1. The facts
Goldman Sachs, the world leading Investment Bank (forget about the universal bank status they took amid the financial crisis late last year, and that they will surely abandon as soon as politically feasible) posted this week record profits for its second quarter ending June 30, at $3.44 billion. Its share price has appreciated more than 70% this year and is now around the pre-Lehman Brothers bankruptcy filing in September 2008. The return on equity (ROE) is standing at 20.3%.
Trading and principal investments were $10.78 billion, 93% higher than Q4 2008 and 51% higher than Q1 2009. Trading in fixed income, currency, commodities and equities generated over half the bank’s record net revenues, almost tripling from last year’s second quarter. The rest of the business remained weak.
Accordingly record compensation will be paid on trading floors: bis repetitas.
Goldman is a private company and conducts its business in the best interest of its stakeholders; it has been very successful in doing so (do you remember that they were amongst the first to sell the real estate and financial sectors pre-crisis in 2008?).
Politicians are certainly going to cry foul whilst they should cheer the success of a private entity that will pay handsomely the Treasury directly via corporate taxes and indirectly via employees' income tax. True it will be a drop in the ocean of debt accumulated not only recently but over the years via relentless public spending and no forward looking policy (consumers are electors first), but it is still better than the current and future state of public finances (stripping off the aid brought to the financial and automotive sectors - by the way Goldman paid $426 million on the preferred stocks it received under the TARP programme). The methodology on which bonuses are paid and the risk asymmetry between the earners and the organisations can be disputed, but the freedom of any company to run its business as it wishes within the limits of the Law should not be disputed in a free society, whether we like it or not.
When one witnesses the attendance of politicians at Parliaments across the democratic world and the jitters between the Governor of California and the Assembly whilst the situation is more than critical for this State, having to issue IOU bills that have been refused by major banks from July 10, I wonder whether they should not get a pay cut for irresponsible behavior, incompetence and absenteeism.
What is at the center of the polemic since the financial crisis started (by the way in August 2007 and not in September 2008), is a power struggle between politicians trying to regain as much control on everything and free market enterprise, or a struggle between unaccountability and accountability. History demonstrates that the former is inefficient, costly, shortsighted and long term leads to a lower standard of living either in relative terms or in absolute terms in some circumstances.
Since the end of the Volcker era (a man of no compromise and Chairman of the FED pre-Greespan), the Western world economy has grown on debt steroids which has accelerated crisis after crisis with always more money thrown (Internet stock collapse, LTCM, 2001 etc.).
I will soon discuss the origin of the crisis from a totally independent standpoint having often been critical about the way investment banking was functioning during my 20 years in the City.