Let's Not Freak Out Over Goldman's 'Secret' $15 Billion Loan

By Daniel Indiviglio

In a splashy headline late Wednesday, Bloomberg reported: "Goldman Sachs Took Biggest Loan From Undisclosed 2008 Fed Crisis Program." Oh, those rascals at Goldman were the worst, sighs the average reader. Is this loan as big of a deal as Bloomberg is trying to make it out to be?

Here's Bob Ivry and Bradley Keoun at Bloomberg reporting:

Goldman Sachs & Co., a unit of the most profitable bank in Wall Street history, took $15 billion from the U.S. Federal Reserve on Dec. 9, 2008, the biggest single loan from a lending program whose details have been secret until today.

The program, which peaked at $80 billion in loans outstanding, was known as the Fed's single-tranche open-market operations, or ST OMO. It made 28-day loans to units of 19 banks between March 7, 2008, and Dec. 30, 2008. Bloomberg reported on ST OMO in May, after the Fed released incomplete records on the program. In response to a subsequent Freedom of Information Act request for details, the central bank disclosed borrower names, amounts borrowed and interest rates.

To be sure, this looks bad. There's this secret program that the Fed aggressively tried to keep under wraps, and Goldman was its biggest beneficiary? Well, not exactly.

First of all, this program wasn't so unusual or ground-shaking. As the second half of the article explains (to readers who got that far), it was really just an expansion of the Fed's longstanding open-market operations. The intent with the program was to pour a little pixie dust on the otherwise dead mortgage-backed securities market, since those securities were used as collateral for the loans. Because the Fed doesn't want to alienate its customers, it just likes to keep things secret.

Second, why does it matter that Goldman happened to take the biggest single loan? It didn't take the most loans or the greatest gross amount of funding. It just happened to take a very large one. For example, Deutsche Bank borrowed nearly twice as much as Goldman over the course of 2008. Credit Suisse borrowed about five times as much. Barclays, BNP Paribas, RBS, and UBS also borrowed more than Goldman.

So this loan program wasn't ill-intentioned, and Goldman was one of many banks to borrow a lot from the Fed. But that doesn't mean that the loan doesn't raise some questions.

Goldman famously denied that it ever wanted to be bailed out by the U.S. government. Supposedly, its former CEO and then Treasury Secretary Hank Paulson force fed the bank $10 billion, because he didn't want any big banks to appear sicker than others. If Goldman never needed that money, provided in October 2008, then why did it take a $15 billion loan from the Fed -- 50% larger than their bailout -- in December, two months later?

Presumably, the bank wanted this liquidity and felt that it could make a better return on the money during the 28 days that it lasted than the 1.16% interest rate that it would pay to the Fed. That isn't exactly nefarious -- it's just Goldman being Goldman. Of course the firm would want a big, ultra-cheap loan if it sees an opportunity to profit. Any other rational, profit-seeking bank should too.

Read the full story at Bloomberg.

This article available online at:

http://www.theatlantic.com/business/archive/2011/07/lets-not-freak-out-over-goldmans-secret-15-billion-loan/241559/