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Goldman Sachs expected to post record profits

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The NYT reports that Goldman Sachs is expected to report it earned record profits for the last quarter:

Analysts predict the bank earned a profit of more than $2 billion in the March-June period, because of its trading prowess across world markets. If they are right, the bank’s rivals will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have rebounded so drastically only months after the nation’s financial industry was shaken to its foundations.

The obsessive speculation has already begun, along with banter about how Goldman’s rapid return to minting money will be perceived by lawmakers and taxpayers who aided Goldman with a multibillion-dollar cushion last fall.

Others have said earlier that Goldman Sachs started behaving more like a hedge fund rather than a bank since the credit crunch.  The NYT concurs by noting that Goldman’s profits are likely due to the fact that it took more risk compared to others:

While others are shying away from risks, Goldman is courting them. A common measure of risk-taking at Goldman and other banks is known as value at risk, which estimates how much money a firm might lose on a single day. At Goldman, that figure rose by more than 20 percent in the first quarter. Analysts predict Goldman’s V.A.R. ran high in the second quarter as well.

“It’s taking opportune risk that others aren’t taking,” said Charles Geisst, author of the forthcoming “Collateral Damaged” and a Wall Street historian. “They are scooping up all the risks that are available.”

It goes without saying that an implicit government guarantee obtained by having powerful allies in high places creates moral hazard.  And there may even be more than just a grain of truth to the conspiracy theory that the federal government bailed out AIG but not Lehman Brothers because Goldman Sachs was a significant counter-party:

For all its success, Goldman is not impregnable. In addition to the federal money it took last fall, it benefited from the government’s bailout of the American International Group, being paid 100 cents on the dollar for its $13 billion counterparty exposure to the insurer, and it has $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation.

Also, did I forget to mention earlier that Edward Liddy, AIG’s CEO Edward Liddy served on the board of Goldman Sachs from 2003-2008 and owns about US$3M worth of Goldman stock?  But of course let’s not lose sight of the fact that the so-called conspiracy theories are gaining traction.

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Written by defennder

July 13, 2009 at 3:32 PM

Posted in US

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