Wednesday, July 15, 2009

A Tale of Two Bailouts

Editorial - July 15th, 2009 - Wall Street Journal

Goldman's traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman's own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.

Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it's not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.

Barack Obama has created an insane financial system that is racing away from the concept of free enterprise. Wall Street had already become an enemy of capitalism with its embrace of crony capitalism before Obama appeared on the scene. The merger and acquistion mania to subsume all corporations into monopoly divisions of huge corporations was the result.

Yet we still cannot get the leadership of the Republican Party to recognize that Wall Street has become an enemy of free enterprise. The Republican leaders carry Wall Street's water whenever they ask. They supported last year's insane bailouts with Bush and McCain leading the charge. I keep on opposing this with little success in getting anyone in the Republican Party leadership to listen. To the leadership, it is all about paying off campaign contributions and they do what their contributors dictate.


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