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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Monday, June 10, 2013

Goldman Sachs Does Not Understand the Risks of TBTF

The following article is a good summation of what Goldman Sachs does not understand about TBTF which makes Goldman take greater risks than it should:

Goldman Says They Don't Benefit From A Too Big To Fail Funding Advantage
By John Carney, NetNet - Business Insider
. . . .
The Goldman researchers are practicing a bit of sleight-of-hand here. The argument about TBTF funding has never been predicated on the absolute funding levels of banks or the funding of big banks relative to small banks. Rather, it's that the expectation of government support lowers the cost of funds relative to what they would be otherwise.

To put it more simply, the TBTF funding argument is that Goldman, with implicit government support, pays less to issue bonds than Goldman without support would.
. . . .
In other words, there is a TBTF subsidy. It's not as large as it once was, probably because the financial crisis made it clear that the largest financial institutions are far more fragile than almost anyone suspected prior to 2008. But it's there and plain enough to see.

It's a bit disturbing that Goldman doesn't seem to understand this. Their misperception means that they are likely to misread or ignore market signals about the risks they take. Goldman—and the other TBTF banks—seem to still be blind to their own vulnerability—which is what got us in the financial crisis mess in the first place.

Read the whole article here


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