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Jul 14 2009, 11:28 am by Megan McArdle

Goldman Sachs' Fabulous Quarter

Even more fabulous than the sky-high forecasts, as Clusterstock lays out.  This is not actually hugely surprising, given that three of their biggest competitors went out of business or were acquired in the last year; as financial markets unfroze, Goldman, which had one of the cleanest balance sheets, was bound to see a hefty increase in their profits.

Still, the populists are bound to make hay out of this, and it's hard to blame them.

It is true that Goldman probably did not need the federal funds it accepted; Bernanke and Paulson pushed healthy banks to take funds as well as sick.   The idea was that if only the sick banks got money, that would send a strong signal to the market that they were in danger, and trigger the very run the feds were trying to prevent.

On the other hand, as Matt Yglesias and others have pointed out, whether they want to be or not, banks like JP Morgan and Goldman have gotten a great deal out of the government interventions.  For starters, they were the first and biggest beneficiaries of having the financial markets not collapse.  And now they enjoy an implicit guarantee that Uncle Sam will not let them fail because they are simply too important.  That is a very valuable and profitable guarantee to have.

I genuinely don't know what to do about this.  The libertarian answer is that the government should make a credible commitment not to bail out banks.  I'm pretty sure that's a bad policy idea, but leave that aside; the government can't make that commitment, because politicians cannot commit their future counterparts to action.  And I guarantee that if there is another crisis, politicians will intervene rather than risk another Great Depression.

Nor is the answer simply regulation.  A lot of that revenue is perfectly sound, boring stuff we want them to do, like underwriting equities.  I don't know where the government would get the legal authority to cap either their volume, or the salaries they pay their workers.  But that doesn't stop it from rankling.

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Comments (4)

ez

Megan-- do we really know whether their revenue is perfectly sound? Their earnings reports are vague and highly non-transparent. As a rule of thumb, investment banks profits are highly correlated to risk taking. The higher the risk taking and leverage, the higher the profits. This should give us some pause.

In an era of massive asset depreciation and shrinking earnings/profits across all industries, few IPOs or mergers, and a general flight from risk, I would be highly skeptical that they made enormous profits mainly due to plain vanilla equity underwriting. My guess is that a lot of profits were made in such highly risky ventures as currency arbitrage or trading in precious metals.

As Goldman is implicitly guaranteed by the US government, Goldman needs to guarantee the US public that they are making money without taking significant risks that could jeopardize the stability of the system or put the tax payer on the hook for an extraordinary amount of money. They have already profited enormously at taxpayer's expense from the AIG bailout, lack of regulation in the CDO market, fees generated from the treasury department for issuing our debt, and the implicit goverment backing of their industry-- a protection not granted by anyone else. They owe it to the American people to be honest and forward about their actions and should not automatically lauded for their brilliance.

We've seen many stories about brilliant business people who were actually engaged in reckless or fraudulent activity with major negative repercussions for the public(see Enron, Long Term Capital Management). We need to be skeptical and dig deeper.

Concerned

The fact is that in the end nothing will change. The government will continue to bail out corporations and in the end taking our future from us and the corporations will continue to take unwise (to any rational person, unless you factor in the fact that they are guaranteed by the government and therefore truly wise) gambles in order for those running the company and those in the company to profit wildly.

People must understand by now that our government is part of the problem and certainly not part of the solution.

Our country and it's very structure is broken and the system that is broken cannot possibly fix itself. The problem to it all is that everyone was duped by Obama's platform of change and still think that he is working for the little guy.

Until we all accept that fact we will simply be continuously dissapointed.

Vermando

As pointed out by EZ, Ms. McArdle's report is incomplete without mentioning that Goldman was paid 100% on the dollar for its terrible bets on AIG - it did not need the designated bank bailout funds, but it would have gone bankrupt had Paulson not rescued AIG and allowed Goldman to live and Lehman to die.

I'd like to think that I'd feel a bit of shame about winning big at a casino where the taxpayers in "flyover country" covered my losing bets, but as nobody's ever offered me the opportunity to make money that way, I really can't say.

TMCD738

Goldman Sachs has earmarked 11.4 million dollars for employee bonuses this year according to the New York Times. They took a loan from the government and turned it into enormous profits. They have payed back what they borrowed, but are leveraging the loan from Uncle Sam (read: you and me) into enormous bonuses for their top performing executives while many others in the country are struggling through this tough recession - which is in part caused by Goldman's risky credit swap business in the first place.

The relentless work ethic at Goldman, one which relies on insane hours and relentless competition to do more with less, leaves little else for individual employees to engage with the world they inhabit, intangible quality of life activities like fostering community, family, improving education for our children, etc. While their investors and analysts are aggressively looking for the next gold rush, the next derivative, and taking their billion dollar bonuses home, our communities, our families are losing their homes and jobs.

The Great Recession may not end until there is a sea change from this greedy mindset, when corporations and people begin looking at the world outside the boardrooms.