifeline, thanking the US taxpayer in the process. $1.1 billion… $1.1 billion…Hmm…something doesn’t seem right. You know why it doesn’t seem right? BECAUSE THE US TREASURY MIS-PRICED THE FREAKING OPTION.

      There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman’s equity could have done a digital, dis-continuous move towards zero if it couldn’t finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren’t discriminating back in November 2008. If you didn’t have term credit, you certainly weren’t getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let’s just say that it is a tad north of $1.1 billion in premium. And the $10 billion TARP figure? It’s a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won’t let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down….

      1. Steve

        Yet again the purported quote flies in the face of the facts on the ground. If Blankfein actually said and believed those words he was apparently at odds with the rest of the marketplace which was much more optimistic about Goldman (to me, it sounds like Blankfein was trying to build camaraderie or give a pep-talk to Mack).

        If we are going to say that GS is indebted to us because it would have failed we have to have good evidence that it would have failed. However, the market consensus is that GS never reached a stage of imminent failure.

        1. Yves Smith Post author


          The credit default swaps market is not omniscient. The banks were doing everything they could to persuade the marketplace they were viable. The oil market also went to $147 a barrel. Dot com stocks that would clearly never earn a dime, like, were also valued by at levels that are now seen as laughable. Markets are not infallible. All you have done is reiterate your argument based on CDS spreads.

          We saw the market repeatedly late to assess the weaknesses of major banks and brokerage firms (save Lehman, which twisted in the wind for months). How far in advance of Bear’s meltdown did the CDS market signal its demise? Per a post I have going up now, the monolines were on the ropes as of January 2008 (their fate was sealed as of 4Q 2007; the deterioration in the mortgage market was undeniable as of then). If the vaunted “markets” were as wise and all knowing as you indicate, they should have valued AIG as in equally serious trouble as of then.

          And you choose to focus on the Blankfein quote and ignore the more serious datapoint: that the Fed was looking at a rescue OF GOLDMAN. The NY Fed had a far better view of the situation than the “market”; it was in touch with the principals and had inside information. In addition, Sorkin, who did far more extensive interviews of the principals involved in the crisis than he could report in his already lengthy book, was the one to offer this view. He would not have come forward with this argument if there was other information that contradicted it.

          1. Steve

            My central point is that the hearsay evidence of an offhand comment is pretty weak especially when contradicted by many real-world datapoints.

            Blankfein also said he was doing God’s work. It doesn’t make it true.

            Yes, markets are fallible but their opinion, right or wrong, means everything in this case. The mechanism by which GS would fail is that the market would withdraw short-term funding because they perceived GS as vulnerable. But the fact is the stock price and CDS spreads show the market didn’t perceive GS as vulnerable and was likely to continue the funding.

            The Fed’s brainstorming is also a weak datapoint. The very nature of brainstorming is to consider the outlandish. Just because the Fed imagined the outcome of a Goldman failure doesn’t mean it was likely. I think their idea of Citigroup absorbing Goldman demonstrates how seriously to take this.

          2. Yves Smith Post author


            “Many real world data points”?? You’ve offered a grand total of one, CDS spreads, and all you have provided since then is empty assertions.

            Did you look at the real data point that mattered, Goldman’s dependence on short term funding versus its balance sheet composition?

            And Bob has it 100% right. The rescue of a garbage barge as unrelated to the Fed’s official purview as AIG formalized the “No More Lehmans” policy. No systemically important bank would be allowed to fail. The first rule of trading is “don’t fight the Fed”.

          3. Steve

            > Did you look at the real data point that mattered, Goldman’s dependence
            > on short term funding versus its balance sheet composition?

            Did you read my last message? I specifically pointed out that the reliability of Goldman’s short-term funding is based on the market’s perception of their stability. And that can be directly measured by their stock price and CDS spreads, both of which indicated that Goldman’s failure was perceived as unlikely (and therefore their continued funding was likely).

            You are stating that Goldman would have failed without government action without *any* proof of that. The burden of proof is on you but the best facts on this matter suggest the opposite: the market would have continued to provide Goldman’s short-term funding.

            > all you have provided since then is empty assertions.

            You’re the one providing empty assertions. You need to argue one or both of:

            1. Goldman’s short-term funding was about to evaporate even while their stock price remained high and CDS spreads remained low.
            2. Goldman was about to fail even while their short-term funding was reliable.

          4. Yves Smith Post author


            The entire financial system, Goldman included, stood on the brink of failure in October 2008. Your argument amounts to revisionist history. The ONLY thing that kept the system was massive, widespread, coordinated intervention. Were you asleep that month?

            And your comments re CDS reflect either ignorance or an attempt to mislead. CDS spreads are on reference entities at set maturities, typically three or five years, and are not a benchmark of the conditions in overnight markets. I suggest you look at how much of Goldman’s balance sheet was being repoed and what happened to haircuts on various types of collateral that were used for repo in September and October 2008. Hint: some haircuts on paper that was widely used as repo collateral went to 95% as of the Lehman BK. And this was when CDS spreads were skyrocketing too, so as repo haircuts were falling, banks were being simultaneously asked to put up more in collateral against positions (their hedges, to the extent they were hedged, were being written down due to counterparty credit downgrades, so you were seeing hedges partially failing too, hence even more collateral demands at precisely the worst time).

            Let’s just look at AIG. Everyone but you accepts that if AIG had gone under, the financial system would have collapsed. That is the official position of the Fed on this matter, which has a FAR better view of the situation than you did. Goldman itself was advocating the bailout. So you are pretending that Goldman could have survived an AIG BK? No reasonable person accepts that viewpoint (and I don’t consider Goldman employees to be “reasonable” on this issue).

            You have only one argument, CDS spreads. You simply come back and keep repeating it. Your argument does not hold water. I by contrast have offered further proofs as well as refutations of the various attempts you have made to shore up your only argument in defense of your position.

          5. Steve

            Glad to see you’re moving off the position that Goldman would have immediately failed after Morgan Stanley. Also glad to see you dropping arguments that rely on phone conversations as evidence.

            But the key change to your argument is now it’s about Goldman being affected by systemic failure as opposed to some defect in their finances. A systemic failure would have claimed the lives of many companies beyond Goldman: companies like FedEx, Target and Caterpillar may well have failed. Should we now be scrutinizing these firm’s business practices because they were “bailed out” and have no right to exist? There’s a reason we don’t: they weren’t responsible for the crisis. And neither was Goldman (Goldman didn’t lose huge percentages of their capital to the real-estate market and poor risk management like many banks).

            CDS don’t directly measure the overnight market but they are still a very good proxy. To argue otherwise you’d have to prove that recovery rates for the reference 5-year debt would be high. And in your new context of systemic failure these recovery rates should be lower still. Yet Goldman’s CDS spreads AND STOCK PRICE show no acute concern of bankruptcy.

            I still invite you to argue how Goldman’s short-term funding was poised to evaporate even while their stock price remained high and CDS spreads remained low.

          6. Yves Smith Post author

            First, the fact that I do not repeat an argument does not mean I have “dropped” it. No one from Goldman or anyone else who spoke to Sorkin has disputed his account, or his general argument.

            Nor have I dropped my argument re the brainstorming. This was at the heat of the crisis, when there was not a luxury of time to be dealing with pie in the sky ideas. Anything that Geithner focused on from the Fannie and Freddie conservatorship through early November was mission critical.

            Second, Goldman had to go to raise money from Warren Buffett at terms at the time that were considered punitive. No financial company at the time could raise money in the public markets. Your arguments get more and more divorced from reality the more you keep writing. Goldman’s first post crisis debt offering was guaranteed by the FDIC!

            You are also incorrect to compare highly leveraged financial firms to real economy businesses,

            1. The average equity of the major Wall Street firms compared to their total assets was 3.5%. That was all they could sustain in losses before being insolvent. There is absolutely NO comparison in the leverage levels.

            2. The real economies you cite were not using overnight funding to support massive longer-duration assets that would show losses if they had to be liquidated on quick notice (even assuming the firms were solvent). You keep refusing to engage the repo issue, which was driving all the big firms to the brink as of the Lehman collapse.

            Repo maturities had collapsed from longer tenors to overnight as of 2007 and this was even more true in 2008. Half of the balance sheet of a typical broker dealer was in repo or similarly short-term funding, and as the crisis wore on, available tenors got shorter and shorter. You keep acting as if this was not the case, or not the driving issue. CDS are irrelevant. All it would take is one night of failure to roll its balance sheet and Goldman and any similarly situated firm would be toast.

            You conveniently airbrush out that Goldman became a bank holding company on September 22, 2008, a mere week after the Lehman BK. Buffett agreed to invest on terms that were seen as very rich for him AFTER the lifeline was in place. It is doubtful Buffett would have stepped in had the Goldman not been given access to the Fed’s balance sheet. That is why the CDS spreads held. Goldman was on official life support. It was evident Goldman was not going to be allowed to fail. The CDS reflect government support, not Goldman’s stand-alone prospects.

            Do you bother looking at repo finance? No. Did you bother looking at the GS balance sheet? No. You keep making the same spurious argument over and over.

            The firms DID have a structural defect in their financing. It’s called too much leverage and a big maturity mismatch. That put them at the vagaries of the short term funding markets. That is not a pressing issue with non-financial companies unless they face a debt rollover and lack sufficient bank credit lines at the wrong time.

          7. Steve

            I have consistently been addressing the short-term, overnight repo funding when I assert that the probability of the market suddenly withdrawing that repo funding can be gauged by looking at how the market is pricing the stock and CDS spreads. The term mismatch doesn’t matter because if they went BK due to repo funding being pulled, CDS reference bonds would probably recover only 10% or so and the stock would drop to sub $1 option value. Third try: please respond to how Goldman’s short-term funding was poised to evaporate even while their stock price remained high and CDS spreads remained low.

            Yes, Goldman raised capital and became a bank holding company. Neither proves or even implies that they were at risk of imminent failure. If failure is even a remote possibility it is prudent to take measures to lower the risk.

            You are taking my analogy too literally when I talk about systemic failure of non-financials. All I’m saying is to the degree that government action prevented systemic failure we are all beneficiaries of that and Goldman is no more in a moral debt to the government than Caterpillar or you or I.

            And let’s stick to the topic: Was Goldman at immediate risk of failure suggesting that their continued existence is probably due to government bailout.

          8. Yves Smith Post author


            You have not refuted a single point I have raised, you have simply dismissed them, and continue to harp on credit default swaps.

            CDS were not a valid indicator of BK risk of financial firms during the crisis period. Lehman’s CDS prices did not signal BK risk when its bond prices did (consistent with an inability to fund), and Lehman was clearly having trouble with funding its overnight exposures prior to its BK. From a paper published by the IMF:

            Lehman’s default shows an exceptional case when cash bond prices collapsed to around 20 cents) even as CDS spreads remained relatively low leading to the unusual scenario where the basis was positive during distress….Barclays (October 20, 2008) writes: “In recent financial institutions bankruptcies, CDS levels were clearly not the leading indicator. Lehman Brothers provides the best example, as its CDS remained in spread running the week of its bankruptcy filing. This actually resulted in some of the best basis trades ever in the credit market as the bonds cratered well before CDS.”

            The reason for the disparity, as I remarked above, is that market participants believed Lehman would be rescued (no BK). The market reaction to Lehman and change in official posture made it clear that no firm that would otherwise be bankrupt would be allowed to fail. The CDS spreads reflected the expectation of official rescue.

            This topic is closed.

          9. Steve

            I have refuted every point you’ve raised. But you have still not addressed my key point that I’ve raised 3 times.

            LEH stock traded at $3.65 the Friday before their bankruptcy but GS never traded below $47. You keep pretending I didn’t mention stock prices but I have continuously mentioned them as an indicator.

            I can’t make you stop claiming GS would have failed but at least I can prove the evidence doesn’t support you.

          10. bob

            They very well could have gotten overnight funding. At what cost? When they are borrowing at 10% and lending at 5%, they are BK.

            On GS stock. You assume that stock prices have to go to zero if a firm is BK.

            Recent exaples, GM, FRE, FNM, AIG. GM is the best exaple to refute you, they were trading above zero well after they filed for BK.

            The level of the stock price is not indicitive of anything. $100 for BRK.A would signal BK, $100 for F would be great. Absolute price means very little. Market cap (share price times number of shares outstanding) is the most telling when looking at the price of stock.

            There is also restricted stock, stock granted to employees that they cannot sell. The stock price could not go to zero.

            There are also index funds, they HAVE to buy all 500 companies in the SP500, until the index is changed. GS is part of a lot of Index funds.

          11. Yves Smith Post author


            Your entire argument hinged on CDS prices, which as I said repeatedly, and the Lehman example shows, is often an inaccurate guide to access to short-term funding and immediate liquidity problems. But even though that has been dismissed you refuse to admit that and continue to advance a bankrupt argument.

            As Bob indicated, the stock price level is meaningless, even more so when market conditions are such that a firm cannot access the public markets. Goldman had to raise funds privately from Buffett, and then ONLY after a government backstop was in place.

            You did not “rebut” evidence, you simply dismissed it, in particular the fact that Goldman had to become a bank holding company to survive, and Sorkin’s account. Sorkin interviewed all the principals, he has a professional reputation to correct, and he was jumped and corrected minor errors in his Too Big Too Fail. The fact that no one at GS disputed his account, when they have been desperate to present the idea that they really didn’t need government assistance, is a silent affirmation. And contemporaneous statements ARE accepted as evidence in court, your assertions to the contrary notwithstanding.

            The CDS and stock markets are particularly poor guides to the health of levered trading firms, of which Goldman was a prime example. What do you need to know to assess the solvency of a trading firm? Its positions on a real time basis. That is the most competitively sensitive information a trading firm has, and one they keep secret. The markets are making at best crude guesses when they try to evaluate firms like Goldman. The actions of all the principals, their desperation to raise equity, their eager acceptance of all government lifelines, says they knew they were on the brink of failure.

        2. bob

          “However, the market consensus is that GS never reached a stage of imminent failure.”

          The market consensus could be viewed, much more accurately, as corporate socialism. The government would not let them fail.

          The market is also still treating AIG as though it still has equity. Work that one out.

        3. craazyman

          You’re right Steve. It’s amazing to our club members how Goldman gets so much criticism. In fact, rather than the US bailing out Goldman, it would appear more in light of the facts that Goldman has bailed out the US. If they had not supported the housing market for so long, the crash would have been far worse than it was. And we are lucky they hedged themselves as skillfully as they did, otherwise, they would not be there now to provide the liquidity that the system sorely needs. Only an informed citizenry can truly preserve our democratic institutions, such as our financial markets, and our right to free enterprise.

          – Mr. Cyrus Kofant, CFP, CPA, LLD
          President and Secretary
          The Money Club of Indianapolis

Comments are closed.