Investment bank Goldman Sachs has charged out of the credit crunch and Government bailout with an impressive $US3.4 billion net profit in its second quarter. It’s a golden recovery story but many are asking how the bank managed to turn itself around and increase its earnings 65% on last year.
Don’t let those crying Wall Street brokers fool you — Goldman Sachs, of course, is an evil corporation hellbent on sucking the life and money out of humanity. Well at least that’s the opinion expressed in a much-discussed (and in some quarters, dismissed) Rolling Stone feature in which Matt Taibbi describes how the bank, a “planet-eating Death Star of political influence”, has historically built itself on bubble after bubble:
The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again…
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But it was this confluence of bubble-riding and political sway that saw the bank bailed out when one of its main competitors, Lehman Brothers, was left to crumble.
By all accounts, it was risky business that led Goldman Sachs back into the black. Bloomberg News reports that Goldman Sachs’ Value-at-Risk, the amount of money they could lose in one day of training, went up to $US245 million this quarter, while competitors like Morgan Stanley were scaling back their trading risk and principal investments.
Aaron Task on Tech Ticker says that the results can be chalked up to Goldman Sachs “superior talents at trading and risk management, as well as its underwriting prowess,” but there are a few other theories floating around as well — like the fact that the US Government has sunk so much cash into the firm might mean it receives favourable treatment. Says Task:
As of Friday, Goldman had yet to repurchase its warrants and bailout monitor Elizabeth Warren has warned Treasury is undervaluing the securities across the industry. In other words, the taxpayer looks likely to get the short end of the stick, again.
But back to those crying bankers. Goldman Sachs’ own staff are one of the biggest winners in this turnaround. The New York Times reports that the bank has set aside $11.36 billion for employee compensation and bonuses, a bold move considering it only just paid off its Government loans:
The prospect of fat bonuses at Goldman is good news inside 85 Broad Street, as well as for businesses that depend on well-paid Wall Streeters. But given that Goldman only recently returned $10 billion in government aid, lawmakers may take a slightly different view.
Economics and law professor William K. Black writes in the NYT ‘Room for Debate’ blog that the employee bonuses represent a certain form of financial insanity. The bonus system sends out a message to Goldman Sachs employees that high-risk strategies and accounting fraud is OK:
If there is little downside to the senior officers and if they can capture the upside, e.g., through massive bonuses, then it pays to either engage in ultra high-risk gambles, or the sure thing, accounting fraud. Either explanation is frightening because it is simply a matter of time before this strategy causes an even bigger financial crisis than this one.