03/18/2010 05:12 am ET | Updated May 25, 2011

Financial Crisis Worked Out Well for Goldman Sachs

Goldman Sachs reported its earnings today. For the quarter, profits from trading and principal investment were $10.03 billion, up from $2.7 billion for the same quarter last year.

A year ago the company was saved by Treasury Secretary Hank Paulson, who intervened on its behalf. So it is interesting, to say the least, that last year's flirt with disaster turned out to be so great for Goldman Sachs. Now that they are a regular commercial bank they actually trade more, which makes sense: if the US Treasury covered my losses, I would also be happy to take major risks.

And they can lever up, since much of their assets are valued at what Goldman says they are worth.

What's more, compensation is up to $17 billion so far this year, up from $11 billion during the same period last year. That is $527,000 per employee, up 46% from last year's figure. I don't resent them that, since every Goldman employee I ever came in contact with was bright, competent and professional, so they probably deserve it.

Yet curiously, the financial crisis seemed to have worked out fairly well for Goldman. They are still a very large, highly levered (16:1) company, where half the profits go the employees (vs. 20% of the profits in a typical hedge fund), and if anything goes wrong, the tax payer steps in to take care of it.

I also find it interesting that they still measure risk by VaR (Value at Risk). That "measurement" proved to be worthless last year, because VaR presents potential losses under normal circumstances. Of course the only time you really need your risk controls is exactly when the results are abnormal, outside the Gaussian curve. The ONLY concern for risk managers should be that tail event, the 50 year flood. But their models exclude those, and this is precisely why Goldman teetered on the brink last year, and may need the taxpayer to backstop them again some day.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at