They will never admit to this at Goldman Sachs (they don’t really fess up to much over there at the Big G) but in the fall of 2008, just after the Lehman Brothers bankruptcy gave the world a lesson in systemic risk, Goldman, the world’s greatest risk taker, was finished too.

That’s right, it was toast. Finished. Kaput. Until, that is, the firm that was built on wheeling and dealing in some of the most esoteric investments the world of high finance had ever seen, needed a government bailout to stay afloat, which included $10 billion in cash from the Treasury Department (granted by its former CEO, then-Treasury Secretary Hank Paulson) and more importantly, full access to the Federal Reserve’s discount window to be a commercial bank.

Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume some of the same risk-taking activity that got it in trouble in the first place.

Goldman, of course, is a commercial bank like no other. You won’t confuse Goldman with the ol’ Bailey Building & Loan. It has no customer deposits—which are what the access to the discount window was first set up to protect—and you won’t be getting a toaster or a debit card from Goldman Sachs anytime soon.

But being a bank has its rewards. With full access to the discount window, Goldman can now borrow cheaply and massively from the Fed in a pinch, and because of that access, it can borrow more cheaply in the credit markets. It’s a loophole that has allowed Goldman to turn back the clock and once again resume much of its risk-taking activities, only this time it’s being financed by the American taxpayer.

There are, of course, many urban legends about Goldman and how it uses its clout in Washington and in the financial business (both Paulson and another former CEO, Robert Rubin held the Treasury secretary post) to advance its allegedly nefarious corporate agenda.

Recent reports have the firm gaming the energy markets, creating the dot-com bubble, and the subprime-debt crisis that took down Wall Street, and then for a time benefitting from its implosion when it “shorted” subprime-related investments, a trade that allowed the bank to profit from the downward spiral. (Hell, I’m sure there are people who also believe Goldman was somehow behind the swine-flu epidemic to corner the market on drug stocks.)

Some of these stories have a basis in fact and some don’t—I’ll leave it up to the reader to figure this out—but what is true is equally disturbing: Goldman Sachs, which was bailed out by the federal government, is now using the bailout to resume the many of the same risk-taking activities that got it in trouble in the first place.

The question I have, of course, is why is the Obama administration, which has decried corporate greed whenever it’s politically feasible, allowed Goldman all the advantages of a bank, when it is really a big hedge fund?

The Treasury Department won’t say and it’s obvious why Goldman is doing what it is doing: Money, and lots of it. The firm announced Tuesday morning that net income for the second quarter was $3.44 billion, while its biggest rival, Morgan Stanley, is likely to announce a quarterly loss.

And it all comes down to risk, or to be more precise, how much risk Morgan is willing to take on the taxpayers’ dime compared to what Goldman Sachs is now taking. Morgan Stanley’s CEO John Mack, chastened by the firm’s own near-implosion last year when it too was forced to become a bank, has radically reduced the amount of borrowing, or “leverage,” Morgan is taking in trading. People inside the firm say it’s difficult to meet client demands without borrowing money.

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“We just can’t get anything done,” said one senior Morgan Stanley executive, speaking on the condition of anonymity. Borrowing to finance trades amplifies gains, but it also amplifies losses when trades go bad. During the first quarter of 2009, Morgan borrowed just $11 for every dollar it had in capital (by comparison during the Wall Street boom, firms borrowed as much as $35 for every dollar in capital), while Goldman borrowed a significantly higher amount—close to $15 for every dollar it has in capital. “Our leverage is the result of risk-taking on behalf of our clients,” Goldman spokesman Lucas van Praag says about the strategy.

And keep in mind this is only for the first quarter. Goldman’s second-quarter leverage is likely much higher given the fact that interest rates have remained remarkably low. Those low interest rates have had another benefit—it has allowed Goldman to make winning bets in the bond markets (bond prices rise when interest rates fall), the same place that decimated Wall Street in 2007 and 2008.

Of course, there are lots of reasons for Goldman’s success. The firm has amazing intellectual capital; some of the smartest people in the world of finance work there. It also knows how to game the system better than any firm on the face of the earth. Case in point: In mid-September 2008, when the world was crashing following Lehman’s bankruptcy, Goldman held $13 billion in highly risky mortgage bonds known as collateralized debt obligations. These bonds were insured by American International Group, which itself was about to go bankrupt.

Without that insurance, Goldman itself would have imploded because the bonds would have been marked down to just pennies on the dollar. The rescue of AIG was supposed to prevent a large-scale crash of the financial system, but it also prevented a crash of Goldman Sachs, which bought those crappy CDOs from Merrill Lynch, which was forced to find a buyer (Bank of America) because it too held the same sludge.

The Goldman purchase of the Merrill CDOs is proof positive that the geniuses at Goldman screw up like everyone else. And I don’t buy van Praag’s spin on the firm’s famous hedges that minimized its losses because the smart money in the markets didn’t at the time. Goldman’s shares were in a freefall, bottoming out at around $50 in the fall of 2008, compared to close to $235 just a year earlier.

Now with all the government help, Goldman is marching its way back up to $235 a share—trading at around $150 Monday—by embracing much of the same risk that nearly led to its demise. It would be nice, though, if the next time Goldman losses money taxpayers didn’t foot the bill.

By PAUL CRAIG ROBERTS

Professor Michael Hudson (CounterPunch, March 18) is correct that the orchestrated  outrage over the $165 million AIG bonuses is a diversion from the thousand times greater theft from taxpayers of the approximately $200 billion “bailout” of AIG.  Nevertheless, it is a diversion that serves an important purpose.  It has taught an inattentive American public that the elites run the government in their own private interests.

Americans are angry that AIG executives are paying themselves millions of dollars in bonuses after having cost the taxpayers an exorbitant sum.  Senator Charles Grassley put a proper face on the anger when he suggested that the AIG executives “follow the Japanese example and resign or go commit suicide.”

Yet, Obama’s White House economist, Larry Summers, on whose watch as Treasury Secretary in the Clinton administration financial deregulation got out of control, invoked the “sanctity of contracts” in defense of the AIG bonuses.

But the Obama administration does not regard other contracts as sacred.  Specifically: labor unions had to agree to give-backs in order for the auto companies to obtain federal help;  CNN reports that “Veterans Affairs Secretary Eric Shinseki confirmed Tuesday [March 10] that the Obama administration is considering a controversial plan to make veterans pay for treatment of service-related injuries with private insurance”;  the Washington Post reports that the Obama team has set its sights on downsizing Social Security and Medicare.

According to the Post, Obama said that “it is impossible to separate the country’s financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.”

After Washington’s trillion dollar bank bailouts and trillion dollar gratuitous wars for the sake of the military industry’s profits and Israeli territorial expansion, there is no money for Social Security and Medicare.

The US government breaks its contracts with US citizens on a daily basis, but AIG’s bonus contracts are sacrosanct.  The Social Security contract was broken when the government decided to tax 85% of the benefits.  It was broken again when the Clinton administration rigged the inflation measure in order to beat retirees out of their cost-of-living adjustments.  To have any real Medicare coverage, a person has to give up part of his Social Security check to pay Medicare Part B premium and then take out a private supplemental policy.  The true cost of Medicare to beneficiaries is about $6,000 annually in premiums, plus deductibles and the Medicare tax if the person is still earning.

Treasury Secretary Geithner, the fox in charge of the hen house, has resolved the problem for us.  He is going to withhold $165 million (the amount of the AIG bonuses) from the next taxpayer payment to AIG of $30,000 million. If someone handed you $30,000 dollars, would you mind if they held back $165?

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PR flaks have rechristened the bonus payments “retention payments” necessary if AIG is to retain crucial employees.  This lie was shot down by New York Attorney General Andrew Cuomo, who informed the House Committee on Financial Services that the payments went to members of AIG’s Financial Products subsidiary, “the unit of AIG that was principally responsible for the firm’s meltdown.”  As for retention, Cuomo pointed out that ”numerous individuals who received large ‘retention’ bonuses are no longer at the firm” .

Eliot Spitzer, the former New York Governor who was set-up in a sex scandal to prevent him investigating Wall Street’s financial gangsterism, pointed out on March 17 that the real scandal is the billions of taxpayer dollars paid to the counter-parties of AIG’s financial deals.  These payments, Spitzer writes, are “a way to hide an enormous second round of cash to the same group that had received TARP money already.”

Goldman Sachs, for example, had already received a taxpayer cash infusion of $25 billion and was sitting on more than $100 billion in cash when the Wall Street firm received another $13 billion via the AIG bailout.

Moreover, in my opinion, most of the billions of dollars in AIG counter-party payments were unnecessary.  They represent gravy paid to firms that had made risk-free bets, the non-payment of which constituted no threat to financial solvency.

Spitzer identifies a conflict of interest that could possibly be criminal self-dealing.  According to reports, the AIG bailout decision involved Bush Treasury Secretary Henry Paulson, formerly of Goldman Sachs, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and currently Secretary of the Treasury.  No doubt the incestuous relationships are the reason the original bailout deal had no oversight or transparency.

The Bush/Obama bailouts require serious investigation.  Were these bailouts necessary, or were they a scam, like “weapons of mass destruction,” used to advance a private agenda behind a wall of fear?  Recently I heard Harvard Law professor Elizabeth Warren, a member of a congressional bailout oversight panel, say on NPR that the US has far too many banks.  Out of the financial crisis, she said, should come consolidation with the financial sector consisting of a few mega-banks.  Was the whole point of the bailout to supply taxpayer money for a program of financial concentration?