Jealousy Clouds Judgment When it Comes to Goldman (GS)

Goldman Sachs (GS)

You always want to be in the middle. If you fall back too far, failure looms large but if you outperform the pack, you become the poster boy for greed. Just ask Goldman. Lloyd Blankfein’s firm has become the favorite whipping boy of the populist media. Yesterday, the bank reported a profit of $3.19 billion for the quarter (those are almost oil company numbers). The bonus compensation pool for the year will be north of $20 billion, the highest ever. Most of the media coverage has expressed anger and outrage. But the true emotion in play here is jealousy and everybody is just trying their best to masquerade it.

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Stock Analysis

Not trying to be a Goldman apologist here. Despite whatever you might hear from the executive suite at 85 Broad Street, there is no denying that Goldman has benefited tremendously from the US government and the taxpayer. Goldman had $13 billion worth of AIG insured mortgage bonds that were essentially junk, had the government not decided to compensate AIG’s counterparties at an unprecedented rate of 100 cents to a dollar (every other transaction at the time was being settled for pennies on the dollar except this one). Goldman claims that even if AIG had gone down without a bailout, it wouldn’t have suffered because all the exposure to AIG was hedged. That cannot be true because no other entity on the planet besides the US government could have stepped up to the tune of $13 billion at the time. Then there is the $10 billion in TARP money and the $22 million of FDIC backed debt that Goldman has issued. The firm also has access to the same cheap Fed money that commercial banks do, even though it is anything but one.

Goldman’s strength in the last 2 quarters has been driven by great results in the commodities and bond trading businesses. This is partly due to the fact that Goldman is getting cheap money from the government (through the discount window and because short-term interest rates are close to 0%). Cheap government money also reduces Goldman’s borrowing cost from private credit markets because lenders know that the government is there to back Goldman up. Goldman response is that most of the profits come from trades on behalf of clients and very little from proprietary trading. But the point is that Goldman is able to service its clients better and provide them with cheap money to play with because of government financing. Therefore, any claim that Goldman is not benefiting from the government and the taxpayer is patently untrue.

But here is where most people lose it — just because Goldman is making some money off of Uncle Sam doesn’t mean it’s the devil or a vampire squid (whoever came up with that at Rolling Stones?). Goldman is playing the card it was dealt and is playing it extremely well. All the steps listed above that the government has taken to help Goldman are not Goldman specific. Every other major firm on the street was afforded the same privileges but they haven’t been able to take advantage of them the way Goldman has (e.g. Morgan Stanley’s (MS: Charts, News, Offers) trading results have been moribund). The people who work at Goldman are just a little smarter than everybody else and that results in jealousy which is masqueraded as anger and outrage. Also, it’s hard to deny that the government doesn’t treat Goldman a little bit better than everybody else. But that’s life. Everywhere else in this world too, the smartest, richest and influential get preferential treatment. And to its credit, Goldman has built itself to be a firm with enough systemic influence that the government has to tend to it.

So we should quit expressing anger over Goldman’s bonuses and acknowledge that it has done a good job. Now, that doesn’t mean that a status quo is all right. Goldman would prefer a status quo but what the country needs is a restructuring of the financial sector to prevent too big to fail firms such as Goldman from becoming so systemically important. The government and the treasury need to lead that initiative but they haven’t done so yet and that is where the outrage should be directed. Don’t blame those who make hay in the system — we all would do the same if in their position — blame those who created the system and can’t fix it.

Some Additional Goldman Commentary

Inside The Great American Bubble Machine — In case you haven’t seen the Rolling Stones piece from a few months ago which gave everybody fits.

Goldman Sachs: Your tax dollars, their big bonuses — Good times for Goldman while everybody else struggles.

Bonuses Put Goldman in Public Relations Bind — The PR guys at Goldman should be the ones getting the biggest bonuses.

 

Other stuff making news

Galleon founder charged with insider trading — Insider trading cases never go out of style.

At $2.5 Billion, G.E.’s Quarterly Profit Hints at Stability — The economy is still not bringing good things to GE Capital.

Amazon.com Cuts Book Prices to $9 in Walmart ‘Price War’ — This is starting to get a little childish.

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