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Why (and how) Goldman Sachs profited
The headquarters of Goldman Sachs Group, Inc. is seen at 85 Broad St. in New York City.
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KAI RYSSDAL: One would expect the world's most successful investment bank to be resourceful. Able to find the diamonds in a very rough economy. And resourceful Goldman Sachs has been -- $3.3-billion-in-profit-last-quarter resourceful.
In a way, it's exactly what was supposed to happen once the government decided on a bailout. Washington wanted banks to start making money again. Another way to look at Goldman's news this morning, though, might be to see it as a company profiting from a crisis it helped create. Here's our Senior Business Correspondent Bob Moon.
BOB MOON: It turns out what happens when the financial system crashes is a lot like what happens when a computer program crashes.
Who are you gonna call? You're likely to end up paying the same people you're cursing, for the technical support to maneuver your way out of the mess.
As Manhattan College finance professor Charles Geisst sees it, that's what's behind all the money Goldman Sachs is raking in now.
CHARLES GEISST: They have a reputation for hiring the best and the brightest people on Wall Street. And when times like this arise and the crunch comes, one needs that sort of expertise to dig one's way out. So in other words, they find themselves on all sides of the market, and all sides of the crisis, and they're benefiting from it.
Businesses have been flocking to Goldman for loans, and for help issuing stock to raise much-needed funding. And the firm's high-tech, split-second trading systems have made a fortune. It's been able to cash in on volatility in oil and other commodities, and the stock market.
Geisst finds irony in Goldman's fast footwork paying back the rescue money it got from the government's Troubled Asset Relief Program. That means taxpayers aren't seeing much benefit from their $10 billion largess.
GEISST: It's sort of difficult to say whether or not the TARP money actually provided the capital that they needed for these activities. My guess is, yes, it did.
Geisst says Goldman's rivals are either gone or still struggling to compete on the same level. But it probably won't continue to have the field and the profits mostly to itself much longer. Goldman's Chief Financial Officer David Venier conceded as much during a conference call with analysts today.
DAVID VENIER: I think some part of it is sustainable and some part of it is not. Over time, you know, firms will recover, firms will be willing to provide more risk capital. And, you know, it's going to happen over time, and it will drive spreads narrower.
For now, though, Goldman is enjoying a very profitable financial crisis.
I'm Bob Moon for Marketplace.
There is a systemic wrongness in a Bank Holding co. like Goldman Sachs being able to make a killing off market volatility at a time when the advanced economies alone are facing the real prospect of 15%+ unemployment. It does seem that there is a real disconnect between the efficient clearing of the financial system and economic output. Consider that 49% of GS profits are to be paid out as employee compensation and it is unreservedly a case of the people at GS screwing the economy by virtue of their market position.
Surely the Banking industry is supposed to be the key to fixing the economy - that was the line that cast TARP, TALF, and the FED guarantees. How is High frequency automatic computer Program trading doing anything but being the best at being the worst. So far, the Banks have been earning historically high spreads on loans, but commercial loans haven't been coming forward; instead GS posts profits based on, essentially, exploiting the goodwill extended by the Federal institutions.
Although this is a monetary zenith for GS, with regards to this Crisis I reckon this looks more like a nadir.
Which brings us to the perennial question: what do we want from our banks? And they are our banks, especially the ones our taxes helped float, or by floating, helped out. Time for some solid thinking on making sure both the risks and returns are shared by us the taxpayers and clients. I do not think the sharply suited men at 85 Broad figured through the sounds of bonus in halls of regulators now.
Some other thoughts at http://www.justmeans.com/So-What-Do-We-Want-of-Banks/3242.html
Love the show. Keep up the good work.
Regards
GS
