OPPORTUNITY KNOCKS, BUT GOLDMAN MUST ANSWER

1/26/11

While we are waiting for the Illinois Supreme Court to (probably) assure us that Rahm Emanuel has resided for the past year or so not where he actually lived but where he intended to live, we are presented with an opportunity to visit another area of inquiry and/or commentary. And I am not talking about the endless stream of banalities, platitudes, and pabulum that the State of Union address has become over the last forty or so years.

In an article on page A9 entitled “Europe’s Fate Still Looms In Davos,” today’s (i.e., Wednesday, 1/26’s) Wall Street Journal reports that Dirk Schumacher, a Goldman Sachs analyst, contends that Spain (whose economy, the same article reports, is twice the size of that of Ireland, Greece, and Portugal combined; an interesting fact of which I was not aware) faces not a solvency crisis (i.e., an inability to pay its debts), but, rather, a liquidity crisis (i.e., a temporary inability to make payments when they are due). Mr. Schumacher says that Spain’s debt can be stabilized at 90% of its GDP. Others, of course, disagree and argue that Spain, primarily because of the financial problems of its regional governments and banks, is in far bigger trouble and will follow Greece, Ireland, and Portugal to the EU trough.

This gave me an idea, or perhaps spawned a question, and it is a genuine question and/or idea, not a sarcastic and perhaps ironic knock on Goldman. While I, like many people, have a few problems with Goldman, I’m probably not among its severest critics and, in any case, this situation is not ripe for Goldman bashing.

I have no opinion on the depth of Spain’s financial difficulties; I just don’t know enough about the condition of Spanish banks and regions to formulate such an opinion. But if Goldman really believes that Spain is facing only a liquidity problem, isn’t there an opportunity, both financial and political, for Goldman here? Couldn’t Goldman raise some money for a bridge loan for Spain to tide it over its liquidity problems? One would think that Goldman could both put its own money where its mouth is and, probably more importantly, persuade institutional and institutionally sized individual investors, to invest in such a pool. Rates, of course, would have to be sufficiently high to compensate investors for the risk; this would be an investment, not a selfless rescue effort. Not only would Goldman and its partners make some money on the deal, but they could also do themselves some political good in the process, doing well by doing good, if you will. Further, should the effort prove successful, the pool could be expanded and used to provide temporary financing to other countries that Goldman believes face a liquidity crisis.

Spain would balk at paying market rates when funds would probably be made available at concessionary rates from one of the rescue facilities that the EU has put in place. But for those of us who believe in markets, and the discipline they impose on their participants, this might be an avenue that the EU, Goldman, Spain, and similarly situated countries might want to investigate.