As Merrill Lynch last night announced a write-down of at least US$15 billion (and a quarterly loss of US$9.8 billion), several commentators have looked deeper into the bizarre situation at Goldman Sachs, and their miraculous avoidance of the sub-prime meltdown. While their Wall Street brethren announce billions of dollars in write-downs, Goldman Sachs are laughing all the way to the proverbial bank, announcing record profits, and paying its CEO almost US$70 million in 2007.

Back in December, the Wall Street Journal’s Kate Kelly wrote a story focusing the efforts of two young Goldman Sachs traders who literally saved the firm billions of dollars. As Michael Lewis in Bloomberg explained:

By the end of 2006, the people creating and selling subprime mortgages and other so-called CDOs (collateralized debt obligations), had put Goldman Sachs in exactly the same position as every other Wall Street firm. Left to their own devices, traders in subprime-mortgage bonds would have sunk Goldman just as they sank Merrill Lynch, Citigroup Inc., Bear Stearns Cos. and every other major Wall Street firm.

Enter two smart guys who trade Goldman’s proprietary books to argue to the CEO and chief financial officer that the subprime market feels soft and that Goldman should short it. This they do, in such massive quantities that they more than offset the long positions in subprime held throughout the rest of the firm, leaving Goldman short the subprime market and in a position to make billions when it crashes. End of story.

As Lewis noted, the Goldman story isn’t so significant in terms of money saved, but rather, for the fact that Goldmans took the rare step of going it alone.

Whereas virtually every other bank has announced grotesque losses (Merrill Lynch has announced write-downs of US$23 billion, compared to its current market capitalization of only US$ 47 billion, meaning that it has lost almost half as much as it is currently worth in the last year), Goldmans has actually profited from the fiasco.

But while Goldmans basks in its deserved glory for the moment, the caliber and nature of the losses across the board prove the fickle nature of the investment banking sector. Virtually every large firm has taken a significant hit to its bottom line and reputation as a result of making wrong calls in relation to sub-prime debt. It should be deeply concerning to anyone thinking of investing in a company like Citigroup, with 300,000 employees, and revenues of US$86 billion, that it was even capable of destroying more than half of its market capitalization based on what was essentially one bad call (multiplied many times).

With their reliance on prop trading and financial engineering, the large banks (and especially the successful Goldman) are increasingly dependent on the skill of their traders, rather than the more sedate business of advice or brokerage.

Two years ago, investments banks like Citi and Merrill Lynch were considered the smartest guys in the room. Now, they just seem like a bunch of gamblers whose luck ran out. Fortunately for the guys who ran the show, they get paid, win, lose or draw.