Vinny’s Blog

Four major wall street companies have gone belly up. 2 have dis-appeared, one is dangling and one is left standing with it’s fate sealed to be converted into a bank like entity rather than leaving it as investment bank.

These 4 companies I am talking about are Merrill Lynch, Lehman Brothers, Morgan Stanley and Goldman. I find many people surprised by what has happened to these companies recently and find them shocked as to how something this drastic could happen to these companies so suddenly and so abruptly.

Well, don’t be surprised, and I hope you won’t be once you read this article fully.

Problem with these companies was brewing for a long time, it was only a matter of time when things caught up with these companies, risky dealings were their own wrong doing.

I first came across this article way back in June, after Bear had gone down already. I read and re-read this article over and over again. When I looked at the dollar amount mentioned in this article, I was shocked and was in horror. Figures are just un-believable.

Back in June I did not know what to make of this article so, I just saved it.

I just could not forget about this article it always stayed in my memory only because of those outrageous numbers 10 Trillion dollars. This article is so interesting I have include lot more from this article than my usual highlights.

Brokers threatened by run on shadow bank system
Regulators eye $10 trillion market that boomed outside traditional banking
SAN FRANCISCO (MarketWatch) — A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.

Big brokerage firms like Goldman Sachs , Lehman Brothers, Morgan Stanley and Merrill Lynch which some say are the biggest players in this non-bank financial network, may have the most to lose from stricter regulation.

The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.

While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn’t have reliable access to short-term borrowing during times of stress.

Such vulnerability helped transform what may have been an uncomfortable correction in credit markets into the worst global credit crunch in more than a decade as monetary policymakers and regulators struggled to contain the damage.

Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.

————- This was known back in June check the article’s publish date —————–
Do you still think it’s a surprise that these big 4 companies are in trouble now ? I will talk about Goldman a bit later…..but for now let us focus on the bigger pictures.
————————————————————————————

While acting like banks, these shadow banking entities weren’t subject to the same supervision, so they didn’t hold as much capital to cushion against potential losses. When subprime mortgage losses started last year, their sources of short-term financing dried up.
“These things act like banks, but they’re not,” James Hamilton, professor of economics at the University of California, San Diego, said. “The fundamental inadequacy of their own capital caused these problems.”

–Now we are in September 3 months later and we find that these 4 big companies are at extinction. Are you still surprised ?

Let us look at Goldman, I have always held this belief that things at Goldman are not as good as they are portrayed. I mean look at the situation, banks after banks, almost no exceptions. Bank in US and banks abroad are writing down bad investment/loan/subprime related losses week after week. Goldman – no this company is portrayed as being the smartest company on Wall Street making record profits and reporting almost no losses.

I questioned my self how is that possible ? they are in the same business as Lehman, Merrill, Morgan Stanley are, they are just as much a part of this 10 Trillion dollar shadow banking system as the other 3. The other 3 took so many losses but Goldman……….no, none, nada. It’s just not possible. But then again who cares what I think….I looked, searched, and tried my best to find detail information about Goldman and it’s prosperity, I did not find much, nothing as big as the article you read above.

But then recently I found someone very credible talking about Goldman and I thought Wow! I was right….at least there is someone else who does not believe what Goldman is trying to portray. Read what IMF chief has to say about Goldman…this article was published on Sep-15th.

INTERVIEW WITH EX-IMF CHIEF ECONOMIST
Banks Won’t Be as Profitable in Future
In a SPIEGEL interview, Harvard academic and former International Monetary Fund chief economist Kenneth Rogoff, 55, discusses Wall Street’s never-ending crisis.
Rogoff: In 2006, the financial sector accounted for a third of corporate profits in the US, although it only represents 2 or 3 percent of total gross domestic product. Goldman Sachs alone distributed $16.5 billion in bonuses to its 26,000 employees. I’m sorry, I think it’s unbelievable. You can’t just make money out of thin air like this, and underlaying this there were enormous risks being taken.

And what’s latest on this company Goldman.

Morgan, Goldman Shares Decline as Confidence Wanes (Update1)
By Christine Harper
Sept. 18 (Bloomberg) — Morgan Stanley and Goldman Sachs Group Inc., the largest independent securities firms in the U.S., fell for an eighth day in New York trading amid a crisis of confidence in financial companies.
http://www.bloomberg.com/apps/news?pid=20601087&sid=afigAmRB1h8A&refer=home

Goldman, Morgan Stanley Bring Down Curtain on an Era (Update3)
By Christine Harper and Craig Torres
Sept. 22 (Bloomberg) — The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aoDmO_d0IJSU&refer=home

Mr. Paulson is now busy cleaning up the mess.

Anyway, I saved the best for the last. Do you think Goldman and others created that 10 Trillion dollars worth of Shadow Banking system in a year or in a day ? or did it take years building it ? If you answer is years, hold you thoughts. Check the date of this article below….

Goldman’s chief to take on Treasury
Paulson nominated by President Bush to succeed John Snow as secretary, boost public perception of performance.
By Chris Isidore, CNNMoney.com senior writer
>>> May 30, 2006: 1:36 PM EDT <<<

Now, do you think Paulson found about this shadow banking system after he became treasury secretary ? or after he collected millions of dollars in Bonus and Salary while he was at Goldman until 2006  ?  Pay attention to timeline here….and what’s highlighted in Red.

Paulson was nominated by President George W. Bush to assume the secretary’s post in 2006 and unanimously confirmed by the U.S. Senate, replacing John Snow.
Previously he had served as Chairman and CEO of investment banking giant Goldman Sachs from 1999 to 2006, during which he led the firm through a period of whopping growth. He embraced risk, taking on debt and betting big when the odds dictated it. Now he is charged with cleaning up the sizable mess left by an epidemic of risk-taking run amok.
http://www.time.com/time/business/article/0,8599,1842634,00.html

Remember IMF chief’s thought about Goldman….pay attention to the year.
In 2006, the financial sector accounted for a third of corporate profits in the US, although it only represents 2 or 3 percent of total gross domestic product. Goldman Sachs alone distributed $16.5 billion in bonuses to its 26,000 employees. I’m sorry, I think it’s unbelievable. You can’t just make money out of thin air like this, and underlaying this there were enormous risks being taken.

And then in an impressive way like an expert Mr. Paulson has proposed  to the United States Government that all that is needed is 700 Billion dollars to clean up this mess and that’s it. Not only that,  decision to give money has to be made quick or else government risks market meltdown…making sure that if things got wrong it’s governments fault.
Paulson urges quick action on $700 billion bailout
http://news.yahoo.com/s/ap/20080921/ap_on_bi_ge/financial_meltdown

And Mr. Paulson has gone a step beyond in asking for help…he has approached other countries as well. First other counties got burned already by buying these sugar coated toxic waste deals from US banks and have taken huge losses…but ignoring all that…now those countries are asked to help yet AGAIN the falling, fragile US. Check this out…

It’s not a call for assistance; it’s a scream for help. US Treasury Secretary Henry Paulson is asking other countries to help buy up bad US debt. The US government is putting up $700 billion in taxpayer money in the hopes that the measure might restore stability in the financial system. But the German government has answered this call quickly and clearly: no. …from the article below….

‘The World Shouldn’t Have to Bear the Burden for America’s Lapses’

Meier also finds Germany’s decision to sit out any bailout operation to be the right move. “The financial crisis is primarily a problem in America,” Meier says. As he sees it, the fact that Germany and Europe are far less affected that the US justifies European reluctance. “The stability of the German banking system is not in danger,” Meier points out as he explains why he believes Europe shouldn’t provide any funds. “The world shouldn’t have to bear the burden for America’s lapses.”
http://www.spiegel.de/international/business/0,1518,579880,00.html

If you still have some appetite for more….here is the final dose. Do you think these 4 Merrill, Lehman, Morgan Stanley and Goldman were the only companies that ran 10 Trillion dollars worth of Shadow Banking System ?

Citigroup’s $1.1 Trillion of Mysterious Assets Shadows Earnings
By Bradley Keoun
July 14 (Bloomberg) — At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank’s $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.
Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.
Read full article here…
http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a1liVM3tG3aI

Here is the article that I recommend reading by all. That 10 Trillion Dollar Shoadow Banking System…

Brokers threatened by run on shadow bank system

Regulators eye $10 trillion market that boomed outside traditional banking

http://www.marketwatch.com/news/story/big-brokers-threatened-crackdown-shadow/story.aspx?guid={FA23DF5A-918F-41DA-B794-7E553ADAFAA7}

And here is link to interview with IMF chief who quoted Goldman’s bonus distribution as un-believable.

http://www.spiegel.de/international/business/0,1518,578308,00.html

[views and opinions expressed here are mine and you need not agree with them. You should not make any financial decisions or any other decision based upon material you read on this website. For that you must contact an expert in the relevant area of your need.]