Goldman’s Best Year Ever?

A reader pointed me to this story in The Guardian citing Goldman insiders saying this could be the investment bank’s most profitable year ever.

Staff in London were briefed last week on the banking and securities company’s prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever. Figures next month detailing the firm’s second-quarter earnings are expected to show a further jump in profits.

A couple months back I said that it would be unlikely for the banks to repeat their spectacular first-quarter results in the second quarter, because it depended on fixed-income revenues being even higher than during the peak of the boom. It looks like I was wrong.

Like most things, there are two ways to interpret this. For the optimists, if some of the big banks are making big profits, that gets us back to a normally functioning financial sector sooner and reduces the chance that they will face a panic in the short term. As many people have pointed out, including us, this is basically the Obama Administration’s strategy.

For the pessimists, the phoenix-rising-from-the-ashes profitability of the big banks is a direct result of massive government aid in the form of cheap money, liquidity programs, and let’s not forget the bailout of AIG; it’s also the result of reduced competition resulting from the consolidation of Bear Stearns into JPMorgan, the failure of Lehman, and the weakened state of Citigroup and Bank of America/Merrill. So the government bought a partially healthy banking sector (the big question is what Citi and B of A will report) with public funds, the few winners (Goldman, JPMorgan) are more powerful than ever, and the government is hoping to get an anemic regulatory reform package through Congress in exchange.

By James Kwak

57 thoughts on “Goldman’s Best Year Ever?

  1. No worries. What’s good for Goldman Sachs is good for America.

    After all, it’s not like the country produces anything other than financial products anymore.

    Might as well just give them the rest of our wealth and be done with it.

  2. What good would Paulson’s TARP have been if it hadn’t been profitable for his friends and former colleagues at Goldman? He cleared out its competitors, fed it TARP money directly and indirectly through AIG.

    They’re well fed, those Goldman guys. In a community that eats what they kill, they’ve feasted extraordinarily well at the banquet known to the rest of us as The Crash….

    But there is a stench to the meal that just doesn’t seem right.

  3. Even if the banks are profitable and resume some measure of lending again, we likely won’t be returning to the “normal” that we’ve come to know.

  4. Citigroup to hike worker pay by up to 50%

    TOKYO (MarketWatch) — Troubled banking giant Citigroup Inc. intends to raise its employees’ base salaries by as much as 50% this year to offset smaller annual bonuses, the New York Times reported Tuesday, citing people with direct knowledge of the plan. The change would mean that most Citigroup employees will make as much money as they did in 2008, the report said. The firm also plans to award millions of new stock options to employees to retain workers and neutralize any drop in stock value, it said.

    At least Golman had a good quarter…Citi sucks and knows it so it ups base salaries. WTF??? Meanwhile many car dealerships are shut down in small towns across America? Obama, wake the f’ up, man.

  5. James,

    I appreciate the even-handedness, but c’mon. Hank Paulson, as CEO of GS, lobbies congress to relax leverage restrictions on i banks in 2002, fails, tries again in 2004 and succeeds.

    Four years later, the same man is put in charge of rescuing the financial system from a (surprise!) meltdown. He allows Bear and Lehman to fail, but then is instrumental in pushing through the illegal bailout of AIG, without which GS is a smoking crater. (Yeah, yeah. Sure they were hedged. I’m sure there was no counter party risk there…)

    The only thing that surprises me here is that GS isn’t hiding this story. I have always figured that their PR-savvy was better than that. OTOH, maybe they think that they can get away with whatever they want and that this will help them snag the best employees of the few competitors they have left.


  6. Felix Salmon had a post on this topic. Arguably the increase in base salaries is justified IF it means that bonuses will be reduced. But, as Felix points out, most likely base salaries go up and bonuses remain the same.

  7. Perhaps the universe has shifted permanently for most of us.

    But it sounds like the “new normal” is quite nice (and lucrative) over at Goldman….

  8. _smile_

    I know what you think, but your even-handedness doesn’t allow you to descend into the spittle-flecked, shrieking invective which is the only rational response to the current situation.

    OTOH, zerohedge has that angle pretty well covered, so perhaps there is room for a more measured voice as well.


  9. I was just responding to the “optimist” argument, which is something like, “it is a good thing the banks are profitable because maybe that means things will improve for everyone else.”

    This argument fits in well with Professor Johnson’s assessment of the official response to the financial crisis – that this was all just one big, unfortunate accident. For those that are inclined to believe this, bank profitability is a positive indicator, as opposed to something the government is manufacturing.

  10. Somebody, again please tell me the business objective of banks. Is it to make money for its managers & employees with other people’s money? Or is it to make good returns for other people on their money by investing in profitable companies that grow the economy & increase everyone’s standard of living? Has this changed over time? Why? What was their objective in investing other people’s money in houses instead of businesses?

  11. Goldman is a trading bank, not a retail bank. Generally speaking, opportunity for profit increases for traders when volatility increases. (Particularly when you are politically well connected, and can anticipate moves in D.C.)

    Volatility (aka, Fear) is not, however, a good thing for real world economic entities that require some amount of stability to operate.

  12. “Arguably the increase in base salaries is justified IF it means that bonuses will be reduced.”

    Utter nonsense!!! Let all these so called “people” take the pay cuts they deserve.

    If they want to leave the country, goodbye and good riddance!!! Don’t ever come back!

    They need to stop exploiting cheap labor and cheap debt to speculate in financial assets and to maximize wealth/income inequality.

  13. “As many people have pointed out, including us, this is basically the Obama Administration’s strategy.”

    And to leave it at that when the nature of the crisis was inherently criminal is itself criminal. Sadly, the froth seems to have settled on an anger that a few months ago was both righteous and seething. And sites like this one deal with the question as though we are simply confronted with the proper reading of charts and statistics. We’ve had a non-solution to our financial crisis forced on us while all the time we were looking it straight in the eye. Shame. Michael Hudson offers a compelling analysis of regulatory outcome here:

    The United States Of America has degenerated into a two-headed dictatorship with all the frills included, the National Socialist state-capitalism, the foreign policy bellicosity and adventurism, the support for ethnic cleansing, the domestic spying, the torture, the list is endless. The reptiles that are our ruling class have stripped us of every vestage of a claim to self-respect and spit in our faces as accompanyment. Today they whine when the elitist revolution they’ve tried to engineer with CIA and media complicity justly comes under the night stick. Happily some in this world have had enough of the high and mighty moral posturing of a Obama or a Sarkozy.

    Perhaps one day, when the full measure of this crisis is forced upon us by inexorable circumstance, bacteria like Obama, Larry Summers, Lindsey Graham, Patty Murray, et al, will find themselves confined outdoors in a razor wire setting awaiting a massive show trial. Dare we hope.

  14. Nice!

    Best paragraph from it:

    “More bank lending – that is, more debt – is the heart of today’s economic problem, not the solution. Finance capitalism is undercutting industrial capitalism, replacing the production of goods and services with predatory extraction of rent and interest via economic “tollbooths,” from parking meters in Chicago to roads in New Jersey. States and localities are facing fiscal shortfalls obliging them to sell off their roads, parking meters and public enterprises to buyers who erect expensive tollbooths and extract yet more income from the shrinking “real” economy. The economy is heading toward debt peonage as it polarizes between wealthy patrons and a work force reduced to patron-client dependency relationships.”

  15. The American poor and middle class are being ruthlessly abused, assaulted, deprived, silenced, decieved, and robbed. There are no good parties in this nefarious enterprize. All about us is evil and deception. The people alone are the only source of hope.

    All the econospeak chari-vari is meaningless and moot, because they fail to account for the terrible costs of the losses burdened, hazarded, and realized by the poor and middle class. Real suffering, real pain, true fear, real loss of wealth, and therefore access and power however minimal it may have been.

    The heart and engine of America is a prosperous hard working middle class. Betting on the predators may benefit insiders in the short term, but woe to them, – for the day or reckoning is soon upon us, and there will be blood and there will be a balancing.

    In a world where there are no laws, – there are no laws for anyone!

  16. That’s actually very funny for people familiar with James style of writing. If you didn’t read James writing before it would be a little confusing whose side he was on in that post. I think it’s part of the fun of this blog. James lets us vent our anger, but he keeps it civilized. Wish we could get other bloggers and MSM to speak as strongly and articulately as James and Simon do. A FEW others but I guess it’s a dying breed……..

  17. … and how much of their profits are from trading oil? (to my knowledge there were no restrictions on their use of the bailout $$)

    Does anyone thinks Goldman would use the money in a way adverse to the interest of the general economy??

  18. also goldman — unlike other banks — had almost no direct exposure to residential or commercial real estate.

    it’s not as if this was great foresight on their part — it’s not the business they have ever been in.

    goldman would have survived an AIG implosion. they claim to have been hedged, but even if they hadn’t they would have lost about $20B. they would have survived fine, and would probably have made huge money scraping up cheap assets if other large banks had been liquidated.

  19. I got this as a link from a Financial Times article. It’s another paper from an academic journal. Entitled “Regulating Bankers’ Pay” it’s 47 pages long. I haven’t even started reading it myself, but it looks like it would be good. It basically tells us what we already intuitively know, but if you’re into self-flagellation like I am, have at it.

  20. i am assuming you have read “the shock doctrine”, right?

    all is proceeding exactly to plan.

    i am looking forward to when we institute “2 minutes hate”

  21. Well folks, I don’t know why you’re worried about bank regulations and bankers’ base salaries. Brian Williams of NBC has reported that many people in the White House like to eat apples. Not to be outdone by a rival network, Diane Sawyer of ABC asked Obama about his affinity for cigarettes (less than 20 hours after he had been asked the same question by Margaret Talev of McClatchy Newspapers).
    I think mainstream media has this one covered guys, no worries.

  22. So last fall, a former Goldman guy went to Congress and said we needed to invest trillions into our tottering financial system OR ELSE! (I consider the $750 billion of TARP to be just part of the investment – we really did sink trillions into the system.)

    Now today, some financial companies are now seeing record profits and will pay out record bonuses.

    I am perplexed how such a healthy, vibrant, profitable company like Goldman absolutely HAD to receive billions in “no-strings-attached” TARP funds in order to keep the financial system afloat.

    Seems like a very odd way to invest in the continued existence of AIG, BoA/Merrill and Citi….

    As someone far removed from the financial community, I see the taint of corruption written all over that deal. I hope that some of the very smart people who know finance better than I do can explain why I’m so very wrong.

    Would not be nearly so concerned if the economy wasn’t continuing to shed hundreds of thousands of workers from their jobs every month. Can’t balance the crippled economy with the wowza success Goldman is having right now….

  23. To quote Aliens (aka Alien 2):

    “nuke the entire site from orbit. It’s the only way to be sure.”

    (for those from the NSA et al listening in – this is just a little gallows humor, I am not advocating violence no matter how appealing, or justified, it might seem)(I’ll leave that to the Neocons thank you).

  24. These commentaries always seem to desend into policy wonkness on both sides of the ideological spectrum so I’m going to try an avoid that and point out a simple fact. This is still the tightest lending market I’ve ever seen, and I have associates and friends much older than I who say the same thing, some of whom have been in finance for 50 years.

    Good for Goldman Sachs and their shareholders that they’re making money – but unless we can actually get lending based economic activity going we’re not going to see real recovery. I’m not talking about leveraged securities or no money down interest only home loans either. I’m talking about small businesses who wouldn’t have laid anyone off if they didn’t have their line of credit pulled, that they used exclusively to smooth cash flow. The guy who wants to take advantage of the lower prices to buy a lot of land and build an office building for himself instead of renting, and being told he needs 30% or more down, before they look at his financials and tax returns. That means a lay off that didn’t have to happen, and a building project that won’t get done. We’ve so swung to the opposite extreme and become so tight on lending standards that what could be a recovery is going to stagnate until something lossens it up to at least normal reasonable standards.

  25. When you pay taxes then see those welfare mothers driving Cadillacs, you can’t help but feel outrage.

    But fund a bailout, see earnings rise and bonuses rightfully paid to deserving hard working executives, well it just warms your heart.

  26. MK,

    I don’t believe you will get that kind of lending. It isn’t profitable enough since, thanks to previous lax lending, we’ve forward shifted decades worth of demand into the last twenty years, and since it requires boots-on-the-ground can’t-be-automated grunt work that banks no longer want to do.

    Instead, as we are seeing, each concession granted to banks in order to get them to lend will be routed directly into either the gaping maw of loss reserves or into speculative bubbles (see oil.)

    Who wants to be a community banker these days? Instead, everyone wants to be JP Goldman. And with your money for nothin’ and your chicks for free, who can blame them?

    I’m afraid that the only way to get things going again is a reset of biblical proportions. That seems unlikely to me, so the next most likely outcome would be an essentially permanent Japan-like malaise, but without the savings to fall back on. Not a catastrophe, just a long, slow, seemingly endless grind down.


  27. Sadly, nullpointer, no, I haven’t read or am I familiar with The Shock Doctrine.

    All I know is that the time has come for the American people to wake up to the fact that they have bupkus to say about the conduct of the political, financial, foreign and arms policies of their government. The idea that parliamentary means will ever bring about a meaningful alteration of those realities is absolute fantasy.

  28. Not sure if you are being sarcastic?

    Banks (investment or otherwise) are for-profit entities that exist only to make money for their owners. Period. Any benefit that accrues to society in general or to the bank’s “customers,” who or whatever they may be, exists only insofar as it is necessary to keep the profit making entity operational. A business will minimize costs (such as salaries and cash bonuses) as much as possible until it affects profits.

    That’s the theory.

  29. My grandpa used to plow his corn fields in Mississippi with a mule 70 years ago. He used to say the hardest part of plowing with a mule was getting its attention. When someone asked him how to get a mule’s attention he would say “you hit in the head with a two by four”.

    We just haven’t gotten their attention yet.

  30. The thing to note about Hudson is that he understands land economics, which most economists apparently don’t.

    In particular, he’s largely sympathetic to the Georgist view that land value should be taxed heavily. Unlike some Georgists, however, he understands that this will require a massive reworking of the credit system, given how much credit is used to purchase land.

  31. Ironic that the World Bank put out their ‘realist’ report the same day the Goldman news came out:
    “Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor and most vulnerable.

    To me it looks like wealth is pouring upstream. Seems like the Obama administration is trying to make some needed regulatory reforms, but there is a lot of propaganda being generated spinning that into a ‘government takeover of the banks.’ Hope people see through that.

  32. JUNE 4, 2009, 9:29 AM ET
    Goldman Sachs: Looming Supply Crunch Means $85 Oil
    From WSJ

  33. your analysis is on the money. The largest banks are grinning now, trying to establish a smoke screen. The motherload of defaults is about to appear in the commercial real estate markets. Nouriel Roubini is correct, we are participating in a ‘W’, a double-dip recession.

  34. I’ve never seen a welfare mom driving a Cadillac. I’ve seen them humbled in the grocery store performing works of mathmatical genious to feed their kids. I’ve also seen the predatorclass, and the heads finance oligarch, and Wall Street titans goating over $300.00 sushi dinners, and red Lamborgini’s. The welfare mom’s I have seen are desperate and enterprizing. The predatorclass titans on the otherhand are heartless, obdurate, cruel, and supremist. The predatorclass imagines they are safe and sound in their oppulent palaces, but they are wildly mistaken. History proves that when elites grow ugly and abusive, obdurate, uncaring, detached, – a real horrorshow rebellion births and grows, and in the end it is elites that end up running and hiding for their lives. We are fast approaching this kind of threshold. Either the predatorclass recognizes, appreciates, and accounts for the palpable, visceral pain and suffering their fellow poor and middle class Americas are hazarding and burdening and works to right these terrible unjust and illegal wrongs, – or the predatorclass will be the targets of a poor and middle class hurled into desperation and revolt. This moment is closer than predators think, and predators will not be safe, and there will be no law, and no end to the resistance and turbulence, and predators will be targeted and held responsible, and culpable, and there will be blood, a reckoning, and a balancing.

    In a world where there are no laws, – there are no laws for anyone!

  35. Are the earnings being reported with all assets marked-to-market? Why did Goldman become an FDIC-insured bank?

  36. The last paragraph of this Guardian/UK article should be considered in light of Goldman’s “good year”:

    Last week, the firm predicted that President Barack Obama’s government could issue $3.25tn of debt before September, almost four times last year’s sum. Goldman, a prime broker of US government bonds, is expected to make hundreds of millions of dollars in profits from selling and dealing in the bonds.

    What’s good for Goldman generally isn’t so good for the nation.

  37. He also holds to debt forgiveness in circumstances such as we are in, an innovative notion with a long history that just might help end our present travail. But that’s about as likely an expectation to have as looking for the truth from Barak Obama and the pond scum that so visibly surround him. One needs a background in bacteriology to plumb the depths of that abyss.

  38. I’m not sure if there is sarcasm at work; regardless, you are aware that “welfare mothers driving cadillacs” was myth perpetuated by Reagan as part of a strategy to appeal to whites at the expense of blacks (although more whites were receiving welfare)? Please see here:

  39. GoldmanSachs is earning always, whether it’s in bull or crisis times. Both are most likely originated by themselves.

    They are to big to fail and they have former employees in every level of financial institutes or government.

    They insure their toxic business with a company which fails, but they know they get paid first when the taxpayer bails them out, once more.

    GoldmanSachs is a MONSTER which has to be dismantled before it destroys the whole communtity and extorts more money from the tax payers.


  40. I think we prefer to be outraged at myths because it gives us the impression that our outrage did something. “Look, no more welfare queens driving Cadillacs, my anger must have done something!” (uh…never were any).

    Whereas with GS – we can’t even fathom what will be necessary – need something different than mere outrage.

  41. I have yet to see any reference to how the $12 billion+ transfer from the Treasury to Goldman Sachs via the AIG bailout figures in their balance sheet. If divided into two equal tranches, GS would post big losses of billions in both the first and second quarters.

  42. What did Goldman produce to make all these profits? Anything? Nothing? Or did they just increase their possession of medium of exchange (money)? How did they do that? By buying some paper assets low from one group & selling high to another?

    Did they produce any jobs for middle class workers?
    How do those profits help our country?

    What are they going to exchange all that increased medium of exchange for? And who’s going to produce it? Guess who. Not them.

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