Why Is The US Taxpayer Subsidizing Facebook – And The Next Bubble?

By Simon Johnson

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 apparently launching a fund that will bring its own high net worth clients in as investors for Facebook.

On the face of it, this might just seem like the financial sector doing what it is supposed to – channeling funds into productive enterprise.  The SEC is apparently looking at the way private investors will be involved, but there are some 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 (for the details, see Andrew Ross Sorkin’s blow-by-blow account in Too Big To Fail.)  This means that it has essentially unfettered access to the Federal Reserve’s discount window, i.e., it can borrow against all kinds of assets in its portfolio, effective ensuring it has government-provided liquidity at any time.

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.

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 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 cost of funding to Goldman Sachs 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 controversy, but estimates made by my co-author 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 over $100 billion in total assets.

In private, I have suggested to leading people in the Obama administration and in 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.  Unfortunately, so far they have declined to take up this approach.

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; this is a significant difference in modern financial markets.  In 13 Bankers we refuted the view that these Government Sponsored Enterprises were the primary drivers of subprime lending and the 2007-08 financial crisis – that debacle was much more about extreme deregulation and private sector financial institutions seeking to take on crazy risks.  But it is still the case that Fannie and Freddie were badly mismanaged – and followed the market in 2005-07 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 this firm’s 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 funding for banks, and compelling to bank executives whose compensation is based on return on equity – as measured, this increases with leverage.  If they have more debt relative to equity, that 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 firms should be able to attract risk capital and compete intensely.  They do not need subsidies in the form of cheaper funding (seen today as a more favorable valuation for Facebook) or in any other form.

Social networking is a bubble in the sense that email 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 will likely be small – in the revised data after the 2001 dotcom crash, there isn’t even a recession (i.e., there were not two consecutive negative quarters for GDP).

But if the losses follow the broader Goldman Sachs structure and are largely debt-financed, then the US 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, read up on 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.”

An edited version of this post appears today on the NYT’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

97 responses to “Why Is The US Taxpayer Subsidizing Facebook – And The Next Bubble?

  1. My comment for NYT article re Goldman ‘investment’ ( http://community.nytimes.com/comments/dealbook.nytimes.com/2011/01/03/why-facebook-is-such-an-important-friend-for-goldman-sachs/?permid=2#comment2 ):

    There are certain ‘inventions’ that will inevitably arise in some form or another given the development of the ‘landscape’ that makes that possible. They can almost be considered forgone conclusions… they are emergent properties of the technologies that make them possible.

    And some of them (especially in NEW landscapes) have a tendency towards concentration (a natural total or near monopoly).

    The peer-to-peer networking offered by Facebook is one such form.

    Like with search before… where Google wasn’t the first to enter the field… once a certain tipover point is reached… dominance becomes self-reinforcing.

    So it is with Facebook… there were (and are) others… but a tipover point may have been reached.

    Though I wouldn’t count on it… (and believe its not the case, at least without some missing needed capabilities and broader focus than data collection for advertisers and governments and as a marketing tool).

    Because while Facebook has many wonderful features… (Yes, I do have a Facebook account)…

    I don’t think it gets to the heart of the requirements for peer-to-peer association and empowerment in an absolutely critical new landscape. Sometimes missed potentials are not regained.

    Examples from the past:

    Television… and reaching even farther back… the invention of money and the mechanisms of ‘credit creation’… (which many of us here see as a very troubled technology.)

    Because of cultural inertia and a natural need for stability… patterns laid down by the first players to gain dominance in such new landscapes become extremely difficult to dislodge.

    Sometimes this can be for the best… usually not.

    Many of televisions initial potentials for civic engagement and localization of political participation were lost… and in fact turned upside down… by its solidification in community unfriendly ways (in this country at least). The INERTIA of certain technology implementations becomes extremely difficult to dislodge even when obviously faulty.

    (I’m 61 and for my whole life people have been pointing out… and its scarcely disputable… that the public airwaves could make campaigning a whole lot cheaper… and candidacy available to more than just the ‘pre-approved’ candidates. Yet media costs and the money quest continues to be a thorn in the side of honest politics and good governance… hmmm… I wonder who’s interest THAT serves?)

    In a way, Facebook and other such sites are trying to address… and/or even bridge a very difficult gap mankind has to address as ICT quickly goes global. In evolutionary terms its essentially instantaneous.

    THERE IS A FUNDAMENTAL SCALING ISSUE IN HUMAN SOCIETIES ASSOCIATED WITH NATURAL HUMAN COMMUNITY SIZE (Dunbar’s Number), THE ALTRUISM PROBLEM (there’s an unavoidable discontinuity between biological and intellectual altruism) AND COGNITIVE LIMITS (the “attention economy”).

    In short… our personal networks are smaller than the social organism of which we are a part. This is both unavoidable and problematic.

    Social Networks & The Social Organism: Healing the Breach

    http://culturalengineer.blogspot.com/2009/05/social-networks-social-organism-healing.html

    THE DEVELOPMENT OF THE WEB IS THE MOST FUNDAMENTAL CHANGE IN PEER-TO-PEER RELATIONSHIP SINCE THE MOVE TO SETTLED EXISTENCE!

    The Internet landscape is being rapidly carved up into private fiefdoms.

    I strongly, even urgently (at considerable personal sacrifice; I’m without support or connections) have been pointing out that at least one corner (a critical corner in my opinion) should be reserved to the Commons… to ALL of humanity.

    The Commons-dedicated Account System:
    A self-supporting , Commons-owned neutral network of accounts for both political and charitable monetary contribution… which for fundamental reasons of scale must allow a viable micro-transaction. Such a network ideally should maintain its own cloud and bank. Accounts may be created and/or maintained with zero balances and/or only momentary balances during a pass-through transfer (I believe the monetization model requires no burden on the actual transaction.)

    Gov 2.0 and New Economies – Designing the Social Contract

    http://culturalengineer.blogspot.com/2009/09/gov-20-and-new-economies-designing.html

    Political Fundraising: Act Blue, Facebook and the Missing Network Imperative

    http://culturalengineer.blogspot.com/2010/08/political-fundraising-act-blue-facebook.html

  2. Herbert Wetherby

    A lot of this is simply juggling whatever happens to be in front of you. As soon as the govt has to relize its bad paper assets, the numbers and equasions change as do the results. Suddenly everything you believed in has now reversed itself and you are left holding an empty bag of jugging tools wondering just how all that could have occured. And in essence a new set of tools and rules is formed to begin a new set of calculations that can then be sifered into a new set ways to profit from the lose of your portfolio. Theres really nothin to it.

  3. I am actually considering a lawsuit against the Federal Reserve for denying me individual bank holding company status. Goldman does nothing different than what I do as an individual investor-speculator, so why shouldn’t I have the same advantage of unlimited access to free capital?

    Who’s with me? A class action lawsuit against the Fed would certainly bring some media attention to the absurd favoritism bestowed upon those clowns.

  4. Goldman must observe the same capital requirements as other banks. Apparently this is within its capacity to carry riskadjusted assets. Is that in the public interest? Probably not. Would it be fair to Goldman shareholders to not let it do things the corporation is entitled to do based on the rules? Would it be fair if US banks were allowed to do less than their non-US competitors . mind you, on US soil?

    Life is a little more complicated than what we would like it to be if we could start all over…

    Nice try though!

  5. Facebook is all clicks and no bricks, making it an internet company that is totally virtual in nature. Because of this, Facebook is far from being a labor-intensive company. Look it up: Facebook, despite spanning the globe and despite making its founder into a billionaire in less than five years, needs only a few thousand people to keep it fully up and running.

    Our banking system is another case in point. It is fast becoming nothing more than a virtual component on the World Wide Web. Because of this, our banks, especially the giant TBTF ones, are cutting back on the number of their employees. They are doing this despite that fact they are growing both in terms of their net worth and their global reach.

    My purpose in saying all this isn’t to bash Mark Zuckerberg and his Facebook empire. Nor is it to bash the Goldmans of the World. I’m merely making the point, despite being rather poor at it, that America doesn’t need more entrepreneurs like Mark Zuckerberg and Lloyd Blankfein who are capable of making billions for their companies by having just a skeleton crew of people working for them. We need more entrepreneurs who can create companies that employ large numbers of people. On top of that, we need more entrepreneurs that are more loyal to the American economy than they are to the global economy, thus refusing to outsource American jobs to low-wage countries. This is the only way that we can get our economy back on a growth curve and get our unemployment rate back down below, say, five percent. And the companies that are most likely to accomplish this are the ones that are rooted in real economy, not the ones that are rooted the the virtual economy.

  6. How does this investment by Goldman Sachs fit within the banks’ proprietary trading ban?

  7. I believe GS likes Facebook because Facebook represents a largely untapped data mine. Just imagine if you were able to sift through the posts that betray the mood of millions. You might just be able to anticipate big trends in purchasing, etc. that could allow you to further refine your ability to be on the leading edge of each and every emerging trend or fad. Fantastic.

    And scary for the little guy, who, every day, stands less and less of a chance of being able to compete on his or her own.

  8. Cynthia, you make some persuasive arguments, all of it is great.

    I wonder whether any of these big capitalists have any concern with USA as a place, with people needing jobs. I don’t think so, at all.

    Happy New Year, everyone!

  9. I’m in. Let me know where to sign on.

    In the meantime, y’all might want to check this out:

    http://steadystate.org/the-financial-crisis-is-the-environmental-crisis/

    It deals with real wealth vs. virtual wealth and the problems caused by fractional reserve banking.

  10. “America doesn’t need more entrepreneurs like Mark Zuckerberg and Lloyd Blankfein who are capable of making billions for their companies by having just a skeleton crew of people working for them”

    Mark Zuckerberg almost single-handedly changed the face of the internet. In 20 years we’ll look back and see how what he started took what was essentially a place to gather and organize information and gave us a way to live our lives on it (for better or worse). That he’s not employing a huge number of people only makes it more impressive how much impact he’s having. To take away from this achievement because he should have created a marketing agency or something that employed people but contributed less is extremely nearsighted thinking. Others will build companies to employ – he’s a true innovator and under no obligation to provide jobs just because he’s making a ton of money.

  11. The capital requirements are a joke.

    We can change the rules. Our soil, our rules.

    The banks have captured the politicians, the government, the regulators, the media and academia, but I don’t think they’ve quite captured the American citizenry. Yet.

  12. Interesting article with some very sound concepts worth considering. I for one never bought into prevailing mindset that we must have incremental growth at any price, because the price is often too great and lopsided.

  13. Goldman may have the same capital requirements as other banks, but the issue is its cost of capital, which is artificially low owing to the TBTF implicit guarantee, which is not enjoyed by other banks. (That the capital requirements do not prevent failure is clear from the recent experience of actual banks – look at the FDIC closings on CR’s webiste.) TBTF’s should be charged appropriate insurance premiums for the implicit guarantee, and the premium payments should not be voluntary, because the gaurantee is not voluntary but forced.

  14. Good question.

  15. The funny thing is that the social network is still blocked for Goldman employees to prevent them from spending their time on Facebook during working hours.

  16. Great article Simon! But please stop promoting Sorkin. and it’s not just his pathetic grovelling before banksters:

    “… While Fuld had been making his way back from India, Gregory had missed his son’s lacrosse game in Roanoke, VA, to spend the weekend at the office organizing the battle plan.” Chap 1 pg 11

    It’s his ability to describe the merging of investment and commercial banks without even attempting to remind the reader that that for decades and for good reasons the banks had been kept separate by Glass-Steagal.

    The best summary for the layman that I’ve read yet is Gillian Tett’s Fools Gold.

  17. $50 billion for Facebook vs. about $200 billion for Google? Doesn’t sound so outrageous.

  18. I think facebook is a big waste of time…. Who really cares what the hell you are doing on a daily basis.

  19. TimeMachineMovie

    The Time Machine (1960) Part 8
    Start at about five (5) minutes into the segment 8. Facebook is a reality that is perceived as social but has unmeasurable consequences in as a political tool. In the 1960s when this film was made people would revolt against even having a picture taken for a drivers license because they felt that the government had no business maintaining records over innocent people. There was a healthy mistrust of government which today is exploited by republican rhetoric concerning “Big Government” and even lends itself to the rejection of regulatory controls. But all things can be corrupted and for the most part history will show that for every technology created to solve a problem, there were those standing ready to corrupt that process as well pretty much as soon as opportunity presented itself. In the 1895 version of the
    book by H. G. Wells, the Time Traveler
    “… meets the Eloi, a society of small, elegant, androgynous, and childlike people. They live in small communities within large and futuristic yet slowly deteriorating buildings, doing no work and having a frugivorous diet. His efforts to communicate with them are hampered by their lack of curiosity or discipline, and he speculates that they are a peaceful communist society, the result of humanity conquering nature with technology, and subsequently evolving to adapt to an environment in which strength and intellect are no longer advantageous to survival.” Later after having his time machine stolen and dragged off to a cave he follows the tracks of his machine and
    … in the dark, he is approached menacingly by the Morlocks, pale, apelike people who live in darkness underground, where he discovers the machinery and industry that makes the above-ground paradise possible. He alters his theory, speculating that the human race has evolved into two species: the leisured classes have become the ineffectual Eloi, and the downtrodden working classes have become the brutish light-fearing Morlocks. Deducing that the Morlocks have taken his time machine, he explores the Morlock tunnels, learning that
    they feed on the Eloi. His revised analysis is that their relationship is not one of lords and servants but of livestock and ranchers,…” http://en.wikipedia.org/wiki/The_Time_Machine

    Today we have “FACEBOOK” and instead of having to demand information and identities from all our citizens we have all of us willingly going to the cave…willingly surrendering all our pictures, friendships, personal experiences and whatever in a social network that surely has a guaranteed “backdoor” (thank you…National Security) so that a record is being established for everyone who participates. The youngest generation naively and innocently walk right into this technological cave without a hesitation…indeed exhuberantly…and we encourage it with movie success and hnero praises of entrepreneurial genius. Well thank you H. G. Wells! Unfortunately you were too far ahead of your time and you could not have known how easy it really turned out!

  20. So, John, how about that class action?

  21. I believe one London financier said something like – the worlds infinite debt creation capabilities have finally run up against the finite resources of the earth.

    It is not only Soddy perspective but Marxists point to the unsustainable internal contradictions of the capitalist system and environmentalists point to the need for the capitalist system to continually grow (cannot be steady state) and will thus deplete the finite resources of the earth.

  22. Brilliant summation of Facebook via The Time Machine.

    I have long had this feeling, that anything being aggressively promoted in the mainstream of our lives, has a Morlock underbelly to it.
    I still remember when we were all being bombarded with scare tactic advertising encouraging us to beef up our retirement portfolios, and I was suspicious then, and look how that turned out.

  23. Bruce E. Woych

    Right On Anne!

  24. Bruce E. Woych

    Thank You bmeisen!

    I agree 100% about Sorkin! He’s a golden boy insider and his book is an apologia and talking points that turn the story into some personalized melodrama (aka: MOVIE rights?) and completely evade, avoid and escape all the collusion and corruption. It may hold some details, but it is a quick revisionary story line meant to appease and please (if not entirely erase culpability in criminal terms).

    The whole idea of these book deals (eg: Paulson; Bush) that come out after the fact seems to be to establish a narrative that all the crony network “INTERLOCK” (google that term) can dissemble in alignment and all have the same deniability communicated and published in a form that can’t actually be held accountable as a formal record. Clever stuff? Remember, Not only is Sorkin a born, bred and groomed insider, but his entire story was created by from interviews with the Wallstreet / Bankster crooks and financial government gangsters (same guys!)

  25. Bruce E. Woych

    http://en.wikipedia.org/wiki/Interlocking_directorate

    Interlocking directorate
    From Wikipedia, the free encyclopedia
    Jump to: navigation, search
    Network diagram showing interlocks between various U.S. corporations/institutions, and four major media/telecom corporations (circled in red).
    Network diagram showing interlocks of the board members of American International Group (AIG), from 2004 with other U.S. corporations.
    Network diagram showing interlocks between various U.S. corporations and institutions and the Council on Foreign Relations, in 2004

    Interlocking directorate refers to the practice of members of a corporate board of directors serving on the boards of multiple corporations. A person that sits on multiple boards is known as a multiple director.[1] A direct interlock occurs when two firms share a director or when an executive of one firm sits on the board of second firm. An indirect interlock occurs when two corporations have directors who each also serve on the board of a third firm.[2]
    Contents
    [hide]

    * 1 Socio-political importance
    * 2 Modern interlock networks
    * 3 Legality
    * 4 See also
    * 5 References
    o 5.1 Notes
    o 5.2 Bibliography
    * 6 Further reading
    * 7 External links

    [edit] Socio-political importance

    Interlocks allow for upper class cohesion, coordinated action, and unified political-economic power. They allow corporations to increase their influence by exerting power as a group, and to work together towards common goals.[3] They help the upper class maintain a class advantage, and gain more power over workers and consumers, by reducing intra-class competition and increasing cooperation.[2][4] In the words of Scott R. Bowman, interlocks “facilitate a community of interest among the elite of the corporate world that supplants the competitive and socially divisive ethos of an earlier stage of capitalism with an ethic of cooperation and a sense of shared values and goals.”[5]

    Interlocks act as communication channels, enabling information to be shared between boards via multiple directors who have access to inside information for multiple companies.[1] The system of interlocks forms a “transcorporate network overarching all sectors of business”.[6] Interlocks have benefits over trusts, cartels, and other monopolistic/oligopolistic forms of organization, due to their greater fluidity, and lower visibility (making them less open to public scrutiny).[3] They also benefit the involved companies, due to reduced competition, increased information

    use the link: there are some interesting charts you might be surprised to see mapped out. this is not conspiracy theory…this is business as usual…and as usual this business is not well known by the public at their mercy!

  26. markets.aurelius

    If you’re serious, please post your progress here on baselinescenario … it’s not as silly or far-fetched as it sounds

  27. TBTF is TBTE — Too Big To Exist.

    Who’s going to win–Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, Wells Fargo and Morgan Stanley–or 300 million Americans living in a crippled and compromised democracy?

  28. Patrice Ayme

    The Athenians and other progressive Greeks had various notions of equality, which they considered basic to democracy.
    Many of these notions are now routinely violated (although the Internet gives some hope to reverse that trend).
    One notion the Greeks did not think of (although they would have if they had a debt economy) was equal access to capital, indeed. But it ought to be a fundamental right in a democracy.

    http://patriceayme.wordpress.com/

  29. This is wrong. The $450M is not Goldman Sachs’ proprietary money. Instead, private clients of Goldman Sachs are investing their own money. The investment vehicle that Goldman is sponsoring is conduit for the private clients to invest their money in Facebook, not Goldman’s own money. Goldman is just arranging the transaction (for a very large fee).

  30. Patrice Ayme

    Europeans have cracked down on banksters in many ways. Why can’t the USA follow?
    PA

  31. we could save time and just declare whatever Goldman Sachs does next is illegal, to save everyone time and pain.

  32. Found an interesting article about the “burden of knowing.”
    Excerpt from:

    http://www.countercurrents.org/smith191110.htm

    “Knowing what lies ahead is a great emotional burden.
    The knowledge that the present is unsustainable is, for many of us, a great emotional burden. It troubles our sleep, our minds, and our basic emotional well-being. Knowledge, like memory, cannot be erased at will, and thus it runs in the background of our lives, unseen by others but deeply troubling to the knower. I am not alone in feeling this weight; correspondents and readers write me that they feel it, too. “

  33. Imagine, giving the world your personality fingerprint and paying to have it accomplished? Simply amazing! Yep, I want my “fifteen seconds” of fame everyday, so where do I sign up?
    There are underlying ramification for all this feverish folly of what is private, and what is public for those to know, and us…to careless? It’s in the hand of “God”, now so back off or He`ll delete your account!
    I’ve just a few things to say about the wonderful job the “Federal Reserve Banking System” has irresponsibly parlayed our great country into an ensuing tragedy yet to happen? This lifetime love-triangle between the domineering “Fed”, the submissive mistress – the all too willing “Treasury” to please her incumbent usurpers, and the backdoor, forlorn and unwilling “Bankster” – never to make a committment to this shamelessly ignorant yet questionable knowing whore!
    The narrative is non-fiction, and it unfolds as I write with many a reference if so chooses such a…redundant delight: “Is this the Fed’s Merry Christmas? Fed Secretly Lent over $3Trillion to Foreign Banks & Global Corporations in Bailout”

    http://www.dailypaul.com/node/152223

    “Capital Purchase Program/ Eye on the Bailout, TARP, Mortgage Modification”

    http://bailout.propublica.org/programs/1-capital-purchase-program

    “The Fed to Release Critical Financial Info Tomorrow”

    http://sunlightfoundation.com/blog/2010/11/30/the-fed-to-release-critical-financial-info-tomorrow/#

    For your Amusement: TALF/ CPFF/ & PDCF (I won’t overburden you with the “European Financial Stability Facility [EFSF]” being backdoored by the IMF with the U.S. blessing?)

    http://www.ny.frb.org/markets/talf_faq.html

    http://www.ny.frb.org/markets/cpff_faq.html

    http://www.ny.frb.org/markets/pdcf_faq.html

    PS. Needless to say all these programs/facilties are at full throttle mate! Thanks to Vermont Independent Senator Bernie Sanders! I’m proud to have lived in Vermont all my young life, and so…so proud of my great Senator – The Honourable Senator Bernie Sanders” – who literally has corralled the Oligarchy!
    Thanks Simon and James :-)

  34. Let’s say you are correct. By taking on the risk of the position now, before all $450m was sold to clients, they are clearly in a proprietary trade. Wouldn’t one trade below the $50bn valuation elsewhere require GS to mark their position down to the same price?

    But you may not be correct. The press reports all say that GS “invests” $450mm with a Russian partner, that GS intends to offer a further $1,5bn more to clients under the 499 exemption, and that GS serves notice that they may liquidate or hedge their FB holdings without informing said clients.

    So it looks like the $450mm is an actual prop trade.

  35. We’re financing it beacause the crisis made the 21st century investment strategy clear: leave the taxpayers with the downside and keep the upside for yourself.

  36. Bayard Waterbury

    Wonderful article which goes to the core of the problem of TBTF banks. Since they are completely invulnerable to market forces — living in a FED sponsored cocoon, they can make new and meaningless markets by borrowing at absurd costs. Facebook is the latest example of Goldman finding completely socially unproductive ways of leveraging the economy by their advantage to be, what else, premier rent takers. We all know that Facebook is nothing but a very large fad. It’s attractiveness, and therefore, profitability will go the way of all such things (as you pointed so cogently to the Dot Com Bubble). But, Goldman knows that, regardless of what happens to Facebook, or any other of their bogus rent taking schemes, nothing ultimately will happen to them. Are they right? Maybe, but my perception is that if they got into deep feces over such activities, they may be, in fact, TBTBBO (Too Big To Be Bailed Out). Assuming, realistically, that the “recovery” does not continue, such as it is, the government is now faced with considering how to deal with the national debt. No problem (except that they won’t). The problem is that, if Goldman, as things tend to go, picks a particularly bad time to need the government’s assistance (bailout), our nation may be faced with the worst possible scenario. If it bails out Goldman (let’s say to the tune of a couple of trillion dollars, not unrealistic), and that further deteriorates (likely) the world’s view of our bond values, there will be two choices: Bail out Goldman, resulting in a far higher cost of supporting our debt which will be unsupportable (the cost, that is), or allow Goldman to fail and create a depression which could make 1929-40 look like a picnic. But so it goes in can kicking. We have made our choices, and, although it’s not too late to change the banking rules, the door is closing quickly. Sadly, this might not even be too bad, if the same were not true in most of the rest of the world (as to banks, that is).

  37. markets.aurelius

    Excellent analysis, Simon. GS: the world’s most nimble GSE. Someone more clever than I will have to re-work their logo into GSE.

    The FB implied valuation is entirely a function of GSE’s … oops, GS’s access to zero-cost funding and its TBTF guarantee. GSE … ooops, there I go again … GS can deploy this to whatever strikes its fancy, regardless of the risk-return tradeoff. And, given GSE’s … dang! … GS’s proclivity for, and demonstrated expertise at pumping and dumping, they’ll be able to gull their private-wealth “customers” into paying an even more princely sum that almost surely will further inflate FB’s valuation after it’s placed with retail.

    One wonders if the Fed is even remotely aware that this access to limitless funding + the certainty of a govt bailout is producing such massively inflated valuations for companies favored by GSE … er, GS? One wonders if other banks will catch on, and similarly elevate any company they deign to favor with the Fed’s largess? The only thing that matters for the “banks” — and I use that term loosely — is they convince enough “investors” to buy the equity they’re going to peddle. The “banks” generate fees, and the founders of these companies become the rich customers of the “banks.” It’s a massive transfer of wealth from “bank” customers to “bank” clients, All of which is only possible at such unreal levels because of the Fed? Aren’t these the same set of incentives those other GSEs (I meant to say it that time) had that produced all that carnage in the mortgage markets.

    This monetary-policy transmission mechanism is something only third-rate crony-capital markets have ever seen. Talk about a crippling distortion of the capital markets and the wealth-creation process. These “banks” are sucking the blood out of the genius of meritocracy, to paraphrase Bob Dylan. These markets exist only to enrich the plutocracy.

  38. I might be willing to let them behave freely as a corporation if they would step away from the Fed trough for money and stop leaving taxpayers with the bill for their screw-ups. The more they expect us to bankroll them (while they take the upside and leave us with the downside), the less I am inclined to grant them (and their shareholders) the right to do anything.

    And honestly, I don’t *care* if they can compete globally if that “competing” means every 5-10 years we have to suffer 20% unemployment and massive economic destruction. They get to be supremely rich while the rest of us get to spend our time playing Russian roulette at our source of income with a five-chamber revolver? No thanks. Create rules that make them want to leave. I really couldn’t care less. If a bank wants to play these games, I don’t want them touching our economy, much less being “systemically important” in it.

    Drop all the favorable treatment, the implication that they can’t be allowed to fail, their ability to hold the entire economy hostage, and the government backstopping, and I might be inclined to cut them some more slack. As is right now, I have no kind words or intentions for them.

  39. How about deciding if what they already did was illegal? In a court of law? With criminal charges and massive jail sentences waiting?

  40. @ Evan___Sorry…but the real truth is his bankroll came from the “king makers with the plans”, but needed a cute youthful face? Remember Micheal Dell,…

  41. @ Bayard Waterbury___If cleansing the system with another depression is to be – time to take our medicine and bring it on. The system we have… “Must” be purged, and whose to say it will be worse than 1929, I dare say naught? If anything, it could bring our country together as one. Ironically great human tragedies in history are known too coalesce and solidified fractured societies. JMHO
    PS. If yopu ask me…twenty percent of the population is already in the bread-line-row now!

  42. The point is that you cannot deny Goldman things that others are allowed to do. Or the US would have to change its entire (international) trade policy. You overestimate the vulnerability of banks to political challenges..

  43. European banks have been doing this for ages. But they -generally- also have been acting as loyal allies of governments, especially mainstream ones, by being more customer-friendly than prescribed by regulation. Of course that can only happen if all the local banks cooperate, which tends to amount to a combination of “patriotism and market suppression”. Or otherwise, corporatism.

    That model went out the door in the US many decades ago.

    But it is what you prefer: the opportunities provided by markets (and the likelyhood of overall economic growth, whatever that may mean to you) or the security provided by the absence of them.

  44. This is a privately negotiated transaction of private securities. I would seriously guess there is an exclusion for these transactions.

    This would not be a firm commitment underwriting either. They would not be taking any risk of that ilk.

    I assume you are referencing secondary market transactions when you talk about a trade occurring below $50M. That also would have no bearing on the outcome of a negotiated transaction (unless of course there was some material adverse change in FB’s condition).

  45. “The FB implied valuation is entirely a function of GSE’s … oops, GS’s access to zero-cost funding and its TBTF guarantee.”

    Are you kidding? FB traded close to $50B on the secondary market and the Russkies are investing at the same valuation.

    Dramatic overreach here….what next…GS causes ring around the collar?

  46. From top to bottom, on every level, GS stinks. Check out this Bloomberg piece: http://tinyurl.com/339n8qn

  47. @bmeisen & bruce e. woych

    You people actually read ALL of Sorkin’s book? I’m amazed. I discarded it after 10 pages. It reeked of financial hagiography.

    In 2010 it was shortlisted for the 2010 Financial Times (yikes!) and Goldman Sachs (double-yikes!) Business Book of the Year Award. If I’d known this ahead of time, I wouldn’t have even picked the book up.

    (BTW, wonder if Matt Taibbi’s new book “Griftopia” will be shortlisted for the Financial Times and Goldman Sachs Award?)

  48. Thanks Mr. Woych and Trouserman. @ Trouserman: I bought and read Sorkin because Simon gave him a good review in the WaPo. I kept reading because I kept thinking that there must of been something for Simon to praise. Except for a couple Wall St. idioms and the fragmentary portrait of Geithner, there isn’t. Leads one to ask, why does Simon praise him? Professional courtesy among NYTimesers? Does Simon get something in return? Or does Simon reason that the people must read something and Sorkin is better than nothing? If so then Sorkin is just barely.

    Gillian Tett reported for the FT, and was onto and exposed the banksters at a comparatively early point. Her Fools Gold is excellent, focusing on JPMOrgan and especially illuminating European connections.

    I’m a big fan of Taibi and am aware of his limitations. Going after the banksters will be tough for him because he simply is not at the same level of Tett, Yves Smith (whose Econned is also excellent and at times scattered), Partnoy, author of Infectious Greed, and Tanta (rip).

  49. When the lights go out, Facebook isn’t worth a candle.

  50. Herbert Wetherby

    You are completely correct, Wall Street privatized the gains and socialized the loses. Which is one reason I totally disdain the law.

  51. markets.aurelius

    @ Steve:

    This is too easy. Read this first:

    http://openchannel.msnbc.msn.com/_news/2011/01/05/5771129-russian-facebook-investors-have-sparked-us-concerns

    Do you seriously believe an investment by a Russian oligarch is evidence of a market-based valuation? This is an extension of the state — and the KGB clique — in the most literal way imaginable, whereas the GS investment is an extension of the state in a less obvious or visible way (hence the GSE appellation for GS).

    In all likelihood, the GS folks will run circles around the KGB guys. The skill set required to get to the top of both those heaps is similar. However, when the KGB is slighted or double-crossed it doesn’t look for a graceful exit … it arranges an accident.

    The other thing that should give everyone on FB pause is the KGB is now an active investor in this medium. Talk about the penetration of the West.

  52. Constitutional Convention and start it off with the fireworks of BURNING the Patriot Act…seriously, any USA born and bred citizens posting on this site….?!

    Obviously not…

  53. These are not “Russians” – do your history….who bought all the Winchesters and then used them to kill the Czar to get his 4 billion to pay for the guns?

  54. amen brother

  55. Actually, I was hoping some resourceful lawyer would read the post and pick up the ball. Regretfully, I don’t have the time and resources to initiate the effort. But if I did, I certainly would, if nothing else to draw attention to the unwarranted favoritism bestowed upon some of these so-called “banks.”

    It’s not that I have anything against speculation in the markets, just so long as it’s not done at the taxpayer’s risk or expense.

    Say Simon, how about it, you must know some good lawyers eager for publicity?

  56. @ bmeisen___Simon’s profound mystique is that he wraps discourse in a foiled ubiguitous fashion…where all at the thought-feast satisfy their sapient lust!

    PS. The FT is a Rothschild’s “Rag”, tailored for Lord Blankfein’s pleasure. It’s nice to see how the puzzel fits with your hands tied behind your back? Ya know,…

  57. Wow…..got a grassy knoll for sale.?

  58. Bruce E. Woych

    earle.florida queries…
    “Imagine, giving the world your personality fingerprint and paying to have it accomplished? Simply amazing! Yep, I want my “fifteen seconds” of fame everyday, so where do I sign up?”

    * http://www.time.com/time/specials/packages/article/0,28804,2036683_2037183_2037185,00.html
    This article does everything but canonize Mr. Zuckerberg, but one segment raises a interest of another dimension for this uncritical mass appeal to unfettered human capital:

    Wednesday, Dec. 15, 2010
    Mark Zuckerberg
    By Lev Grossman
    TIME
    (selected excerpt)
    “The door opened, and a distinguished-looking gray-haired man burst in — it’s the only way to describe his entrance — trailed by a couple of deputies. He was both the oldest person in the room by 20 years and the only one wearing a suit. He was in the building, he explained with the delighted air of a man about to secure ironclad bragging rights forever, and he just had to stop in and introduce himself to Zuckerberg: Robert Mueller, director of the FBI, pleased to meet you.
    They shook hands and chatted about nothing for a couple of minutes, and then Mueller left. There was a giddy silence while everybody just looked at one another as if to say, What the hell just happened?
    It’s a fair question. Almost seven years ago, in February 2004, when Zuckerberg was a 19-year-old sophomore at Harvard, he started a Web service from his dorm. It was called Thefacebook.com, and it was billed as “an online directory that connects people through social networks at colleges.” This year, Facebook — now minus the the — added its 550 millionth member. One out of every dozen people on the planet has a Facebook account. They speak 75 languages and collectively lavish more than 700 billion minutes on Facebook every month. Last month the site accounted for 1 out of 4 American page views. Its membership is currently growing at a rate of about 700,000 people a day.
    What just happened? In less than seven years, Zuckerberg wired together a twelfth of humanity into a single network, thereby creating a social entity almost twice as large as the U.S. If Facebook were a country it would be the third largest, behind only China and India.”

    [...later in the text after much aggrandizing and proselytizing over the billionaire daydreamer guru...or pied piper...the author revives the presence of Big Government interests and Big Government fears as well]:

    “…How big could Facebook get? It’s big enough that it’s starting to bump up against governments as well as other companies. Mueller’s visit wasn’t a one-off. He was there because Zuckerberg has a better database than he does. Facebook has a richer, more intimate hoard of information about its citizens than any nation has ever had, and the U.S. government sometimes comes knocking, subpoena in hand, looking to borrow some. “We feel like it’s our responsibility to push back on that stuff,” Zuckerberg says, “so oftentimes someone will come with a subpoena, and we’ll go to court and say, ‘We don’t think this is enough.’ Ultimately I think this stuff gets used for good.”
    Conversely, some governments fear Facebook’s great database and the ease with which Facebook can be used to form networks and spread information. China has blocked the site since 2009. Iran, Pakistan and Saudi Arabia have all banned it at one point or another. Zuckerberg will be visiting China over the holidays — his girlfriend has family there — and you can’t help but wonder if he’ll be doing some stealth market research. That’s almost a fifth of the world’s population he’s not reaching.
    But even without China, there’s a distinct feeling of manifest destiny about Facebook. Plot its current growth on a curve and it hits a billion members in 2012. There are 6.9 billion people in the world, 2 billion of whom are on the Internet. Is there a point at which all of them are on Facebook?”
    [end of quotes]

  59. Did I write something that was not the TRUTH, Steve?

    Think Bush Cabal invented all those marked-up-with-black-magic-marker

    documents redacting “history”, not just the document –

    no one ever mentions the USA kleptocrat who was all over the Czar….Armand or something like that..

    And Kennedy is DEAD – you’re a sicko for turning that TRUTH into the comment you just made…

  60. Wait – the CZAR gave (communism) rifles to the criminal elements in his country…it that YOUR grassy knoll, Steve?

  61. Indeed, the fruits of always backing the “strong man” with weapons and booze/drugs in all pre-agricultural societies on Spaceship Earth is not good fruit, is it?

  62. Implying that the KGB is using Facebook to infiltrate the west deserves a comment about silly conspiracy theories.

    And don’t be childish and suggest I am somehow disparaging Kennedy.

  63. So they haven’t been mining it already?

    They, obviously, have all the data they need to call us “stupid” with full confidence.

  64. Steve, “Implying that the KGB is using Facebook to infiltrate the west deserves a comment about silly conspiracy theories.”

    Agreed. But it’s right off the typing fingers of those who kept that whole “moon landing was a hoax” schtick going – the danger to USA is from within. KGB just leans back and serves up caviar and vodka to watch what the “secret societies” will pull next to ruin another civilization…

    Rolling Stones channeled the eternal priesthood’s “Lord” when they came out with the “sympathy for the devil” song – except on Spaceship Earth today, it’s name isn’t “Lucifer” – it’s Caligastia.

    We’ve all met Cal and his sidekick Dal, haven’t we?

  65. markets.aurelius

    Steve, don’t let the fact that you cannot appreciate what’s going on convince you there’s a conspiracy theory here. There is no conspiracy theory. This is just a set of facts that lead to an indisputable conclusion. Not for nothing, but you need to read up on a few things, starting with the DNI report at

    http://www.fas.org/irp/dni/osc/runet.pdf

    1) from the DNI report footnote h on p. 6 (all open-source stuff):

    “In October 2009, the Communications and Press Ministry offered a tender for the provision of technology needed to allow bureaucrats to promote state interests on social networking sites like Twitter and Facebook.

    “According to the tender, the winning company would further be required to draft a concept to promote state interests through the websites and propose “methods of monitoring” the sites in order to “boost the effectiveness” of the activities of state bodies on the sites. The ministry added that it was also considering tracking discussions at social networking sites operating in languages other than Russian (Moscow Times, 23 October 2009).”

    2) history of KGB:

    http://www.time.com/time/magazine/article/0,9171,953701-1,00.html

    The KGB was the most effective and ruthless intell organization in the history of the modern world. The Kremlin and all the oligarchs over there are alums of the KGB.

    There no conspiracy theory at all: it’s just a fact of life … you’ve got a reconstituted KGB pulling all the levers over there. Nothing more. Nothing less.

    I believe it was Marx himself who said the capitalists would sell the rope used to hang them.

  66. @ Bruce

    Follow-up of old, not so old news? “Cyber Experts have proof that China has Hijacked U.S. Based Internet Traffic” Ref:
    http:www.nationaldefensemagazine.org/blog/Lists/Posts/Post.aspx?List=7c996cd7%2Dcbb4%2D4018%2D8825eada7aa2&ID=249

    Can someone spell “AMDOC” the nadir trojan horse of the middle east? “How Israeli Backdoor Technology Penetrated the U.S. Governments Telecom System and Compromised National Security” Every phone call in the world is basically routed through this small (esoteric) network. Ref:

    http://www.antiwar.com/orig/ketcham.php

    PS.___but China, Russia, Israel, and God knows who else is going to our Premier Colleges and Universities being taught by the best software & cyber professors in the U.S. – and know ones looking! What’s up with that?
    Good link Bruce :-)

    JMHO

  67. @ markets

    Check out BSkyB and tell me how “The” two baby-boys in high heels are doing? I don’t mean Traffic and Jack Bruce neither,…

  68. @bmeisen: Thanks, I’ll check out the Tett and Smith books. I’ve read “Infectious Greed”. Great cautionary book and bonus points for being written several years before the crisis.

    My favorite financial writer currently is Bill Bonner. In his “Empire of Debt” (2004, I believe) he predicted in clear language that the US economy would probably go down after a bursting of the housing bubble. He can also be extremely witty. Sample quotes from “Mobs, Messiahs, and Markets”:

    “For clients, hedge fund investing is like playing strip poker with a beautiful woman–by her rules: when you lose a hand, you take off your shirt; but when she loses, she puts on a leather coat.”

    “We approach investment markets cautiously, as a man approaches a woman in the early morning.”

    His website is Dailyreckoning.

  69. I am afraid that if I post anti-government messages, I will find myself on the no-fly list. Seriously, the feds are watching and listening for radical talk, broadly defined as anti-GS, anti-establishment. God help us all.

  70. The powers that be will be able to maintain law and order even with double the current rate of unemployment. It may not be pretty, but we could be just like the Philippines soon, and from the ‘green zone,’ behind the gate, life will still be good. Don’t count on depression sinking the police state either.

  71. Herbert Wetherby

    I’m sure there are plenty flying under the radar, what is your point?

  72. Herbert Wetherby

    but when she loses, she puts on a leather coat.”

    That is simply not true, when she loses she puts a blanket around her neck, reconsiders, waits awhile and takes off her pants. So this book looks like you can read from a quote.

  73. @ Trip___”God Bless Julian Assange”!

    PS. Don’t worry Trip – the “Executive Office of the President U.S.A.” tunes in often…surprised? ;>`0

  74. Bruce E. Woych

    It is a teling fact that the TIMES article quoted above had its own controversy concerning the cover of TIME magazine. As you might recall the consensus was that (right or wrong/ good or bad; aside…) Julian Assange should have been on that cover. Until proven otherwise, I would say that JA is the last courageous stand for a truthful “outing” of REAL treachery and deceit in the power dynamics of our global inferno. Be that as it may, and aside from the democratic and journalistic gravity of that issue of free press and the right to an uncensored public information system, the magazine decided upon a Zuckerberg coronation which (to my mind) made us all out to be “zuckers.”
    The fact that China / Russia / Israel and others are potential parasites to this system is not surprising. (Suppressive regimes would be facilitated by susch a system to target legitimate dissent and kill opposition in aggregates…very efficient trapping…but; you have to ask yourself why some of these reject Facebook? I think the answer is that they realize that the system of surveillance that exists technologically would greatly aid the attention and intentions of US intervention and manipulations in those countries. I digress…and this is, of course, speculative).

    More telling and appropo:
    Today’s Sunday paper reports that the US Attorney’ office in Alexandria Va. (backed by a Magistrates court order from Dec. 14th, 2010) has targeted and demanded details on the accounts of people suspected of being associated with wikileaks from all over the world. This is Obama’s “constitutional background” policies?????

    markets.aurelius:
    Thank you so much for the historic facts involving the disintegration of system by essentially “captured” legislated decisions to break down our rights to privacy and open a back door peek hole to everything we communicate via internet. We should recall that Bush actually started this without constitutional considerations, and the eavesdropping on American citizens is insidiously becoming the legal norm…ONE COMPROMISE AT A TIME…the neo-zucker / Obamian way !

    for ease: let me repaste your references (gratitudes to markets.aurelius)

    read up on a few things, starting with the DNI report at

    http://www.fas.org/irp/dni/osc/runet.pdf

    1) from the DNI report footnote h on p. 6 (all open-source stuff):

    “In October 2009, the Communications and Press Ministry offered a tender for the provision of technology needed to allow bureaucrats to promote state interests on social networking sites like Twitter and Facebook.

    “According to the tender, the winning company would further be required to draft a concept to promote state interests through the websites and propose “methods of monitoring” the sites in order to “boost the effectiveness” of the activities of state bodies on the sites. The ministry added that it was also considering tracking discussions at social networking sites operating in languages other than Russian (Moscow Times, 23 October 2009).”

    2) history of KGB:

    http://www.time.com/time/magazine/article/0,9171,953701-1,00.html

    The KGB was the most effective and ruthless intell organization in the history of the modern world. The Kremlin and all the oligarchs over there are alums of the KGB.

    There no conspiracy theory at all: it’s just a fact of life … you’ve got a reconstituted KGB pulling all the levers over there. Nothing more. Nothing less.
    thank YOU : markets.aurelius!

    (so perhaps the real question we might be asking is why and who wants to take over this system using our decidedly un-American ethical teams of Goldman and their Sackers!???) Can you really believe that this international interlock is working as intermediaries for democracy, truth and the traditional American Way?

  75. Bruce E. Woych

    Please note that the demands from US Officials for the information was sent to Twitter Inc. (a technical detail but it should have been included in the comments above concerning Facebook itself as a depository of data from American’s private lives).

  76. Still digesting what happened in Arizona – just this week I quipped that Arizona, in practice, was Byelorus.

    A peaceful protest against the “power elite” would be for everyone to bail out of Facebook – delete (which you can’t do – they won’t delete it) – your account.

    And so much for the KGB – light off

    …and if you are too addicted to your belief in the power of virtual reality,

    then trash Facebook,

    and all other ME ME ME toy-sites where you disgust everyone with your public narcissism,

    by re-inventing yourself with goofy funny sophomoric LIES.

    What a difference a day makes – this whole facebook-power is clearly utter BS.

    I am mindful of how this “technology” ultimately breeds a new type of mental instability – especially among the children….much worse of a slacking off of parental responsibilities than the TV babysitting your kid’s minds…

  77. Why the continuing brutal censorship of we-the-stupid who actually say something smart and good once in a while about how to get out of this mess…?

  78. I know that this is very “plebeian” but, my definition of capitalism (as we practice it) is as a un-numbered group of rats in a rotating cage:
    The cage must go faster and faster to satisfy the needs of the rats until the whole disintegrates.
    “Monetary” centrifugal force will collapse the world economy when that crucial line is crossed.

  79. Nice description of the intent behind the Glass/Steagall Act……and so many others that were implemented in the 1930’s to “protect” society from the outrageous ravages of “unbridled” capitalism.
    We need a “firewall” between the maniacal flows of speculative hot money capitalism and the true progressive needs (read: not “desires”) of a society.
    “Regulatory Capture” has succeeded for banks/financial houses exceeding their wildest dreams and has crushed our society.

  80. +1000

  81. another +1000!

  82. You have lost your right to be called, “citizen”

  83. Now you know why our community police forces have been mostly “militarized” over the past 30 years!

  84. Bruce E. Woych

    State of the Union January/February 2011 ATLANTIC MAGAZINE Sunday, January 9, 2011

    The Atlantic Home
    The Tyranny of Defense Inc.

    In 1961, Dwight Eisenhower famously identified the military-industrial complex, warning that the growing fusion between corporations and the armed forces posed a threat to democracy. Judged 50 years later, Ike’s frightening prophecy actually understates the scope of our modern system—and the dangers of the perpetual march to war it has put us on. (full article links below):
    By Andrew J. Bacevich

    http://www.theatlantic.com/magazine/archive/2011/01/the-tyranny-of-defense-inc/8342/ (page 1of 3)
    http://www.theatlantic.com/magazine/archive/2011/01/the-tyranny-of-defense-inc/8342/2/ (page 2 of 3)

    http://www.theatlantic.com/magazine/archive/2011/01/the-tyranny-of-defense-inc/8342/3/ (page 3 of 3)

    “The national-security state continues to grow in size, scope, and influence. In Ike’s day, for example, the CIA dominated the field of intelligence. Today, experts refer casually to an “intelligence community,” consisting of some 17 agencies. The cumulative size and payroll of this apparatus grew by leaps and bounds in the wake of the September 11 attacks. Last July, TheWashington Post reported that it had “become so large, so unwieldy and so secretive that no one knows how much money it costs, how many people it employs, how many programs exist within it or exactly how many agencies do the same work.” Since that report appeared, U.S. officials have parted the veil of secrecy enough to reveal that intelligence spending exceeds $80 billion per year, substantially more than the budget of either the Department of State ($49 billion) or the Department of Homeland Security ($43 billion).

    The spending spree extends well beyond intelligence. The Pentagon’s budget has more than doubled in the past decade, to some $700 billion per year. All told, the ostensible imperatives of national security thereby consume roughly half of all federal discretionary dollars. Even more astonishing, annual U.S. military outlays now approximate those of all other nations, friends as well as foes, combined.”

    http://www.theatlantic.com/magazine/archive/2011/01/the-tyranny-of-defense-inc/8342/3/

  85. Bruce E. Woych

    bmeisen: (et. al…):

    Selected reference bibliography for the political economy of crisis and legitimation:
    I have a copy of FOOL’S GOLD (Gillian Tett) and it is a much more objective insider’s depiction of market realism in action. The larger book created in 1990 The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (Ron Chernow) is a more comprehensive work overall, and I say this as an Anthropologist (certainly supporting Tett’s critical understanding on the clockwork of financial malfeasance that she witnesses and reports; eg: financial journalism with a PhD in social anthropology). Nevertheless it is hard to ignor the staying power of Liar’s Poker by Michael Lewis which ends up teaching from experience as it informs us at the very threshold of the derivatives entry into the Milken world of metaphysical finance, greed and deceit. Milken was directly involved in the S&L Swindles from those days [*INSIDE JOB: THE LOOTING OF THE SAVING'S & LOANS: (1991 paper ED) Stephen PIZZO, M. Fricker & P. Muolo] and today he is head of the Milken Institute (basically a wealth club of privilege) instead of being in jail. To round this sector one might find some historic foundation to all this in a starter by Joel Bakan entitled “the Corporation: The Pathological Pursuit of Profit and Power. published in 2004 by the Free Press.

    From an anthropological perspective, you may want to check out Janine R. Wedel’s SHADOW ELITE:How the World’s New Power Brokers undermine Democracy, Government, and the Free Market 2009. Certainly THE SHOCK DOCTRINE : the Rise of Disaster Capital is a financial eye opener as well (by the journalist Naomi Klein). Complimenting the insights from these is William Brittain-Catlin’s
    OFFSHORE: The Dark Side of the Global Economy 2005.Finally on the global supply chain profile and modeling (business / corporate: not political-military), you might want to study HUNGRY CORPORATIONS: Transnational Biotech Companies Colonise the Food Chain.
    (2003)by Helena Paul and Ricardia Steinbrecher; …along with Jonathan Beaty & S.C. Gwynne’s THE OUTLAW BANK: A Wild Ride into the secret heart of BCCI. (out in 1993 but is the grand daddy model of all this hooligan global finance).

    On the domestic front again it is difficult not to mention the compelling political journalism of Russ Baker with his FAMILY OF SECRETS
    expose (2009) simply because it interjects so much into understanding the current corporate corruption model of American finance and public sector crisis. Leaning closer into the theoretical history of politics and corporate corruption is Ted Nace’s GANGS OF AMERICA: The Rise of Corporate Power and the Disabling of Democracy (2003).

    Finally, getting back to the question of bailouts or looting at hand, one might consider the book by Nomi Prins (2009) IT TAKES A PILLAGE: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street (Wiley); The WEB of DEBT: The shocking Truth about our Money System and How We Can Break Free (2007, 2008) Ellen Hodgson Brown, J.D. and last but not least THE BUYOUT OF AMERICA: How Private Equity will Cause the Next Great Credit Crisis. (2009) by Josh Kosman.

    I have tried to avoid the theoretical in favor of the critical descriptive depictions of factual data for every reader to discern for themselves. I hope the material speaks for itself and serves you well. B.E.W.

  86. @ Bruce

    You forgot to mention Ivan “The Terrible” Boesky the brains behind Milkin – “He who dies with the most toys wins”, this not so mad Russian was once quoted as saying…Nice!

    PS. Ivan has been showing Eastern Europe the ropes for over 20 years – now isn’t that special?
    Ref via Google: Traffic – “The Low Spark of High Heeled Boys”

    As always Bruce great digging :-)

  87. Bruce E. Woych

    SO RIGHT EARLE! But then I skipped the entire military industrial input to the problems; the reactionary shadow cold war which evolves into the current intelligence community; CORPORATE WARRIORS (P.W. SINGER:2003)…MAKING A KILLING: How Corporations use Armed Force to Do Business (Madelaine Drohan: 2003)…
    SELLING OUT: How Big Corporate Money Buys Elections, Rams through Legislation and Betrays our Democracy. by Mark Green (2002…well before the current constitutional crisis over Corporate Leviathan control & Supreme Court complicity). And I probably should not have left out William Black’s The Best Way to Rob a Bank is to Own One…contribution as well.

    But thanks for the opportunity Earle: it feels more complete now.

    For your consideration, think about the power behind this magnitude of money and the overall issue of perverted incentives:

    State of the Union January/February 2011 ATLANTIC MAGAZINE Sunday, January 9, 2011

    The Atlantic Home
    The Tyranny of Defense Inc.

    In 1961, Dwight Eisenhower famously identified the military-industrial complex, warning that the growing fusion between corporations and the armed forces posed a threat to democracy. Judged 50 years later, Ike’s frightening prophecy actually understates the scope of our modern system—and the dangers of the perpetual march to war it has put us on. (full article links below):
    By Andrew J. Bacevich

    http://www.theatlantic.com/magazine/archive/2011/01/the-tyranny-of-defense-inc/8342/ ; (page 1of 3)
    http://www.theatlantic.com/magazine/archive/2011/01/the-tyranny-of-defense-inc/8342/2/ ; (page 2 of 3)

    http://www.theatlantic.com/magazine/archive/2011/01/the-tyranny-of-defense-inc/8342/3/ (page 3 of 3)
    “The national-security state continues to grow in size, scope, and influence. In Ike’s day, for example, the CIA dominated the field of intelligence. Today, experts refer casually to an “intelligence community,” consisting of some 17 agencies. The cumulative size and payroll of this apparatus grew by leaps and bounds in the wake of the September 11 attacks. Last July, TheWashington Post reported that it had “become so large, so unwieldy and so secretive that no one knows how much money it costs, how many people it employs, how many programs exist within it or exactly how many agencies do the same work.” Since that report appeared, U.S. officials have parted the veil of secrecy enough to reveal that intelligence spending exceeds $80 billion per year, substantially more than the budget of either the Department of State ($49 billion) or the Department of Homeland Security ($43 billion).
    The spending spree extends well beyond intelligence. The Pentagon’s budget has more than doubled in the past decade, to some $700 billion per year. All told, the ostensible imperatives of national security thereby consume roughly half of all federal discretionary dollars. Even more astonishing, annual U.S. military outlays now approximate those of all other nations, friends as well as foes, combined.”

    http://www.theatlantic.com/magazine/archive/2011/01/the-tyranny-of-defense-inc/8342/3/

  88. Steve,

    Interesting. No need to mark to market an equity stake?

    Maybe not. But how is that good accounting? Reinforces Simon’s post.

    For what it is worth, I’d love to see some justification to get $50 billion worth of web ads. Or is FB to be monetized some other way?

  89. Well, there is no market, so nothing to mark to, except the last private transaction. Of course, this is getting muddier because of the secondary markets that are developing. However, these secondary transactions are often/always common shares, not the preferred shares that investors hold.

    Where it gets interesting is if their is an impairment or change of circumstances, absent a transaction. Then the investors use there own judgement to change (or not) their valuation. Which can lead to wildly different valuations by different firms for the same security.

    The good news is that this is not really a big deal, or any deal, in terms of systemic risk.

  90. Today I just discovered Simon Johnson’s & James Kwak’s very interesting materials.

    In the spirit of the well received article that I authored with support of Rick Bookstaber (also from MIT) “Preparing for an Audit Mandate to Contribute to Systemic Risk Anticipation”, http://www.accountant.nl/Accountant/Opinie/Meningen/Preparing+for+an+Audit+Mandate+to+Contribute+to+Sy.aspx,addressing remediation to moral hazard, I think the following developments in the international auditing and computing science communities will interest you.

    1. The Jacquard project by the Dutch National Center of Mathematics and Computer Science, in cooperation with PricewaterhouseCoopers, the Dutch Tax Office and ComputationalAuditing.com, see:
    http://www.cwi.nl/en/2010/1064/Software-engineering-researchers-and-audit-experts, with an introduction at the 21st World Continuous Auditing and Reporting Symposium, with the title “Building a Domain-Specific Language to Capture Concepts and Methods of the Owner-Ordered Audit Tradition”, see: http://raw.rutgers.edu/21wcars and http://raw.rutgers.edu/docs/wcars/21wcars/presentations/WCAS_21_Elsas.pdf

    2. The Smart Auditing course organized by the research School for Information and Knowledge Systems (SIKS), a network institute in which over 450 research fellows and Ph.D. students from 11 different universities collaborate, and accredited by the Royal Netherlands Academy of Arts and Sciences, see: http://www.siks.nl/SA-2010.php and http://www.slideshare.net/PhilipElsas/siks-elsas-final2
    Especially this last link shows more details of the proposed solution approach to remediate moral hazard, although some parts are of quite a technical nature,

    Philip Elsas
    ComputationalAuditing.com

  91. Bruce E. Woych

    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=6087

    contact@therealnews.com

    TRNN is opening up a channel of interactive commentary & communication.

    If you want a dose of some truth, listen to this editorial commentary:

    January 12, 2011
    The Tucson Shootings, Civility And The New Class War Zone
    Instead of using ‘civility’ to cover up reality, how about a people’s civility intended to reveal it.

    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=6087

  92. Bruce E. Woych

    http://www.nytimes.com/2011/01/12/technology/internet/12myspace.html?src=un&feedurl=http%3A%2F%2Fjson8.nytimes.com%2Fpages%2Ftechnology%2Findex.jsonp

    Hot Social Networking Site Cools as Facebook Grows
    By TIM ARANGO
    Published: January 11, 2011
    As Facebook was negotiating a half-billion-dollar investment from Goldman Sachs recently, MySpace, once the dominant Web site for social networking, was preparing to fire nearly half its staff.
    (more at the link from the NY Times above) printed in the paper 1/12/2011

  93. I love you guys and I love your work but I really dont see what the hoopla is on this one. Am i missing something? possible.

  94. Bruce E. Woych

    http://www.alternet.org/story/149545/twitter_is_hero_as_feds_attempt_to_trample_wikileaks%27_free_speech?page=entire

    AlterNet / By Ida Hartmann
    Twitter Is Hero as Feds Attempt to Trample WikiLeaks’ Free Speech
    Twitter was willing to challenge a grand jury subpoena, but it is unlikely the same can be said about Google and Facebook.

    also check out the protest letter here:

    http://anonops.blogspot.com/2011/01/open-letter-to-department-of-justice.html

  95. This is a nice post. I am a new member of this site and I am excited to share to anyone this upcoming event.

    Mega Call – Sneak Preview on January 24th at 5 pm PST – 8 pm EST
    T. Harv Eker, Ryan Lee, Randy Garn, Brian Tracy, Barbara de Angelis, Jim Kwik, Brad Wozny, Gary Spirer etc.

  96. So far, no one has mentioned that the initial funding for Facebook came from the CIA. The board of directors and the mentors to Facebook mostly come from the spy community, which makes sense: mine valuable data about the American people and use it to the CIA’s advantage. There exists not a single “valuable” company out there that is NOT funded and/or monitored by the US intelligence community. If something is too valuable, then the CIA isn’t about to let you keep it.