That’s the title of a Bloomberg article that also cites Bernie Sanders and Simon. Here are the direct quotes from Blankfein:
“Our business is very complex, and I won’t deny that, but it’s far, far simpler than most of the competitors. I wonder myself how some of these things get managed.”
“Most of the activities we do, and you can be confused if you read the pop press, serve a real purpose. It wouldn’t be better for the world or the financial system [to change the firm’s activities].”
“We pretty much stuck to our investment-banking knitting. That’s why we have 30,000 people and many of our competitors have well over 200,000 or 300,000 people.”
I more or less agree with most of this. It makes sense that investment banks should underwrite securities, trade those securities, and trade derivatives, and should advise corporate clients engaged in large financial transactions, although I’m less sure why Goldman needs to be in proprietary trading, private equity, and asset management. Goldman clearly makes more sense as an entity than, say, Citigroup.
But that’s not the question. I don’t think anyone doubts that at $1 trillion in assets (plus derivatives exposures), Goldman is too big to fail. The real question is not whether Goldman should be in a different mix of businesses. The question is whether a $1 trillion Goldman provides any value to the world that wouldn’t be provided by four $250 billion Baby Goldmans. (Each Baby Goldman would be about the size that Goldman itself was in 1998, when it was already one of the top two investment banks in the world, and the corporate world had no apparent constraints on financing.) I don’t think Blankfein answered this question.
By James Kwak
The Baseline Scenario 
“We pretty much stuck to our investment-banking knitting.”
That’s good to hear! So he would not object if we removed the prop trading and fixed income divisions and left behind only investment banking?
I mean, I am sure all the high-frequency trading and front-running pension funds and borrowing from the Fed at 0% to invest in Treasuries is completely irrelevant to Goldman’s bottom line. Right? I mean, all that stuff is just an afterthought, really.
Yes, surgically removing everything from GS except the “investment banking knitting” sounds like a potential compromise. Thank you for the suggestion, Mr. Blankfein.
Is the real problem the size / interconnectedness of these “banks’, or is it the highly leveraged complicated opaque derivatives that they are addicted to?
What real purpose outisde of agricutural and raw materials commodities do “derivatives” serve, anyway?
Blankfein appears to have misspoken when he spoke of Goldman Sachs sticking with its “investment banking knitting.” Goldman Sachs is a commercial bank. http://www.nytimes.com/2008/09/22/business/22bank.html
It speaks to the degree that Congress is in the pockets of these fools that neither party has jumped on this rage yet.
I’m not criticizing James Kwak for highlighting the topic, because that’s what this site NEEDS to do since everyone else is dropping the ball. I STRONGLY 100% SUPPORT BREAKUP OF THE LARGEST BANKS WHICH THREATEN SYSTEMIC SAFETY AND SEPARATING THE COMMERCIAL (RETAIL) BANKS FROM INVESTMENT BANKS. But breakup of big banks is a dead issue. It has been a dead issue for months. The taxpayers and media put very little pressure on politicians and politicians therefor don’t create any threat to breakup the banks. We shouldn’t expect Blankfein (an intelligent man, like him or hate him) to wave the white flag when there’s a couple people outside the Goldman Sachs fortress with water pistols, do you?
The most shocking news out of this in weeks was Nate Silver saying he thought it would be the “public option” of 2010. Nate, better back-pedal fast before the masses question your political savvy.
I’m not sure the break up of the banks is a dead issue. Does Blankfein understand how MASSIVELY exposed GS is? When they pay their people $20BN in December and the unemployment rate is 10.5%, he may yet see pitchforks outside 85 Broad. And so may Congress.
Yes. Lies and deception, and the marketing of perception. That’s the game. All to bilke the taxpayers.
There is NO reason for these casinos and these players to exist. And they certainly shouldn’t receive one penny of public money.
Period.
PERIOD.
I want ALL the public money ooured into thes theftitutions back. NOW.
I want all those in Congress who supported pouring public money into these theftitutions tried for treason.
I want to see these thieves and crooks out in front of Home Depot looking for work.
I say: Death to the Financial “Phantom” Economy.
I say: Death to publically owned companies.
I say: Death to the notion of corporations.
Goldman appears to have been one of the least exposed to the toxic game in which nearly all the big players appear to have played more or less in lockstep. That doesn’t exonerate them.
But I don’t know why having four of them at 1/4 the size each would make them less likely to walk more or less in lockstep again. Isn’t the systemic problem characterized not be the actions of any one firm, but by the simultaneous vulnerability of MANY firms to the same bad bet?
It’s predictable that with a size-based breakup, efficiency would be decreased, but what else? At what threshold of size is a firm “too small to be saved”?
Wrong question being asked and considered. The whole concept is disgusting. Drill down far enough and realize who is untimately, ULTIMATELY gagging up every cent of these profits. If you can’t see that it is ultimately people, individual people being ripped away from their personal dollars,….. collectively hundreds of billions at a time. There is no justification for finance to be 70 percent of the US Economy.
It is a zero sum game. Every trade has a winner and a loser. Clearer example, where did Citibank and their fabulous oil speculator get the billions of dollars of trading profits they garnered in 2008? Where did Exxon get the $2.7 trillion in gross revenue? How many times did you fill your gas tank at $4.799 a gallon.
I’d rather be a slave to a Chinese warlord than read about another Andrew Hall and his billion dollar Switzerland castle and art collection. How did he get the right to steal a dollar a gallon from every citizen in America for over a year. That was economic terrorism and I want to hold him to account. Claw back, you wanker.
Just remember though, this is G-d’s work that GoldenSacks is doing~
Not to sound like a neophyte, but I am currently reading Web of Debt and, in all honesty, I don’t see where GS has any redeeming qualities whatsoever..
Can someone else show me some insight?
Given how our current monetary system is effectively setup, if we changed it to something we actually owned (you know, our own creation of money, not a privatized setup based on a usurious pyramid), GS would have no purpose to exist at all.
It’s not a bank, it’s one large hedge fund..
Traditional investment banking and some of the innovations that have been introduced do have real purposes.
But what is the “real purpose” of marketing securities that the firm is simultaneously shorting?
Who did we bail out AIG for again?
James,
You have hit the proverbial nail on the head. Nice work.
Best regards,
Macstibs
Dear Mr. Blankfein,
According to your latest 10-Q filing, page 22, your firm owns:
– $122 billion in Treasuries. (Up from $70 billion one year ago; what’s up with that? Oh never mind.)
– $59 billion in “equities and convertible debentures”.
– $88 billion in “derivatives contracts”.
On page 39, we see that your firm is counterparty to $3.8 trillion in derivatives transactions.
Just out of curiosity, do any of these things fall under the rubric of “investment-banking knitting” by your definition? What is that definition, exactly?
Apparently Barney Frank thinks he can do a half-ass job with bank reform, and all of us are supposed to get giddy because “It’s never been done before.” I encourage all to watch this video and try to keep track of the “draft” legislation, even before it gets voted on. Barney Frank is doing this behind closed doors, and I hope James Kwak will keep his nose to the grindstone keeping us aware what is happening with the draft legislation. If you care about America, please click this link.
http://www.ritholtz.com/blog/2009/11/key-reform-pols/
I should have given proper credit for the link above, I got that from Ritholtz’ site and it’s Dylan Ratigan on MSNBC. Go Dylan!!!
(sorry to keep replying to myself)
And do not miss page 72, where we learn that “Investment Banking” contributed $127 million of the $4.8 billion in Goldman’s pre-tax earnings for the quarter ending September 30.
This is actually getting kind of funny.
So investment banking knitting = creating a Gordian knot by weaving each institution together so that the failure of one causes the failure of all. Reminds me of the scene from the movie “Kingdom of Heaven” where all of the siege towers are roped together and they all fall at the same time due to counter-balanced weights…..or deverivatives, CDO’s, etc. as the case may be. Will President Obama be bold enough to cut this Gordian knot?
If this financial meltdown repeats itself, but on an even greater TBTF scale and the US and Europe are not able to save the financial system I doubt that China will be pleased holding all of that US debt.
If Goldman is such a sound business, why did it have to be subsidized by tax-payers last year? I mean not just the money from Treasury that it paid back this year but also the conversion to Bank Holding Company that enabled them to access to Fed borrowing window (low cost money indiretly subsidized by tax-payers)
Thanks Ted; positively scary.
Every institution too big to fail ought to be compelled to report an open book-keeping system, including the the too big to fail FED.
Exactly.
Too big does not depend on how many people you employ.
Too big is just as Bernie defined it: give us a list you firms you feel you would be compelled to bail out. That’s ‘too big’.
It is in a lot better shape than other TBTF cos. and I guess that was his only point.
A couple of issues remain the ones to answer. First, why, if they are so successful, need they rely on the public teat to support what is not really anything resembling traditional banking by being called a bank holding company only for convenience (and massive guaranteed debt)? Second, what is it they do that truly and uniquely benefits the wider world, or even the universe of finance (if they work hard to squeeze everyone else to their wake? And a final comment: it is impossible to feel good about what they will mean to the future of the American or world economies.
It’s really very simple. Ask yourself what would happen if GS went bankrupt? ‘Nuff said. Break ’em up. Citi too. BoA too. Wells too. Break ’em all up. Then let the prosecutions begin.
I think you just might be on to something.
So when is Lloyd returning the banking charter?
They stuck to their knitting, right up to the point they dropped everything and ran to the Fed with their hair on fire. Then they went back to doing what they were doing. It’s not quite as brave as sticking to your knitting the entire time, but far more lucrative.
Even though I am an unbeliever, I really can’t imagine that God needs money, let alone using Goldman Sachs as an avatar to collect it…
Just think of all of the jobs that breaking up these Trusts will create: the inefficiency of smaller scale will cause duplications that might put people to work.
The baby-fascists will employ more people than the mega-.
Quote from the Bloomberg article:
“Politicians and regulators are debating whether last year’s credit crisis and government bailouts showed that some finance companies had become so big that their failure WOULD put the entire economy at risk.”
The absurdity of this statement is highlighted by the keyword “would”. The operant word here is “DID”. Obviously this is why the politicians caved and gave the largest banks whatever they wanted. What is there to debate? Congress and the public at large must move beyond the theoretical discussions here and stay focused
on the reality and the aftershocks we are still experiencing.
Too big too fail will have to wait while they argue over health care and abortion:
http://americaspeaksink.com/2009/11/the-democrat-party-is-prolife/
Well, this recalls a bit of wisdom I was given in my youth by an old businessman – “don’t steal nickels and dimes, if you’re going to steal make sure it is a lot of money.”
Thus, when Blankfein lies, it is a big, big, big lie.
nicely done, Nemo
Gs is a classical example of “too big”, but not only because of TBTF.
In a free market, an agent is “too big” if it can
a. Move the market with its actions, or
b. Predict the actions of other players
GS is in clear violation of condition b.
Being a broker, it has access to a considerable chunk of the order stream going into the market. This enables it to know – in advance – about the demand and supply curve, and trade accordingly.
Someone has to start lobbying for these buy-and-sell order streams to become public – this is the real meaning of transparency in today’s markets.
The ground for prop trading should be leveled.
I’m going off topic here, but it deals with finance reform, so I hope James will humor me here. I found a great video discussing finance reform on MSNBC’s Morning Meeting with Dylan Ratigan. I am stupid about computers, but I am going to try to imbed the video here. It will either go swell or make my post look very retarded. Anyway if it works I hope people will watch the link. About 8 minutes.
Visit msnbc.com for Breaking News, World News, and News about the Economy
F*#^ me. Ok nothing is simple in life. Just go to this Link and look for the Chris Dodd picture (The old dude with white hair) and press play. http://www.msnbc.msn.com/id/31510813/#33855467
Hey! Leave him alone. Blankfiend is doing God’s work!
Let’s see how productive they are when HFT is eliminated, their influence in government is contained, when all derivatives and swaps are transparent and on a public exchange, when they stop borrowing at low rates from the FED, when they have no loan guarantees from the FED, when accounting rules require mark to market and eliminate SIV and other off the books vehicles and when there are no more dark markets.
I am sure that must have left something out.
I like that. Still trying to digest whether their extraodinary talent was making a better world or legitimizing fraud.
The problem is that TBTF institutions represent systemic risks, that lead in turn to automatic public support if things wobble.
Automatic support means you cannot lose on your bets regardless (privatized-profit-socialized-risk model), and that understanding contributes to risky investing for higher yields and this in turn increases system risk. Rinse and repeat, until global implosion. Reference the past 24 months if you want to know what that looks like.
Four Goldmans would be 1/4th as likely to present systemic risks, and during a crisis could be allowed to float or sink, as useful. At least, public support would not be automatically assumed.
Thus the four Goldmans would think twice about some of their risks, since they would be likely to absorb all the costs of failure, which at present is not even remotely the case.
So breaking up Goldman is about hamstringing moral hazard, or at least unwinding the privatized-profit-socialized-risk model.
cougar
And a hedge fund is just fancy Newspeak for a Ponzi Scheme. Only this Ponzi Scheme is bankrolled by the FED, which postpones the inevitable day of reckoning, while allowing GS to suddenly be worth $1 Trillion(according to Kwak) when a year ago it was broke.
Somebody show me some insight how GS is now worth $1 Trillion today. Mr. Kwak? Anyone? (/fading echo/: anyone?… anyone?… anyone?)
Ella, my light, my guiding star, my angel…
Basically, what you are saying is, when GS is no longer one of the primary beneficiaries of our fascist system, then it will be OK. Fascism being defined as: “A philosophy or system of government that advocates or exercises a dictatorship of the extreme right, typically through the merging of state and business leadership, together with the ideology of belligerent nationalism.” American Heritage Dictionary of the English Language, American Heritage Publishing Company, NY NY, 1971.
If we lived in a democracy, each of your points would, conversely, operate to protect the citizens, not GS and all similar corporations. I also submit that electronic voting (corporate controlled voting) is the greatest single evil on the face of the planet today, which enables the elite to remain fearlessly fascist. The corporate form of ownership is the second greatest evil. Barry Manilow is the third greatest evil.
See the maps and discussion at Blackboxvoting.org.
Go, Nemo! That is exactly the right track.
As is the front running. The Fed needs to look at that one. Starting with Bear.
Of course. Concur on black box voting.
We need some Tea Parties down on Wall Street.
Can someone explain this borrowing from the fed to invest in treasuries. I just don’t see that in the numbers. Fed discount window borrowing is really tiny. And these are overnight loans, sure you can keep rolling them but discount window borrowing has come down from close to $100B last year to only $20B. So it clearly looks like banks have dramatically cut down on fed borrowing. Even $100B at the peak of the crisis is a tiny amount considering the size of the financial sector.
I couldn’t find any other section in the fed balance sheet where they are lending money to private institutions other than to AIG.
I really think the banks are just using their depositor money to invest in treasuries rather than borrowing from the fed.
Secondly investing in 10 year treasuries is not as safe as you guys think, a sharp rise in yields reduces value of treasuries. So interest rate risk is real factor when investing in treasuries, especially when your funding is short term.
Maybe I am missing something, can someone try to explain.