In fact, he's right. The government is implicitly putting taxpayer money behind the Facebook investment. But if economic columnists had cause to question every business decision made with the tailwind of government money, we'd be even more repetitive and boring than we are already.
If "too big to fail" poisons Goldman's decision-making, it's the tip of a colossal iceberg. Skip to content Site Navigation The Atlantic. Popular Latest. The Atlantic Crossword. Goldman is not a venture capital fund or primarily an equity-financed investment fund. It is a highly leveraged bank, meaning that it borrows through the capital markets most of the money that it puts to work.
As Anat Admati of Stanford University and her colleagues tirelessly point out , the central vulnerability in our modern financial system is excessive reliance on borrowed money, particularly by the biggest players. Goldman Sachs is a perfect example. Most of its operations could be funded with equity — after all, it is not in the retail deposit business. But issuing debt is attractive to shareholders because of the subsidies associated with debt financing for banks and to bank executives because their compensation is based on return on equity — as measured, that increases with leverage.
If banks have more debt relative to equity, this increases the potential upside for investors. It also increases the probability that the firm could fail — unless you believe, as the market does, that Goldman is too big to fail.
Social-networking companies should be able to attract risk capital and compete intensely. In , regulators started requiring companies with more than shareholders to publicly report their financial results. 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. But once those shares are sold on a private exchange — often after employees leave the company — they are no longer exempt. 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.
Most risk capital is lost? We hold risk capital for a 7bp event Then we have prudent margins. 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 author's point is that we have created a system where risk capital is being financed through debt rather than equity.
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.
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.
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