Banks focus on Goldman Sach's credit
Stock prices whiz by on a ticker near the Goldman Sachs booth on the floor of the New York Stock Exchange in New York.
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Kai Ryssdal: Goldman Sachs reported an eyebrow-raising number today. Nearly $3.5 billion in quarterly profit. Healthy, by almost any measure. But there's a backstory here that's really kind of important. Like all investment banks, Goldman relies on its reputation to do business. If they think Goldman can't pay them back, other banks aren't about to lend them money. All you have to do is think back to Bear Stearns and Lehman Brothers if you need some real life examples of that one.
Now, with earnings like today's, no one's questioning Goldman's ability to service its loans. But its all-important reputation is still under attack as Marketplace's Alisa Roth reports.
ALISA ROTH: Goldman Sachs is primarily an investment bank. It advises companies on mergers and acquisitions and helps them raise money. And it trades. A lot.
David Stowell is a professor of finance at the Kellogg School of Management at Northwestern. He says to do all that, the bank needs cash.
DAVID STOWELL: An investment bank has to raise an enormous amount of financing. They obviously issue stock to raise equity financing, but they issue lots of bonds, and borrow money.
Goldman Sachs borrows because it doesn't have big deposits like other commercial banks. It gets its money from lots of sources. One of the biggest is short-term loans from other banks.
But those banks won't lend to Goldman. If they don't think the firm will make good on its debts.
STOWELL: A firm like Goldman Sachs, reputation is extremely important. But you have to separate to a certain extent reputation from credit-worthiness.
It was a lack of credit-worthiness that brought down Lehman Brothers and Bear Stearns. Lenders got nervous they wouldn't get their money back. So they stopped lending. With no money those banks couldn't do business and they collapsed.
Anil Kashyup is a professor at the University of Chicago's business school. He says credit-worthiness isn't a problem for Goldman.
But all this attention from the government could be.
Anil Kashyup: So I think amongst the consenting adults that participate in this market, I'm not sure that this is as critical for undermining the trust as the perception that if the government's out to get these guys maybe we don't want to get tangled up in it and be transacting with them.
Kashyup says Goldman's allegedly dirty dealings probably won't turn out to be a big deal.
KASHYUP: I don't think their customers are going to desert them.
He says in the end, this is all about reputation. And Goldman's reputation as a solid moneymaker will more than make up for a whiff of scandal.
In New York, I'm Alisa Roth for Marketplace.