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Thursday, January 6, 2011

Taxpayer Backing for the Facebook Bubble

Taxpayer Backing for the Facebook Bubble
By Deal Book
January 6, 2011 8:13 AM

The Goldman Sachs deal with Facebook is essentially backed by
taxpayers’ dollars, Simon Johnson, a former chief economist at
the International Monetary Fund, writes at Economix.

Goldman, as a bank holding company, has “unfettered access” to
the Federal Reserve’s discount window — meaning that it essentially
has government-provided liquidity at any time, Mr. Johnson argued.

So Goldman, in pursuing its many farflung investments, can borrow
at a lower rate than it otherwise might, because creditors think the
government will be good for the loans even if the firm isn’t.

By some estimates, he writes, that is worth a 50-basis-point
discount on the rate Goldman pays on its loans.

Fannie and Freddie were badly mismanaged — and followed the
market in 2005-7 with bad bets based on excessive leverage —
in large part because they had an implicit government subsidy.

Those institutions should be euthanized as soon as possible.

Goldman Sachs now enjoys exactly the same kind of unfair,
nontransparent and dangerous subsidy: it has effectively
become a new form of government-sponsored enterprise.

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.

There is a difference between raising money for business, once
the defining activity of investment banks, and stoking shares in
a sector that is now everybody’s darling, and likely overblown.

By channeling debt guaranteed by the United States government to Facebook, Goldman is in effect inflating the valuation of social networking businesses, Mr. Johnson argues.

Social networking is a bubble in the sense that e-mail was a bubble.

The technology will without doubt change forever how we
communicate with each other, and this may have profound
effects on the nature of our society.

But investors will get carried away, valuations will become too high
and some people will lose a lot of money.

http://dealbook.nytimes.com/2011/01/06/taxpayer-backing-for-
the-facebook-bubble/

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