Why Are Taxpayers Subsidizing Facebook,
and the Next Bubble?
By SIMON JOHNSON
Simon Johnson, the former chief economist
at the International Monetary Fund,
is the co-author of “13 Bankers.”
Goldman Sachs is investing $450 million of its own money in Facebook, at a valuation that implies the social-networking company is now worth $50 billion. Goldman is also creating a fund that will offer its high-net-worth clients an opportunity to invest in Facebook...
the joke being goldman has many shareholder
but it counts only as one...lol
thus facebook needs not fill in..re[port..those normal things..
public listed companies..must do
its a perversion..but goldman makes it own rules
google the rolling stone magazine goldman sax revealation
On the face of it, this might seem just like what the financial sector is supposed to be doing – channeling BAILOUT..accredited..fiat money into productive enterprise.
The Securities and Exchange Commission is reportedly looking at the way private investors will be involved,...but hey goldman owns them..but there are more deeply unsettling factors at work here.
Remember that Goldman Sachs is now a bank-holding company – a status it received in September 2008, at the height of the financial crisis, in order to avoid collapse (see Andrew Ross Sorkin’s blow-by-blow account in “Too Big to Fail” for the details.)
This means that it has essentially
unfettered access to the Federal Reserve’s discount window –
that is, it can borrow against all kinds of assets in its portfolio,
effectively ensuring it has government-provided..liquidity at any time.
so there you go we are further shareholders
but we are only there to cop the cost/..shaft
Any financial institution with such access to such government support is likely to take on excessive risk – this is the heart of what is commonly referred to as the problem of “moral hazard.”
If you are fully insured against adverse events,
you will be less careful.
but goldman has allways had govt underwriting..
or rewriting any law they chose..its a professional govt teat sukking leach
Goldman Sachs is undoubtedly too big to fail – in the sense that if it were on the brink of failure now or in the near future, it would receive extraordinary government support and its creditors (at the very least) would be fully protected.
in ever lower value fiat dollars
lest we forget the natzies experience with their hyperinflating deutchmark
where a million marks count buy a stamp...[banker's finance both sides of all wars]
In all likelihood, under the current administration and its foreseeable successors, shareholders, executives, and traders would also receive generous help at the moment of duress.
No one wants to experience another “Lehman moment.”
This means that Goldman Sachs’s cost of financing..is cheaper than it would be otherwise – because creditors feel that they have substantial “downside protection” from the government.
How much cheaper is a matter of some debate, but estimates by my colleague James Kwak (in a paper presented at a Fordham Law School conference last February) put this at around 50 basis points (0.5 percentage points), for banks with more than $100 billion in total assets.
which they reionvest half into govt bonds reaping in two percent
nett clear proffit..all from you tax payers..1.5 percent just doing nuthing
In private, I have suggested to leading members of the Obama administration and Congress that the “too big to fail” subsidy be studied and measured more officially and in a transparent manner that is open to public scrutiny – for example, as a key parameter to be monitored by the newly established Financial Stability Oversight Council....[multiple sghareholders dont count apparently
loll a new way of washing away corperate accountability
aint govt grand...ya elect your people into power
and privatise the fed reserve..or licence bankers to print all the paper they wish
or the bailouts..or unlimited credit
bailout govt...and make govt pay intrest on huge sums
no worry we shall get a new tax..[recall when ghandi complained about a tax on salt
or the tea party when a tax was put on tea...lol
you fools pay income tax on wages
wages isnt income...[income is proffit earned on investments]
wage isnt income...so stop signing documents saying it is..stop taxing wage as income
Unfortunately, so far no one has taken up this approach.
ie audit the fed...and the pentupigram[sorry pentagone]..who have lost 2 trillion..according to dick cheeney..announcment..9 hours before he pulled off 911
[that pushed that headline out of the news...lol]
However, there is consensus that the implicit government backing afforded to Fannie Mae and Freddie Mac in recent decades allowed them to borrow at least 25 basis points (0.25 percent) below what they would otherwise have had to pay – a significant difference in modern financial markets.
In “13 Bankers,” Mr. Kwak and I refuted the view that these government sponsored enterprises were the primary drivers of subprime lending and the 2007-8 financial crisis – that debacle was much more about extreme deregulation and private-sector financial institutions seeking to take on crazy risks.
Nonetheless, Fannie and Freddie were badly mismanaged – and followed the market in 2005-7 with bad bets based on excessive leverage – in large part because they had an implicit government subsidy. Those institutions should be euthanized as soon as possible.
Goldman Sachs now enjoys exactly the same kind of unfair, nontransparent and dangerous subsidy: it has effectively become a new form of government-sponsored enterprise. Goldman is not a venture capital fund or primarily an equity-financed investment fund. It is a highly leveraged bank, meaning that it borrows through the capital markets most of the money that it puts to work.
As Anat Admati of Stanford University and her colleagues tirelessly point out, the central vulnerability in our modern financial system is excessive reliance on borrowed money, particularly by the biggest players.
Goldman Sachs is a perfect example. Most of its operations could be funded with equity – after all, it is not in the retail deposit business. But issuing debt is attractive to shareholders because of the subsidies associated with debt financing for banks and to bank executives because their compensation is based on return on equity — as measured, that increases with leverage.
If banks have more debt relative to equity, this increases the potential upside for investors. It also increases the probability that the firm could fail — unless you believe, as the market does, that Goldman is too big to fail.
Social-networking companies should be able to attract risk capital and compete intensely. They do not need subsidies in the form of cheaper financing, or in any other form.
Social networking is a bubble in the sense that e-mail was a bubble. The technology will without doubt change forever how we communicate with each other, and this may have profound effects on the nature of our society. But investors will get carried away, valuations will become too high and some people will lose a lot of money.
If those losses are entirely equity-financed, there may be negative effects, but they are likely be small – in the revised data after the 2001 dot-com crash, there isn’t even a recession (there were not two consecutive negative quarters for gross domestic product).
But if the losses follow the broader Goldman Sachs structure and are largely debt-financed, then the American taxpayer will have helped create another major financial crisis.
And if you think that sophisticated investors at the heart of our financial system can’t get carried away and lose money on Internet-related investments, remember Webvan: “During the dot-com bubble, Goldman invested about $100 million in Webvan, the online grocer that never got off the ground and eventually collapsed in bankruptcy.”
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