Goldman Sachs: Profit Dissonance

By James Kwak

A reader pointed me to this story in The Guardian citing Goldman (GS) 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 (AIG); it’s also the result of reduced competition resulting from the consolidation of Bear Stearns into JPMorgan (JPM), the failure of Lehman, and the weakened state of Citigroup (C) and Bank of America/Merrill (BAC). 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.

Comments

[dcb:]

> If you read the works of Jefferson he described exactly what happened in this crisis. it is very interesting reading. He described what would happen if you gave private bankers the ability to control money supply. There is extensive writing suggesting that bankers intentionally caused the banking crisis that lead to the creation of the central bank in the US. The fed is privately owned by banks. While I want a fed to be independent of the whims of politics, the idea of having it owned by private banks amazes me in its absurdity. read in detail about the NY fed. Wow, the more you know about what is going on in the fed system the more disturbing it is.
>
> Now let us take a bit of conjecture. the entire monetary policy of the country is essentially controlled by private banks. (so naturally they do what is best for them). which means over expansion of leverage (credit) and currency weakening. This allow linear profits to become log in nature. since all credit crisis end up the same. I am a very powerful firm with many connections and have lobbied the government of the rules and regulations that are in place before the current crisis (cheap excessive leverage). I have my players in many of the right places, and realize the house of cards is getting unstable (too much cheap excessive leverage throughout the system). What is the easiest way to bring it down. create a consumer recession which causes home owners not to be able to pay mortages, credit cards, etc. How will I create such conditions.
> We know from the 70's you can induce a recession via commodity price increases. Well my, analyist starts talking up oil, I start making well timed purchases to help drive it up. my former partner runs the commodites exchange so that isn't an issue. Boom house of cards falls. My firm being the best and brightest just happens to be the one that notice something wrong in mortgages, and avoided most of the carnage, and since I know exactly who is leveraged to the hilt I can take out cds contracts on people such as AIG. I also have my place. The sec hasn't been doing anything about naked shorting in years, and my former partner runs the NYSE as well. So I run up the price of oil, start to short at strategic times and recession combines with strategic shorting does the rest. I also know the positions of the other players on the street and can take them out too. Note others see my trades and add to the effect creating help without intentionally doing so.
>
> If you want virtual proof of this firms recent manipulations take a look at some of tyler durden's articles. there is one article which shows the percent of goldman trading prop desk on NYSE. take a look at the percent traded on the almost two month straight down run we had, and then on the bounce up. then look at the percent when the rally needed support and currency markets were moving in the opposite direction to support the rally. then start looking inot when support was provided at specific time of day at critical inflection points. david FRY does some interesting data analysis on this
>
> Some of what i have written is conjecture, the great majority of it is fact. In truth the only real conjecture is did the events happen by accident or with intent. I vote with intent until proven otherwise, and this is why I believe this particular firm must be broken up. In fact all of these firms must be broken up into much smaller pieces so no individual firm could actually do what I have mentioned above.
>
I would like to add to this the role of Goldman in AIG, them getting 100 cents on the dollar, the fact that Blankfien was the only banker in the meetings of AIG with the fed, and the fact that they are the only one standing. Goldman guys ran Tarp, the list goes on and on

I hate to say this, but my scenario would fit with the fact that this has been caused by goldman. If that was the case it should be their most profitable year ever. I think there is enough circumstantial evidence to support a federal investigation of this firm and their role in the crisis. I would support any such effort

Jun 24 08:51 AM

[dcb:]

If you are allowed to manipulate the markets, NYSE and commodities, you will make a lot of money!!! Add to that telling people not to buy when you establish positions and getting them to buy when the market should be correcting.

Please see zero hedge recent article about goldman's conviction buy list. In reality our current government is run by a massive corrupt fraudulent company that I see no reason that the techniques to put mobsters in Jail could not be used.

Jun 24 08:56 AM

[Harry Tuttle:]

I wholeheartedly disagree with the labels. The government subsidized the financial sector by backstopping the losses that came with the HUGE bets they made in the 2003-2007 period. The remaining players will take a bigger share of a smaller pie, so they will make money.

There is no "optimist vs. pessimist" debate here. The Treasury is run by Wall St. lobbyists so they work for Wall St. There is absolutely no evidence that any of this is good for the overall economy in the medium or long term.

Jun 24 09:47 AM

[Warm_Paw:]

Bank earnings aren't being reported as they used to be.
Earnings are over positive to hype the economy.
Notice this crisis centers around toxic assets on bank balance sheets yet no one discusses the percentage of toxic assets unwound for each bank, or the amount of these assets left on bank balance sheets.
We have at least two more death spirals dealing with the unwinding of these assets. The public's obviously not to know that.
The public's to take the hit buying bank stocks so they can dump these mortgage backed securities.
The very idea citi or Goldman want to give larger pay to bank execs has me wonder why the tax payer should be on the hook to bail them out.
Let them fail. Greedy pigs should get slaughtered. As for throwing the economy into a tail spin, it's inevitable.
These banks need to go the way of the car companies.
The real challenge is bringing manufacturing back to America.
Jobless people don't pay taxes.
The few working people won't be able to shoulder the burden.
Of course we could raise the tax rates on bankers and right the countries woes.

Jun 24 09:54 AM

[XRTrader:]

Why do people always gripe about what caused what and whom to blame? Who cares. Its over. Isnt this an investing site?

Lets face the facts and talk about options/stock plays to maximize profit when these banks do beat earnings estimates!

Jun 24 11:53 AM

[dcb:]

The government would love for this dialog to disappear which is why it can't. Since the press has decided not to actually perform its function of educating the populace as to what is going on site like this are about the only forum of real democracy in action anymore. A thriving democracy requires a that the media always have their eyes out for the abuse of the system. The founding fathers understood this which is why we have the first amendment. The very idea of "it's over lets move on" dooms us to the mistakes of the past and prevents effective governing.

We care because we who is to blame and who is the case because we do not want to see this happen again. the current stake are huge. Throughout my life I have seen multiple banking crisis that were not very hard to predict, yet there are no real policy changes. Lat Amer Debt, Russian/emerging market, S&L, LTCM. The list goes on and on.

We had the dot com bubble, greenspan gave out truckloads of free money which caused the housing boom. In order to fix this "crisis" the dollar and stability of our system has been put at risk in order to bail out a system that fails time and time again. Each time we fix a crisis the cure poses greater and greater system risk. Is it fair to put everything american's have worked their entire life for at risk in order to bail out wall street. I do not think so.

Don't be so smug to think that what happened to Argentina, or iceland can't happen here. The policies are in place to almost ensure that it will happen. But hey, since the bankers will still be getting their bonuses I guess everything is alright.


On Jun 24 11:53 AM XRTrader wrote:

> Why do people always gripe about what caused what and whom to blame?
> Who cares. Its over. Isnt this an investing site?
>
> Lets face the facts and talk about options/stock plays to maximize
> profit when these banks do beat earnings estimates!

Jun 24 12:41 PM

[morph366:]

The PR folks at GS would be smart not to have this story appearing in too many places other than The Guardian.
One senses that there is a strong antipathy building towards GS not only amongst the "little people" that haven't given up in desperation (myself included) but even amongst the financial elite that envy their GS counterparts - who, for the time being, sit under a Washington halo.

Jun 25 08:26 AM

[LoveShorting:]

James & dcb - - thank you for speaking the truth. Let's hope more people learn the facts, care about this, and act on this.
XRTrader - - are you kidding??? or do you work for GS ???
disclosure - - still short GS and will be until they end up like Enron.
This is still a democracy so there is hope.

Jun 25 08:59 AM

[jackooo:]

Obama is hope!!

Jun 25 12:30 PM