Apart from a fascination with how much money Goldman Sachs made by the day, minute, hour and second in the second quarter of 2009, the media reaction to Tuesday’s record-breaking figures mostly focuses on whether they will be some sort of regulatory backlash.
Nils Pratley at The Guardian ask whether exceptional profits deserve exceptional rates of taxation:
Regulators are clearly determined to stamp on remuneration structures that encourage excessive risk-taking. But Goldman demonstrated that, in the current investment banking climate, you don’t have to take big risks to earn big bucks. The bank’s leverage ratio has halved since 2007.
The question for governments in the US, Europe and Japan is whether they are prepared to tolerate this state of affairs indefinitely. The point of rescuing the banks was to prevent economic catastrophe. That process clearly involves banks rebuilding their capital bases and generating profits once again. But once this stage is reached — and Goldman has got there faster than anybody else — it’s time to ask whether exceptional profits deserve exceptional rates of taxation.
If we, the taxpayers, are obliged to underwrite the banking system, it is surely right to extract a fair price for that guarantee. That’s how pricing power works, as Goldman would presumably understand.
While the FT’s Lex also touches on this point, with a clever squid reference:
Give credit where due — Goldman is an extremely adept manager of risk and deploys it when others balk. But this is no more business-as-normal than last autumn. Goldman has $171bn in excess liquidity burning a hole in its pocket and is again paying out big bucks. The government could yet opt to cut this sucker down to size. Calamari anyone?
Jeremy Warner, now writing for The Daily Telegraph, says the indestructible Goldman will need to find a new golden goose:
It seems quite unlikely after what’s just happened that the body politic is going to tolerate rates of return of 23 per cent in a business which rightly or wrongly is judged to have contributed to the near collapse of the banking system and a deep recession in the real economy. Goldman is supremely adaptive, so it will no doubt survive the regulatory onslaught, or find ways around it, but we may be approaching the last hurrah of easy money. It’s going to be a lot tougher in future.
Alex Brummer at The Daily Mail says us mere mortals have been taken for a ride again and is worried that public resentment of bankers could spill onto the streets:
What is not being recognised, however, is that were it not for the enormous amounts of public money poured into the global monetary system by national governments, those surviving banks would also be in dire trouble.
The figures are mind-boggling. Estimates compiled by leading economists suggest that the aid provided so far by our government to the banking system is as much as £1,269billion.
In the U.S., the total has reached £6,415billion, while in Europe, where governments have still to fully confront the losses, the figure is £1,007 billion.
Without these enormous bailouts, which may not be recouped by the taxpayer for at least a decade, financial groups such as broker-dealer Goldman Sachs might never have been able to have stayed afloat.
Unfortunately, the civil service officials responsible for protecting taxpayers’ shareholdings in the banks - including 70 per cent of RBS and 43 per cent of Lloyds Banking Group - appear to be drawing entirely the wrong conclusions from events and are making an utter mess of things.
David Wighton at The Times says the profits and bonuses at Goldman will be hard for ordinary mortals to stomach, although he reckons there is little sign of excess risk taking:
Profits certainly have recovered remarkably quickly and if the markets hold up for the rest of the year the bonuses will surely follow. The size of these payments will be very hard for many ordinary mortals to stomach. After all, Goldman has benefited massively from taxpayer-funded support for the financial system that Wall Street banks helped to undermine.
But, even if you believe big bonuses were a significant contributor to the crisis, there is no evidence that Goldman is encouraging excessive risk-taking.
The vast bulk of the money it is making comes from straightforward stuff such as making markets in commodities — where margins have shot up because competitors have pulled back — or helping companies to raise money from share issues. The bonuses it pays will conform to the rules drawn up by the Financial Services Authority with all the deferrals, clawbacks and the like.
Although The Wall Street Journal’s Heard on the Street isn’t so sure:
But Goldman swung for the fences to post these second-quarter numbers, judging by its value-at-risk — an industry risk measure that estimates the one-day loss on trading positions in certain adverse conditions. Granted, VaR is an imperfect and narrow measure. It gave no warning of the huge recent losses at banks. It is hard to reconcile across firms. And Goldman has higher capital buffers today to absorb potential losses. Even so, the big gap between Goldman’s latest VaR and first-quarter numbers from other firms is raising eyebrows.
In the second quarter, Goldman’s VaR climbed to $245 million, its highest quarterly level since the firm went public in 1999. At Morgan Stanley, VaR was $142 million in the first quarter, while J.P. Morgan Chase’s trading VaR was $190 million. Goldman’s first-quarter figure also was higher at $240 million.
However, probably the best comment on the Goldman results comes from Eliot Spitzer, the former New York governor and attorney general. Speaking to Bloomberg, he said US banks had made a “bloody fortune” while receiving taxpayer money without a proven benefit to the wider economy:
Politicians understand the “populist rage” with excesses in the financial industry and in this case the “public is right,” Spitzer said in a Bloomberg Television interview today. “We have saved financial services, we have not created a single job. We are still bleeding jobs.”
Spitzer said rules proposed by President Barack Obama’s administration are irrelevant because agencies failed to enforce existing regulations. “Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.” “You don’t need new regs to do it, you just need the will to do what they were supposed to do,” he said.
Related link:
Goldman’s blow-out Q2, the analysts react - FT Alphaville
Goldman’s getting riskier - FT Alphaville
Goldman, bonuses all around - FT Alphaville
