What’s good for Goldman Sachs…
…isn’t necessarily good for America. Goldman Sachs is reporting a US$3.4bn profit (way better than the US$2bn initially predicted) for the 2nd quarter of 2009. This comes after it paid back TARP funds of US$10 bn the first quarter. But of course, Goldman still owes the American taxpayers money. You see, as noted earlier, Goldman received about US$13 bn from AIG when the latter sent out bailout funds it received to its counter-parties (of which Goldman is one), which is currently run by a former Goldman director and who also happens to own US$3M worth of Goldman stock.
Factoring the US$13bn in, Goldman Sachs hasn’t made any profits yet. It’s still operating at a loss. That isn’t stopping its top executives from breaking out the champagne, rewarding themselves with huge bonuses while praising themselves for daring to take risks when Government Goldman Sachs knows it has friends in high places whom can easily bail the hedge fund bank out when it runs into problems.
That Goldman Sachs was able to post profits because the federal government bailed out AIG whilst ensuring that its counter-parties for all insurance deals are fully paid sends the wrong message to the rest of Wall Street: That it’s OK to take risks and those who shy away timidly from risk like Morgan Stanley would continue to operate at a loss:
But to a degree unique among its peers, Goldman has turned the crisis to its advantage. Its perennial rival, Morgan Stanley, has refused to gamble in the markets and, as a result, is expected to post a humbling quarterly loss.
Wall Street bankers gambled with the mortgage market, causing one of the worst financial crises in the world, and this is the message the Obama administration is sending to Wall Street? Rahm Emmanuel was right in saying that we should never waste a crisis. Goldman Sachs ought to have been nationalized. That way we’ll know what truly goes on inside that damned financial institution.
Update: Mark Thoma has a blog post aggregating reactions from analysts (including his own).
Update 2: Paul Krugman wrote an op-ed today (July 17th) on why Goldman Sachs’ record profits don’t mean much for the rest of America.