Close inspection of the graphic above really tells you all you need to know about the much heralded "super-talent" on Wall Street. The large red columns on the chart shows us just how much of Goldman Sachs' (NYSE:GS) revenues come from trading its own capital. When I say its "own" capital this has to be seen in the context of that wonderful sleight of hand of modern capitalism - when times are good banks will vigorously protest how they are putting their own capital at risk and deserve to be compensated mightily; when times are not good, they will quietly use the public's capital to play with, but still make the case that they need to be rewarded generously in the interests of maintaining "orderly" markets.
In 2007, when capital markets were extremely cooperative the red column put in a rather staggering peak performance. 2008, which some may recall was a little more troublesome for markets in general, saw the red column drop back substantially.
Questions might legitimately be asked as to just how far the 2008 column might have dropped, even below the zero axis, if it had not been for the kindness shown by Secretary Paulson in making AIG's obligations to GS whole. This rescued the bank with $10 billion of taxpayers' money, fast-tracking the conversion from investment bank status to commercial bank status, and in essence providing a gigantic safety net under the financial system.
Rolfe Winkler in his blog at Reuters captures the flavor of Goldman's business quite well with this remark.
It’s a hybrid hedge fund and bookie, with an investment bank and asset management business thrown in for good measure.
All that I would add to the suggestion regarding its role as bookmaker is that GS is in the unenviable position of knowing that it can rely on laying its riskiest bets off to Tim, Larry and all their other chums and ex employees in Washington.
The part that I think irks most of us is the notion that bankers as punters are essentially counting on liquidity and favorable trading conditions. A cynic might even suggest that it is in fact the government's mandate to GS to provide the requisite support to create such conditions. They feel fully entitled to eye-watering compensation when times are good, and, the most generous welfare programs in the history of humankind when markets run into a spot of bother.
Let's allow Mr. Winkler to have the last word as he has mustered the energy to raise some pertinent further issues. However, I am afraid they will almost certainly go into that great black hole of silence and meet with no response from those who should be required to address them.
With that in mind, one is left to wonder whether Goldman was really worth saving last year. What have taxpayers received for $50 billion worth of cash and guarantees, for giving Goldman access to the Federal Reserve as its lender of last resort?
Saving Goldman was largely about saving the derivatives market, which is so big and unstable that the death of one counterparty could mean the death of all. With big commercial banks like JP Morgan Chase (NYSE:JPM) in deep, saving the derivatives business was as much about protecting depositors and maintaining the integrity of the payment system as it was derivatives themselves.
Many of us didn’t like it — we thought banks like Goldman should have been recapitalized the right way, by wiping out shareholders and forcing subordinated creditors to eat their share of losses. But that ship has sailed. We socialized the risk while privatizing the profit because we were told we had no other choice: The government had to guarantee the biggest banks’ liabilities because they were too unstable to survive bankruptcy or FDIC receivership.
If that’s true, why haven’t we seen any substantial reforms to reduce systemic risk? Congress is kicking around new resolution authority to help resolve failed systemically-important banks. But the goal should be reducing systemic risk to begin with. Yet serious reform of the derivatives market — something that would reduce its size significantly — is nowhere on the radar.