Did Goldman Gain from America's Pain?

Wednesday I was featured at the New York Times “Room for Debate” blog, along with five others more notable than me.

• William K. Black, economist, the University of Missouri
• Yves Smith, financial analyst
• Mark Thoma, economist, University of Oregon
• David Merkel, financial analyst
• Charles Geisst, author
• Jeffrey A. Miron, economist, Harvard University

The question was “about Goldman’s (GS) compensation pool, which will be $11.36 billion (set aside) for the first half of 2009 (working out to about $386,429, on average, for each of the roughly 29,400 employees and temps).

The average reader may be perplexed about huge bonuses making such a comeback. We’re asking various economists, whether it’s reasonable to be critical of this kind of payday at Goldman when the rest of the economy is still floundering? Or is this a sign that the financial industry is stabilizing and the federal government’s aid is doing what we want it to do?”

Word limit was 300. I had more to say, because if you’ve read me for any length of time, you know that I am no fan of government intervention. I was against the bailout from the start, preferring Resolution Trust-style solutions.

My view is that Goldman would have survived on its own without the bailout, though it would have scraped by. That said, absent the bailout, Goldman might have ended up being a near-monopoly. Bank of America (BAC) would be gone, as would Citi (C), and Wachovia. Wells Fargo (WFC), JP Morgan (JPM) and Morgan Stanley (MS) would be question marks. The amount of increased pricing power to the remaining investment banks would be even larger than it is today.

Most of the government programs Goldman Sachs benefited from were available to many institutions of their size and class. The government took the risk that some of the money would be used by healthy firms to make more money, in order to prevent panic regarding firms that needed the money to survive. Other money, like the TARP, was forced on Goldman.

Does this mean I don’t think that Wall Street (and thus Goldman) has too much influence on government policy? No, I believe that the US Treasury has been captured by those that regulate them. This includes Pimco and Blackrock, who finance the government, and the investment banks, who try to profit from government policy. There are too many appointees in high positions at the Treasury and Fed coming from firms that seek to influence the US government.

I don’t fault Goldman for its actions; they are a profit-seeking firm, and a very good one. I fault our government for intervening where they should not have done it.

Let the bonuses be paid, why should the employees of Goldman be held responsible for the errors of the US Government? That is water under the bridge. Let us move on and try to make future government policy better (less interventionist).

PS — does that mean we shouldn’t investigate Goldman Sachs to see if they aren’t front running the market with their high frequency trading? No, that’s worth looking into, but such an investigation would need some deeply smart people to be able to understand what is going on.

Comments

[Johnc222]

Goldman didn't gain from America's pain. It caused America's pain along with Deuchter bank of Germany.

Goldman set the banks up beautifully....they gave the banks a lesson in how Wall street really works,.

The repeal of Glass-Steagal was a blessing to Goldman.... johnc222

2009 Jul 15 09:21 AM

[KirbyJF1]

Goldmans Doom Machine (Trading Software) is awesum. I don't know how anyone can match it. With their software they don't want the uptick rule reinstated & they need the SEC to keep their wink & Nod on naked shorting to the detriment of any one invested in the markets. The average investor is a fool if you think you can invest in the New Casino that Wall Street has developed. With all the new taxes comming our way, why take any risks in the market or in the economy. I'm getting out of the majority of stocks I own. I can't compete any longer.

Kirby

2009 Jul 15 10:49 AM

[DonFurio]

More whining from the losers and shorts.


On Jul 15 09:21 AM Johnc222 wrote:

> Goldman didn't gain from America's pain. It caused America's pain
> along with Deuchter bank of Germany.
>
> Goldman set the banks up beautifully....they gave the banks a lesson
> in how Wall street really works,.
>
> The repeal of Glass-Steagal was a blessing to Goldman.... johnc222

2009 Jul 15 11:14 AM

[Thomas J. Gordon]

Lehman and Bear are gone. There is less competition in Investment Banking. I remember in the muni world if a municipality wanted to float a bond all the investment banks bid on it. Now there are less investment banks bidding on it.
I would have been more curious if David had any feel whether gs is making all it's money on its proprietary trading. i sold my gs at 205. i didn't believe any company could consistently be that much smarter than everyone else.

2009 Jul 15 11:54 AM

[Shiv Kapoor]

Dunno why I have a bad feeling about this. Cant see anyone, be it a person or a program beating the markets in perpetuity; buy and hold person like Buffet perhaps, trader unlikely. Am hoping GS is not Enron II in the making. In the meantime, I do hope the auditors are exercising extra due diligence.

2009 Jul 15 01:45 PM

[User 328641]

GS was bailed out in the first place by AIG without regulations/restrictio... The rest is history...

2009 Jul 16 08:34 AM

[Brad Denny]

While the Goldman corporate chiefs and traders were hedging with bets against the markets, GS chief investment strategist Abby Joseph Cohen confidently maintained her S&P 500 target of 1,600. Was it just that the left hand did not know what the right hand was doing? Or is there a darker side to Goldman's "for profit" operation?

2009 Jul 16 02:04 PM

[artm]

The Government made good Goldman's CDS book with AIG. The $11 billion Golman bonuses cost the taxpayers $180 billion in the AIG bailout.

2009 Jul 16 11:26 PM

[Thomas J. Gordon]

artm, great point. I remember thinking it was funny that people were compaining about 150 mill in boneses at AIG when the federal gov't was paying certain parties mega billions to keep them whole. Let AIG go bankrupt and what would gs have gotten?

2009 Jul 17 05:11 PM

[Moon Kil Woong]

Hmm Goldman helped to precipitate the recession by marketing bad mertgage bonds as AAA with derivatives after getting AIG to sell insurance on them. Then they bought more insurance than they needed to bet on their default. Then got the Federal government to bail AIG out. Then before AIG settled at penies on the dollar they convinced the government to use TARP money to give more to AIG so they could pay their derivatives contracts out at 100 cents on the dollar even though they didn't need to.

Now they are using that money to corner the enture US equity market with program trading and suing a former employee for stealing their proprietary program trading code saying that "in the wrong hands it can be used to manipulate the markets." At the same time, since they have too little money to corner the market (a minor problem) they have decided to use too much leverage thereby asking the FDIC for the rights to violate VaR and keep using the SEC's minimum equity maximum leverage rules which are basically the same rules that bankrupted Bear Stearns and caused the financial collapse that ensued.

Did I miss something? Should we leave Goldman Sacs to their own devices. Certainly not. Although you can say that you can't blame GS. They do whatever is in their best interest regardless of who they hurt or steal or destroy including our wealth, market, and economy, such an argument is the reason we put people in prison and regulate what they can do oh so very carefully.

2009 Jul 19 12:32 AM

[Sober Realist]

Well said. GS has no moral imperative to safeguard the well-being of America, so we shouldn't trust them being in key positions of our government.

On Jul 19 12:32 AM Moon Kil Woong wrote:

> Hmm Goldman helped to precipitate the recession by marketing bad
> mertgage bonds as AAA with derivatives after getting AIG to sell
> insurance on them. Then they bought more insurance than they needed
> to bet on their default. Then got the Federal government to bail
> AIG out. Then before AIG settled at penies on the dollar they convinced
> the government to use TARP money to give more to AIG so they could
> pay their derivatives contracts out at 100 cents on the dollar even
> though they didn't need to.
>
> Now they are using that money to corner the enture US equity market
> with program trading and suing a former employee for stealing their
> proprietary program trading code saying that "in the wrong hands
> it can be used to manipulate the markets." At the same time, since
> they have too little money to corner the market (a minor problem)
> they have decided to use too much leverage thereby asking the FDIC
> for the rights to violate VaR and keep using the SEC's minimum equity
> maximum leverage rules which are basically the same rules that bankrupted
> Bear Stearns and caused the financial collapse that ensued.
>
> Did I miss something? Should we leave Goldman Sacs to their own devices.
> Certainly not. Although you can say that you can't blame GS. They
> do whatever is in their best interest regardless of who they hurt
> or steal or destroy including our wealth, market, and economy, such
> an argument is the reason we put people in prison and regulate what
> they can do oh so very carefully.

2009 Jul 19 01:28 AM