Goldman Sachs: It's Not About Taking Risks

Those who take risk do not always win. A variety of mathematical models dealing with risk address and negate the chance of almost uniform success by one party. While those on Wall Street would promote the overwhelming risks in the industry, I would maintain that Wall Street circa 2009 is not in the risk business. How so? Let’s review results from the firm regarded as the best at managing risk: Goldman Sachs (GS).

The Financial Times provided insights into the Goldman Sachs ‘casino’ in writing Thursday morning, Goldman Benefits From Trading Bonanza:

Traders at Goldman Sachs recorded only one daily loss in the third quarter, highlighting the trading bonanza sweeping Wall Street as central banks continue to pump billions of dollars into the financial system.

The performance – revealed on Wednesday in a regulatory filing – compares with two losing trading days in the previous quarter and confirms that the authorities’ drive to revive markets after the crisis is yielding huge windfalls for some banks.

Before the crisis, banks regularly recorded trading losses on several days in a quarter.

Goldman made more than $100 million in profits on 36 of the 65 days in the three months to September and recorded more than $50 million in profit on more than eight out of 10 trading days, the filing shows.

To lose money on a total of only three days over the last two quarters defies the rules of logic, assuming that markets are free, fair and balanced. Even in Vegas the house doesn’t win at that rate.

The question begs then as to the nature of the supposed risks being taken by Goldman and every other Wall Street firm. Beyond the risks, we also need to question the very nature of the markets themselves. When a firm makes money 98% to 99% of the time, don’t tell me they’re taking risk. They are doing nothing more than ’shooting fish in a barrel.’ How so?

Let’s revisit what Larry Fink, the king of Wall Street himself, said about the risks, or lack thereof, taken within the financial industry. I addressed Fink’s assessment this past July in writing, “The King of Wall Street Takes on the Casinos”:

Revenues and profits are a function of volumes and margins.

Any businessman worth his salt works tirelessly at increasing his own volume and margin while necessarily narrowing those of his competition. I see a classic case of these competitive forces at work this morning in a report from the Financial Times, BlackRock Chief Attacks Wall Street Earnings:

Larry Fink, BlackRock’s founder and chief executive, on Tuesday took aim at the “luxurious” trading profits enjoyed by Wall Street banks, saying that they have taken advantage of reduced competition to charge their customers more for even basic trades.

“There are fewer players. There is very little capital being committed by these dealers,” Mr. Fink said.

Little doubt The King of Wall Street, Larry Fink is irked by the ransom being charged by those running the Wall street ‘casinos.’ The king says as much in stating:

“They’re just taking the spread between the bid and the ask [the price gap between buyers and sellers] and they are making very luxurious returns,” he added.

In layman’s terms, the King is denigrating those working the Wall Street ‘casinos’ as the equivalent of toll takers on the Triborough Bridge. Who likes paying increased tolls? Nobody, and especially not a king.

The size of the tolls and the regularity with which they are being collected by Goldman Sachs does not equate with risk-taking. This dynamic is totally consistent with behaviors and revenues generated in an oligopoly.

Oligopolies are fabulous for those running the business, but certainly not healthy for customers and the public at large.

Wall Street and Goldman Sachs in the risk business? I don’t think so.

Disclosure: No position in GS

Comments

[balois:]

"...To lose money on a total of only three days over the last two quarters defies the rules of logic..."

Right - somebody at GS must have messed up really badly on those three days. Gimme Zero % Fed Funds and I ll guarantee, you wont lose on any day!

have a good day

Nov 05 05:44 PM

[Tony Petroski:]

Mr Doyle makes an excellent point in this article. Goldman is not at risk. They aren't making their money by "trading." They make their money by skimming a small amount off the trades for which they are providing "liquidity."

This is the secret of the Madoff disaster. The Madoff investors knew that he couldn't return a consistent 17% day in and day out, but they assumed that he made his profit skimming the daily trade.

Nov 05 07:05 PM

[Graham and ...:]

Goldman's activities make it easier to run Ponzi schemes based on one's purported ability to "roll" money. Goldman actually does what the scamsters purport to do. Except that they can't.

The original Ponzi scheme was based on a "postage stamp" arbitrage that was actually do-able. Except that Ponzi saw a chance for easier money by running his scam.


On Nov 05 07:05 PM Tony Petroski wrote:

> Mr Doyle makes an excellent point in this article. Goldman is not
> at risk. They aren't making their money by "trading." They make
> their money by skimming a small amount off the trades for which they
> are providing "liquidity."
>
> This is the secret of the Madoff disaster. The Madoff investors
> knew that he couldn't return a consistent 17% day in and day out,
> but they assumed that he made his profit skimming the daily trade.

Nov 05 07:40 PM

[ebworthen:]

Risk? What risk, they just roll the taxpayer for cash from the FED at 0%.

High Frequency Trading (HFT) using the best computers and network connections money can buy - and that no one else can.

Goldman Sachs has a monopoly here - and they also get the H1N1 vaccine before anyone else.

"It's good to be King!"

Ah Louis...and Henry...and George...witness your successors.

Nov 05 09:11 PM

[talld:]

I believe there are many ways to skim daily trading, but the difference between ask and bid is not one of them, at least as far as makes sense to me. If someone is asking 50 and 7/8ths and I bid 50 and 5/8ths and they sell to me, there is no difference to keep.
There are many ways to arbitrage the market, from ETFs to foreign stocks in emerging markets ETFs changing with currency. But I dont see how the difference in bid and ask pays anyone anything. Well, perhaps the few people who dont put in a price, but just buy "at market." But who does that?

Nov 06 12:49 AM

[Tony Petroski:]

talld:

(I don't know, I'm guessing)

Goldman has access to market information that says in the next 1/10 of a second 1 million people want to buy FXI and 500,000 people want to sell, all at the "market" price of $42.20. You don't need to be from MIT to know that in this situation, the price will go from $42.20 to $42.21 and Goldman gets 1/10 of a cent on this transaction because they provide "liquidity." Isn't that how it works?
I'm not saying it's illegal. But I know that real traders have some down days.

Nov 06 09:45 AM