There are many terrifying things in the world, but for my money the most terrifying news article I have read in weeks was the one in the New York Times today by Graham Bowley and Jenny Andersen headlined "For Goldman, a Swift Return to Lofty Profits". Now it's obvious from my writing that I am not a fan of the big banking companies like Goldman Sachs, but why would it scare me so much that they had made big money this last quarter? Because of how they made it:
In essence, Goldman has managed to do again what it has always done so well: embrace risks that its rivals feared to take and, for the most part, manage those risks better than its rivals dreamed possible.
"It is, in many respects, business as usual at Goldman," said Roger Freeman, an analyst at Barclays Capital.
Traders said Goldman capitalized on the tumult in the credit markets to reap a fortune trading bonds. It profitably navigated a white-knuckled run in stock markets. It bought and sold volatile currencies, as well as commodities like oil. And it reaped lucrative fees from the high-margin business of underwriting stock offerings, which surged this year as other, more troubled financial institutions raced to raise capital.
So what Goldman is doing is the exact same kind of high-risk, "white-knuckled" trading that led us to the economic collapse of last fall. And because their bets are -- so far -- paying off, they will be giving out $18 billion dollars in salaries and bonuses to their traders; and because those bets are paying off, most of the other big Wall Street firms will be following them back into these speculative trading ventures.
Goldman is happy to take these risks because, hey look, they are still too big to fail. They know that even if their luck runs out, the Federal Reserve and American taxpayers will still be there to back them up.
This article should be raising five-alarm, all hands on deck red alerts all over Washington, DC. But I fear too much of the business media and DC politicians are once again not paying attention. The good news I can report is that high-level sources in the White House are paying a lot of attention to this, and are very troubled by it. I am very glad about that, but am still concerned that Treasury and most of Capitol Hill seem not to understand the consequences of Goldman and their ilk going back to the exact same dangerous games they had been up to before. It's like last fall's financial collapse never happened.
Now just so you think I'm all doom and gloom, since I started with the scariest article I had read, let me end on the funniest article I've read in weeks. Peter Wallison at the American Enterprise Institute wrote an article attacking the idea of a consumer financial protection agency, in other words, regulations on those big banks' trading practices, saying the idea of protecting consumers and our entire economy from high risk trades is "elitist". Wow, that is comedic chutzpah on a very high level: defending Goldman Sachs and their friends from more regulation, defending the most elite and irresponsible speculators in the world, by calling those of us who want some regulation of them elitist.
That kind of comedy gold is exactly what got us into the mess we are in today. Which I have to admit, isn't so funny after all.
Mike Lux is the author of The Progressive Revolution: How the Best in America Came to Be.