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 [e-mail].

Comments

[outnow]

Yawn, the fact that they can steal us blind is not even news. I'd rather think that a young boy is trapped on a flying saucer ballon. The boy can be rescued, we cannot because of our corrupt system and our bought-and-sold representatives who gladly accept campaign contributions from their benefactors. Then they are smoozed by lobbyists. This behavior is considered to be "normal."

Being sucessful as a capitalist does not entail any ethics or morals. In fact, breaking the law is easier when you own those who make and are supposed to enfore it. The rotation system in and out of the government is so obvious.

The system is irreparably broken and they can't even admit that fact on Gravy Street or Wall Street or whatever they call it. Only Kucinich and a few honest ones even mention this fact.

[Jimboy17]

Sounds like theft to me.

[Antiks]

Conflicts of interest. Former CEO gets bailouts for all his buddies on Wall St. Big surprise there.