Goldman vs. Grassley on Build America Bonds

The latest dust-up involving Goldman Sachs involves Build America Bonds. The New York Times reports:

Senator Charles E. Grassley of Iowa has asked Goldman Sachs to clarify how much it has collected in underwriting fees as states and cities issue so-called Build America Bonds to raise money for infrastructure projects and create jobs.

The senator, the senior Republican on the Finance Committee, said Wednesday in a letter addressed to Chief Executive Lloyd C. Blankfein that he was “concerned that American taxpayers are subsidizing larger underwriting fees for Wall Street investment banks, including Goldman Sachs, as a result of the Build America Bonds program.”

The bond program, part of stimulus legislation passed last year, is intended to help local governments raise money by issuing taxable bonds; the federal government subsidizes 35 percent of the interest payments. On Wednesday, the Senate passed a bill that would expand the program and its subsidies.

In the video below Grassley stresses that he is not accusing anybody of anything. He is merely asking for information. However, what this particular incident demonstrates is that we are now operating in a different political climate.

Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved.

-John Kenneth Galbraith, The Great Crash 1929

Before the financial crisis, these types of transactions would have occurred without the slightest measure of political interference or regulatory oversight. But, now everything is being scrutinized because it has become increasingly obvious that bankers were not always looking out for the best interests of their clients. Let me give you a few examples.

You may recall my post “Predatory lending local government version” in which bankers including Goldman Sachs and UBS sold local governments complex financial products for large fees. These investments soured, leaving the governments with huge losses. But, the banks benefitted from provisions which protected them. They largely escaped losses.

As I see it, this was the same dynamic at play in the recently revealed Greek cross currency swap dust-up, also involving Goldman.  The New York Times accuses Goldman of selling Greece these risky products and then betting on Greece’s default. The events echo CDS trades Goldman conducted with AIG that could have cost the firm billions if not for Tim Geithner’s intervention (later the subject of a controversial cover-up). But Goldman was not so much betting against Greece any more than it was betting against AIG. It was insuring itself against Greece’s default because it had effectively loaned Greece billions in off-market cross-currency swaps. Goldman was protecting itself while allowing its client/counterparty to fend for itself.

However, in today’s world, after all of the previous revelations, people are now aware that bankers are often protecting themselves while leaving their clients unprotected.