Out of Control Policy Blog

What Goldman's Recovery Means

The President said in a speech today that, thanks to him, things are looking up. Speaking at Georgetown University the President said measures introduced by his administration to help pull the country out of recession have been saving jobs and thawing the frozen credit market. How much the Obama (and Bush) administration will help or hurt the economy long-term will be a debate for history, ultimately. But what can we learn from short-term signals about the supposed success of government intervention?

Despite being down at the lunch hour, Wall Street has had a rebound over the past week or so, leading some to believe the bottom has been found. Also, some of the banks have begun returning bailout money, and, in particular, big name investment firm Goldman Sachs is looking to give back the $10 billion it received last October too. And, sticking with the Goldman theme, the financial giant announced today it had raised $5.5 billion from investors to start a "fund dedicated to buying private equity investments on the secondary market."

The question is, does the Wall Street bounce and Goldman success mean that government programs to capitalize the banks or create means of getting toxic assets ("Legacy" assets) off bad bank books have been a success? If the President is to claim that his policies are the cause of the market's success or the recovery of businesses, then there should be some clear cause-effect relationship. Right? But proving causality won't be easy.

For instance, the market bounce could be explained by realizing that there was a big sell off from hedge funds towards the end of the first quarter to pay back clients nervous about the economic climate (see this post from March 28 for more about that). With sell offs pushing the market lower it created cheaper buys for bargain hunters. And after all, the Dow is still only around 8000, just barely more than half of its height in 2007. All that to say, given the number of times the Dow has dropped during or after an Obama speech, I doubt the President can (or wants to) take credit for success in the financial markets (because he'd also need to take the blame).

What about the banks? It still seems that the banks that were good before the bailouts are the only ones really thriving (like BB&T or Wells Fargo). And Goldman is doing well because it didn't really need the bailout money in the first place. They were one the banks many believe were "forced" to take bailout money from the Paulson Treasury Department. Currently, Goldman has about $111 billion in cash and cash-equivalent securities on hand. They don't necessarily "need" the $10 billion the government gave them. They certainly don't want to pay the interest accruing on that loan. So its not like the capitalization program necessarily saved them. It could be argued that the government bailout of firms like AIG that were able to pay back their creditors, one of them being Goldman, did help keep the firm above water, but from all appearances, the firm would have survived that too.

And besides that, the banks giving the money back are doing it because they don't want to be controlled by the Treasury Department. With the Pay for Performance Act still in the Senate, potentially allowing Secretary Geithner power to set salaries from executives to janitors, no wonder banks are giving the cash back fast.

It could be argued that the Obama plans are helping, but there are plenty of other reasons for why good things are happening in the market right now.

UPDATE: As a clarification, Goldman has cash on hand and is better off than a lot of firms, but they are still a struggling firm, not exactly thriving. Thanks to Kellen D. for the comment.

Anthony Randazzo is Director of Economic Research


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