In Goldman Sachs We Trust: The Story of a $222 Stock going to $1 During the Great Depression.
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As we look over the masters of the universe on Wall Street with Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs only two remain standing and no longer in their previous form. Yet in the midst of all this turmoil, the storied Goldman Sachs is still churning out the profits. A recent report by Bloomberg shows that Goldman Sachs made more than $100 million on trading revenue on get this, 46 separate days during the second quarter. This is rather unbelievable in the midst of the deepest recession since the Great Depression. The spotlight in recent months is squarely on the Wall Street giant and is probably not the kind of PR they are looking for.
On the front page of the Goldman Sachs site, you will see the push for “the economics of climate change” which largely focuses on the cap and trade policies which they stand to benefit from. You will also find the announcement of their paying of $1.1 billion in TARP warrants. Much of the criticism being leveled at Goldman Sachs is they are profiting largely because they have access to taxpayer funds through the U.S. Treasury and Federal Reserve. In fact, when AIG was bailed out a full payment was funneled through the failed AIG firm straight through to Goldman Sachs at par value. This was only possible via taxpayer money and there is yet no solid argument or analysis as to why they needed to be made whole on this transaction.
Yet this isn’t something new. This is an institution that survived the Great Depression. John Kenneth Galbraith in his popular The Great Crash 1929 has a chapter dedicated to Goldman Sachs. There is a pattern emerging dating back nearly a century:
“Goldman, Sachs and Company, an investment banking and brokerage partnership, came rather late to the investment trust business. Not until December 4, 1928, less than a year before the stock market crash, did it sponsor the Goldman Sachs Trading Corporation, its initial venture in the field.”
Now you must remember the theories going around during the late 1920s about the roaring stock market. One theory went that stocks held a “scarcity value” and the reason their prices were going high was because of a lack of common stock. Therefore it was a fertile breeding ground for the investment trust or company. The investment trust really didn’t promote new enterprise. What it essentially did was allow people to own stock in old companies through a new form. Goldman Sachs needed to join the boom:
“The initial issue of stock in the Trading Corporation was a million shares, all of which was bought by Goldman, Sachs and Company at $100 a share for a total of $100,000,000. Ninety per cent was then sold to the public at $104. There were no bonds and no preferred stocks; leverage had not yet been discovered by Goldman, Sachs, and Company. Control of the Goldman Sachs Trading Company by virtue of a management contract and the presence of the partners of the company on the board of the Trading Corporation.”
Not a bad profit. A quick 4 percent bang on the initial offering. But this was only the beginning of the game for Goldman Sachs. The argument being leveled on the organization today boils down to this. Goldman Sachs made large profits on the mortgage backed securities market. When the party started overheating, they had the vision to back out and time the market and hence use strategies such as shorting to make a profit on the downside. Yet they couldn’t get out of the way quickly enough. When things really imploded, they called in their chips with the government (many former Goldman Sachs employees like Henry Paulson were at the head of the Treasury) offered generous assistance to the firm. The generosity was well timed for Q1 and Q2 of 2009 were the firm is making gigantic profits once again. People forget how tenuous things got for the firm in 2008 culminating with the March low:
While the overall stock market is enjoying a record breaking 50 percent rally in 5 months Goldman Sachs has seen a 350% increase in value in this same time period. Now many are asking how is this firm profiting multiple times over the entire stock market? They are still using massive leverage to garner outsized profits with implied insurance from the U.S. Government. I don’t think Americans are averse to profit. In fact, they aren’t pulled away by gigantic profit. Why don’t you see massive outrage for Google, Oracle, or Dell for example? What is at the core here is the corporate welfare that appears to be occurring. That is, the recession with the epic housing bubble, was aided by firms like Goldman Sachs and here they are taking taxpayer money and gambling once again. Unlike a company like say Mervyns or Circuit City that failed because they had bad management, here we have a company being rewarded.
But let us go back to what occurred during the Great Depression since the current behavior seems to be something very familiar with the firm:
“In the two months after its formation, the new company sold some more stock to the public, and on February 21 it merged with another investment trust, the Financial and Industrial Securities Corporation. The assets of the resulting company were valued at $235 million, reflecting a gain of well over 100 per cent in under three months. By February 2, roughly three weeks before the merger, the stock for which the original investors had paid $104 was selling for $136.50. Five days later, on February 7, it reached $222.50. At this latter figure it had a value approximately twice that of the current total worth of the securities, cash, and other assets owned by the Trading Corporation.”
Massive value increase even though tangible real value was much less. Incredible spikes seem to follow the firm. Maybe they have the Midas touch?
“This remarkable premium was not the undiluted result of public enthusiasm for the financial genius of Goldman, Sachs. Goldman, Sachs had considerable enthusiasm for itself, and the Trading Corporation was buying heavily of its own securities. By March 14 it had bought 560,724 shares of its own stock for a total outlay of $57,021,936. This, in turn, had boomed their value. However, perhaps foreseeing the exiguous character of an investment company which had it investments all in its own common stock, the Trading Corporation stopped buying itself in March. Then it resold part of the stock to William Crapo Durant, who re-resold it to the public as opportunity allowed.”
Goldman Sachs seems to have a pattern of passing the proverbial buck after they have rinsed all profits from their venture and move out of the way before the train derails. In this case, the stock was hyper-inflated because the firm was buying itself. The L.A. Times in November of 2008 talks about this double sided betting:
“(L.A. Times) Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.”
That is really looking out for the country especially with a state in major distress. I’m sure the 38,000,000 residents of California appreciate this hedging on the state.
But in a time with no SEC, virtually anything went on Wall Street during the Great Depression. Of course, we all know how the story ended with the epic 1929 crash. Years later in Washington Mr. Sachs had this to say to Senator Couzens:
“Senator Couzens: Did Goldman, Sachs and Company organize the Goldman Sachs Trading Corporation?
Mr. Sachs: Yes, sir.
Senator Couzens: And it sold its stock to the public?
Mr. Sachs: A portion of it. The firm invested originally in 10 per cent of the entire issue for the sum of $10,000,000.
Senator Couzens: And the other 90 per cent was sold to the public?
Mr. Sachs: Yes, sir.
Senator Couzens: At what prices?
Mr. Sachs: At 104. That is the old stock…the stock was split two for one.
Senator Couzens: And what is the price of the stock now?
Mr. Sachs: Approximately 1 ¾”
Some things just never change.