Goldman Earnings: Unfair Advantage or Trading Prowess?

The friendly folks at CBS Radio woke me up early this morning to talk about a front page New York Times article about Goldman Sachs. In my sleepy, throaty voice, all I could ask is, "Goldman again?"

Goldman will release its second-quarter earnings before the bell tomorrow morning amid high expectations. Analysts expect that the firm earned between $1.8-$2 billion in the March-June period and some believe that the number could be even larger. The pop in earnings likely came from positive results from fixed income, commodities and currencies (FICC) trading operations.

There will be those who rightly acknowledge that Goldman profited with the help of Uncle Sam. I'm not talking so much about the $10 billion in TARP funds, which has already been repaid, but about Goldman being made whole when the government saved AIG. That was the overlooked real story when I appeared on CNN the morning the AIG bonus news broke, but I was prevented from raising the issue -- watch the video and you'll see what I mean.

Goldman has also used cheap government money to issue $28 billion worth of bonds. But what everyone seems to be talking about is that the resurgence in Goldman's earnings has more to do with the firm's decision to assume risk when others were too nervous to do so. This includes executing lots of trades based on proprietary computer models, known as high-frequency trading. Think of this as a sophisticated form of day-trading with risk controls in place.

Goldman also benefited from lack of competition: with fewer players in the game, the spreads (the difference between bids and offers) have been wider, allowing for more robust profits for those who have the wherewithal to enter the game.

Image by Flickr User epicharmus, CC 2.0

Where does that leave everyone? Here's how it shakes out:

• GS shareholders: happy that shares have increased 68% this year to141.87 (through Friday's close).
• GS employees: cautiously optimistic that the bonus pool remains in tact through the end of the year.
• Taxpayers: angry that the firm is profiting amid a deluge of rotten news.
• Financial journalists: delighted that there's a story to talk about on a summer Monday morning.

Follow Jill Schlesinger on Twitter: www.twitter.com/jillonmoney

Comments

[Acharn]

I'm trying to figure out what you said here. It seems to boil down to: the bank holding company Goldman Sachs made a lot of money by taking advantage of help the government gave them. I don't see any suggestion that anybody broke any laws, although I think somebody did based on what I read elsewhere. I just don't get it -- what point is your story trying to make?

[Jill Schlesinger - Huffpost Blogger]

The success of the firm is based on *both" its willingness to take risk and the advantage it had due to government help. The law-breaking you raised was addressed in a Matt Taibbi's Rolling Stone article (http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine) among other places...

[ucjb]

Obviously, the system is rigged and Goldman Sachs is gaming the system. In just a mere 9 months from total banking meltdown Goldman Sachs is making huge profits.

Goldman Trading-Code Investment Put at Risk by Theft

“The bank (Goldman Sachs) has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Assistant U.S. Attorney Facciponti said...

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajIMch.ErnD4

[Jill Schlesinger - Huffpost Blogger]

This is an interesting story worth following...

[perrylove]

Thanks Jill, keep at it!!
I dont read the mainstream crap and this type of information is important so I appreciate you putting it here for me to find easily alongside the social issues I am concerned with. How about a daily market DJIA/S&P update? Can HuffPo add that?
Its sad to see so few comments here. If the article were about palin, or abortion or some other important but easily digestible topic, then this comment section would be flooded with witty one-liners. We leftys need to understand what is happening in the financial markets AND engage with each other on how to help take this topic's power away from neo-cons and back to the middle class.

yes, goldman has a huge inside advantage.­..geithner and paulson, both goldman sachs alumn, hired by bush, continued by obama. how can we persuade obama to throw them out and replace them with the next evolution of globally sustainable financial visionaries?

[Jill Schlesinger - Huffpost Blogger]

perrylove--thanks for your comments. I think that most want to sort through this information in a thoughtful and deeper way than is often expressed in the media or even in some of the more vituperative comments that I receive from time to time. As a responder just said to me, "this (the Goldman Sachs story) is not going away anytime soon." If that's the case, then let's really talk about it instead of shouting at one another.

[theaetetus]

They are the face of capitalism in the 21st century. Amoral, driven by profit and willing to use any means necessary to further their agenda of amassing more wealth.
They are not only crooked but a great threat to the global economy.

[Jill Schlesinger - Huffpost Blogger]

I figured that you would see it that way...:)

[stujo4]

Unfair advantage. Decidedly.