All posters, except thrill, seem to have fundamentally misread the article. It isn't about Facebook or GS for that matter. Its concern is that several banks including GS have a "too big to fail" subsidy. That subsidy is an implied insurance against failure. Let's say you are GS management and you have two possible investment choices: 1) A safe boring sure thing financed with little leverage that will bring in somewhere between 5% and 10% yearly return, or 2) A speculative leveraged investment that would bankrupt the company if it failed, but would make 50% a year if it succeeds. Which would you do? If 2 fails, the taxpayers pick up the bill and you can try again, if it succeeds you get substantially richer. This isn't capitalism in the sense that you learned in school. It's crony capitalism of the sort that the US has always rightly criticized in "other" countries. It doesn't make it right when it's practiced in the US.
I would argue that the consolidation of (fiscal) power into a few large centralized institutions can be a natural outcome of capitalism, since an increase in the size of an institution (either through growth or acquisition) can offer more profit opportunities. Now if you view a corporation through the traditional lens of being sociopathically focused on profits, then it is natural for it to seek a position where its failure would catastrophically affect too many people for responsible governments to allow, as a sort of insurance. It's not "crony capitalism", it's unbridled capitalism. On the other hand, placing oligopoly restrictions to prevent the growth of corporations beyond a certain size and impact isn't (in a very strict sense) "capitalism". We already think that monopolies are bad, but where do you draw the line with oligopolies? 3 large banks? 5? 20? GS subsidizing FB, and the taxpayer subsidizing GS seem to be very natural outcomes of an unrestricted business environment and a mandate to generate profits.
NOTE: not trying to take a left or right stance here, just viewing matters through the fun lens of mathematical optimization.
There are two things that make this particular case so interesting.
(1) Facebook is still technically a < 500 shareholder company, subject to a "special case" set of rules for reporting. In 1964, regulators started requiring companies with more than 499 shareholders to publicly report their financial results. (source: http://dealbook.nytimes.com/2011/01/05/the-500-investor-thre...
) Facebook isn't there, but if EVER there were a case where this old-fashioned rule should not apply, it would be here. Goldman-Sachs IS (indirectly) benefiting from a "free" pool of money that comes from taxpayers. It's no longer a private-company issue.
(2) employee-owned shares typically do not count toward the 500-investor limit. But once those shares are sold on a private exchange — often after employees leave the company — they are no longer exempt. This is interesting because Facebook has "1700+" employees, which is far more than the kind of small "we need protection" private companies that the 1964 rule set out to protect.
I think a better title would be: why are we pumping up the next bubble with debt rather than equity?
I don't really worry about Goldman Sachs or Facebook. They are both best of breed and they handle themselves very well. The real danger here is that we are entering an era where risk capital is being financed through the debt, rather than the equity, markets. This is entirely inappropriate as most risk capital is lost and the 10% or so that does return is supposed to make up for the other 90%. Can you imagine how bad the current financial crisis would be if 90% of real estate was not just underwater but completely worthless?
Most risk capital is lost? We hold risk capital for a 7bp event (99.93% chance the situation will be better than this). Then we have prudent margins. Why the fuck would we burn through 90% of our risk capital most of the time?
Couldnt we apply this argument to ANY company goldman invests in? So what is the call to action here? Goldman should not play bank and thus not lend money?
This editorial is a not-entirely-successful attempt to conflate two different topics of discussion: FB's valuation (and Goldman's market-making involvement therein), and the dangers of leverage in the financial sector.
It's quite likely that Goldman would have made this play with FB regardless of its current special access to federal dollars, thus making the two topics incidentally and not fundamentally related.
I would say that it is very likely Goldman would have made this play regardless of it's federal guarantees. The difference - and the author's point - is that there is less systemic risk in this scenario because Goldman would get the $450M through the equity markets rather than through the debt markets.
The author's point is that we have created a system where risk capital is being financed through debt rather than equity.
Indeed. The last hit piece the NYT ran on this topic explains why: this deal is likely to make Goldman, Facebook, and all the investors who buy into Goldman's SIV a lot of money.
Also, this deal is peripherally related to bailouts at best. Goldman will not require a bailout even if they lose their entire $500 million investment (i.e., if Facebook goes bankrupt tomorrow, which is exceedingly unlikely) - Goldman has a market cap of $90 billion.
Even if Facebook's valuation isn't a bubble valuation (as I've argued previously) it is certainly the case that money lent at excessively low interest rates will create bubble valuations.
What can you do about it? You could stop accepting dollars, I suppose.
If you can buy gold with dollars lent to you at excessively low interest rates while the taxpayers shoulder the risk that gold prices might crash, that would be a viable way to take advantage of the situation.
But I was asking how to improve the situation. Does buying gold improve the situation in some way that is not obvious to me?
As gold supply is relatively fixed, it's harder to manipulate than valuations of internet companies. Spending dollars on gold rather than stocks will reduce the stock bubble risk and reduce price for dollars (measured in gold / $), so reducing your vulnerability to dollar bubbles caused by government policies.
It's not perfect but it's a form of insurance. Based on recent gold prices, it looks like many people are taking that insurance.
Essentially I'm agreeing with you - stop accepting dollars, use gold instead.
Accurate version: Goldman finances its operations through debt rather than equity because of it's explicit federal backing. The risk capital it is investing in Facebook is therefor debt rather than equity. Facebook is so hot right now that it is probably overvalued. This leads to a debt bubble - rather than an equity bubble - which is much more painful for the economy.
That isn't to say, of course, that it's reasonable to finance buying its stock with implicitly-taxpayer-guaranteed loans. The calculations I linked above suggest that Goldman thinks there's a very large chance that this investment will turn out to be worthless.
There have been a whole run of nytimes stories that have the same second half of the text about "the obama administration" and goldman sachs getting access to cheap government money.
With a different - what they have done this time - first paragraph. It seems like somebody at the NYT doesn't like either GS or the Obama adminsitration.
In this case GS are doing something naughty - but they aren't borrowing government money to do it, and since they aren't even investing their own money it's hard to see why they would need to
GS (and other favored companies) doesn't need to actually borrow - they gain advantage by having access as needed to 'government money', better defined as coercively (you know - prison if you don't give it) acquired taxpayer money. Merely having that access is the advantage - they can take greater risks - and reap greater rewards - than others because of it.
Laissez-faire capitalism at work! No really, can somebody explain why institutions like this are allowed to have such advantages over their competition? This seems like it would be an easy political target FROM ALL SIDES of the aisle. "Big government" messes with the "free market" and the "rich get richer".
::EDIT::
Since I can't respond to my sub comments at this point, the first sentence, is, in fact, sarcasm.
My first sentence was sarcasm. I indeed did look it up to verify its meaning and to determine that it was what I wanted to say, even though the term was not unfamiliar to me.
I don't think it is a matter of Obama, Paulson had a huge moral hazard during TARP as an ex-GS leader. I think there's a general anti-GS sentiment from the Paulson induced 100% bailout of AIG counter-parties.
Subsidizing the social networking bubble? Email was totally monetized by companies like RIM and now large hardware firms that sell the email server stuff. However social network is being monetized in the direction of at the very least advertising, putting real money behind the valuations of these companies like Facebook. Sure advertising is a fickle beast, but the majority of companies(i.e. everyone but Twitter) have more than vaporware making up their business models.
