Why US householders are facing ARMaggedon
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Goldman Sachs is clearly “on top of the world” just like the papers say. The financial industry dominates the universe. And its masters report for work at Goldman.We are full of questions. When a company is already on top of the world, where does it go next? And what kind of world is it that a company such as Goldman would be on top of?
It is a world that favours money shufflers and debt. After all, George W Bush did not ask the president of General Motors to take the highest financial post in the country, Secretary of the Treasury. No, he turned to the alpha firm of the whole slick skulk – the ‘biggest hedge fund in the world’, Goldman Sachs.
Has an important financial deal been done in the last five years without Goldman’s fingerprints on it? Is there a derivative that Goldman has not created, promoted or traded? Is there any bond, mortgage or IOU in all the world that does not mention Goldman somewhere in the small print?
No, that’s why Lila Rajiva concludes that Goldman no longer merely trades the capital markets, Goldman IS the capital markets (see Why it's time to sell Goldman). The New York firm is practically a living legend. Its innovations, connections, and ambitions helped turn America into Speculation Nation. And now the credit bubble that Goldman helped to create threatens not only the world economy – but Goldman itself.
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In the whole dark night of history from the beginning of United States of America to the dawn of the 21st century, the nation accumulated $5.7trn in gross federal debt. Six years into the next millennium – it is hardly even time for breakfast – and now the figure is half as much again. In those same first years of this century, US mortgage debt rose by an additional $3trn, much of it in diabolical ARMs – adjustable rate mortgages – where payments go up after the teaser rates expire. Nor is all that money used to buy houses; ‘equity extraction’ rose to more than 9% in the third quarter of 2005.
Meanwhile, Goldman’s worldwide trading has helped stimulate and facilitate insolvency at home and abroad. When a big corporation – or even a sovereign nation – wants to borrow money, to whom does it turn? Goldman, of course. This trillion dollar trade in debt has helped the US fund a current account deficit equal to 7% of the GDP. And it lured the world’s richest nation – with a net asset position with the rest of the world, equal to 5% of GDP – into becoming the world’s biggest debtor, with a negative net asset position equal to 20% of GDP.
And now the US householder faces a double problem. Interest rates are rising and so are his mortgage payments. More than $1trn worth of ARMs are scheduled to be ratcheted up this year. And another $1.7trn next year. Plus, his government – which also funded its spending with short-term financing at low rate – now must refinance trillions worth of its bonds at higher ones. No wonder they called Hank Paulson to the Treasury department.
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