How Close Did We Get to the Brink?
Dec 14, 2009
Posted by Jody Eisenman | Filed under Uncategorized
Now that Wall Street and the banks seem to have stabilized, there is a claim by Goldman Sachs that they were never all that close to bankruptcy. On the other hand, we have Tim Geithner, secretary of the US Treasury, who asserts that not only was the entire financial industry at risk, but in an interview with Bloomberg television, “None of them would have survived” had the government stood aside and let the crisis run its course, he said. “The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run.”.
This opinion is hotly disputed by Goldman President Gary Kohn, who stated “we had cash”. I’m with Geithner on this one. First of all, we were in the midst of a classic run on the banks. If the major banks like Citi, Bank of America and Wells Fargo failed, it’s hard to see how any of these banks could have survived. Banks typically keep less than two percent of their deposits on reserve. There is no way they could have met the demand for withdrawals.
In addition, it is pretty much common knowledge that Goldman had massive counter party risk to AIG. Had AIG not been bailed out, there is a real good chance Goldman would have been in deep trouble. The really scary part of this is that banks are now paying record bonuses for 2009. It is very likely, IMO, that they are talking many of the same risks they took previously which led to disaster. Unless the leverage starts changing dramatically, it is entirely possible this could happen again. As Geithner stated, “the basis problem we face across the system is that executives were paid for taking imprudent risks”. Lets hope the Fed puts the appropriate controls in place going forward.
