Letting Goldman roll the dice

October 15, 2009

On this morning’s conference call, David Viniar, Goldman Sachs’ chief financial officer, emphasized the bank’s valuable social role. His bank made markets and provided credit when other financial players were suffering.

But is Goldman really such an indispensible financial intermediary? One look at the firm’s revenue breakdown shows that it’s more casino than anything else, and some of the markets it makes still put the economy in danger.

With markets recovering and competitors falling away, Goldman’s trading and principal investment revenue through the first nine months of the year was nearly $24 billion, on pace to break the $30 billion record set in 2007.

(Click chart to enlarge in new window)


Goldman, in other words, generates most of its revenue trading its own money and earning vigorish on customer transactions. It’s a hybrid hedge fund and bookie, with an investment bank and asset management business thrown in for good measure.

With that in mind, one is left to wonder whether Goldman was really worth saving last year. What have taxpayers received for $50 billion worth of cash and guarantees, for giving Goldman access to the Federal Reserve as its lender of last resort?

Saving Goldman was largely about saving the derivatives market, which is so big and unstable that the death of one counterparty could mean the death of all. With big commercial banks like JPMorgan Chase in deep, saving the derivatives business was as much about protecting depositors and maintaining the integrity of the payment system as it was derivatives themselves.

Many of us didn’t like it — we thought banks like Goldman should have been recapitalized the right way, by wiping out shareholders and forcing subordinated creditors to eat their share of losses. But that ship has sailed. We socialized the risk while privatizing the profit because we were told we had no other choice: The government had to guarantee the biggest banks’ liabilities because they were too unstable to survive bankruptcy or FDIC receivership.

If that’s true, why haven’t we seen any substantial reforms to reduce systemic risk? Congress is kicking around new resolution authority to help resolve failed systemically-important banks. But the goal should be reducing systemic risk to begin with. Yet serious reform of the derivatives market — something that would reduce its size significantly — is nowhere on the radar.

Indeed, Goldman’s trading results suggest that market is coming back with a vengeance. It’s playing in very risky markets with a capital structure that remains vulnerable yet is guaranteed by taxpayers.

To Goldman’s credit, they’ve rebuilt their capital levels faster than anyone. Their leverage ratio has fallen from 35 to 16 in less than two years, despite pressure from equity analysts to juice returns by deploying “excess capital”.

But at $50 billion, the bank’s mark-to-myth, or level 3, assets remain as high as its tangible common equity, the cushion it has to absorb losses. And Lehman proved that conventional definitions of capital aren’t worth much when push comes to shove. On Sept. 1, 2008 the bank was “well-capitalized” according to regulatory measures, two weeks later it declared bankruptcy and was showing negative net worth in the tens of billions.

Derivatives have lead to systemic crises every 10 years or so — portfolio insurance in 1987, Long-Term Capital Management in 1998, the global financial crisis a year ago — yet cosmetic changes are all that is ever offered. The frequency and violence of such events prove that more is necessary to rein in these markets.

Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit.

Even as Goldman reported results that reflected in part the resurgence in derivatives, the House Financial Services Committee passed legislation that would increase derivatives regulation. But the bill is riddled with loopholes that Wall Street can easily exploit. A much tougher line is necessary.


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Think saving Goldman, but esp. JPMorganChase, was about saving broker/dealers…….of US Treasuries

Posted by crocodilechuck | Report as abusive

Great piece, particularly the last three paragraphs. Timeline analysis always and eye-opener. Just goes to show, money makes money. Hopefully the turnover doesn’t get wiped out by matched costs/losses.

Posted by Casper | Report as abusive

Good stuff, Rolfe!

Posted by Sam | Report as abusive

This article is totally on target. Why does our government subsidize Casino/Hedge Fund Investment Banks? (Rhetorical question – We all know the answer)

I have never been this angry about any one issue in my life. I can only hope enough people show their displeasure so that government must act.

Posted by imapopulistnow | Report as abusive

Although it is dwarfed by “Trading and principle investments”, it seems like “Net interest income” has grown at a substantial year over year rate (especially considering the most recent data is for nine months only). I am a novice at understanding earnings reports, but is it possible that much of that growth is one way or another tied to government subsidy (through guarantees of some form or access to exceptionally low interest rates), and if so, could a number be put on it? Might be interesting to see how that number compares to the record bonuses.

Posted by John | Report as abusive

I do not understand why people seem so blind to obvious “conspiracy theories”. Bush and Cheney come from oil money and oil backing and oil has biggest run in history (and holds the price for the longest time) — no one sees this as strange?
Goldman, Sachs has Paulson see his $800MM in GS stock fall to $200MM (if he still had it in a “blind” trust) and uses the US Treasury to back his cronies “for the good of America”? Bob Steel (former Goldman Parter) was undersecretary of the treasury. And that is just TWO of the people “helping” to save us from doom.
Does no one see that this country is being run for the good of a few and if these gamblers run out of money, we will just save them so they are REWARDED to play the highest beta game they can find at Casino FED.

Posted by Brian | Report as abusive

Aloha Rolfe Winkler,
You wrote: To Goldman’s credit, they’ve rebuilt their capital levels faster than anyone. Their leverage ratio has fallen from 35 to 16 in less than two years, despite pressure from equity analysts to juice returns by deploying “excess capital”.

But at $50 billion, the bank’s mark-to-myth, or level 3, assets remain as high as its tangible common equity, the cushion it has to absorb losses. And Lehman proved that conventional definitions of capital aren’t worth much when push comes to shove. On Sept. 1, 2008 the bank was “well-capitalized” according to regulatory measures, two weeks later it declared bankruptcy and was showing negative net worth in the tens of billions.

Would you explain the first sentence for me please? Who would be the ones who are pressuring Goldman Sachs? What are they pressuring them to do? By who’s authority can “they” pressure anyone?

I also do not understand what you mean by “juice returns by deploying “excess capital”; Deploying excess capital means to you???? How would that be accomplished without regulatory transparency?

Mahalo for answering my questions,
Ineda Raze

Posted by Ineda Raze | Report as abusive

Torches and Pitchforks people… Torches and Pitchforks!

Posted by Marcus W | Report as abusive

“Their leverage ratio has fallen from 35 to 16 in less than two years”
Its still leverage. Now every bank is leveraged, but they are also regulated, and their deposits are guraranteed by the US, for the social good of providing credit and liquidity to the US population as a whole.
GS is getting the guarantee, and the profits, but what is the US population as a whole getting (O yeah, a hole, big frigging debt hole).

Posted by fresno dan | Report as abusive

Remember too that GS wanted to be under the bank charter so that they can get part of the TARP money, because the were going to be “bankrupt”. Then months later they didn’t want the government scrutinize them, the TARP money was paid back.

Posted by Rob | Report as abusive

Goldman Sachs is a greta company…they hire the best people, work extremely hard and manage the businesses better then anyone else.

All companies should emulate GS in their respective industry.

We have become a society that wants it all but is unwilling to work hard.

It’s a shame how goverments and people target Microsoft or GS because the succeed.

The US taxpayer is Goldman’s put option in trading. When will people get a clue what is going on.

Obama wants a redistribution of wealth? Stop the theives first, then proceed.

Posted by dave | Report as abusive

@ fresno dan
Every bank is leveraged. Some not 16 to 1, some more. Banks are leveraged by the very fact that they contain deposits. Deposits are debt. Debt adds leverage, therefore, all banks are leveraged. The government should simply remove GS’s commerical bank status, remove them from the the TGLP and not let them borrow from the Fed discount window. The government made a profit from GS on the TARP, and thus far have made profits from lending to them at the discount window. Shut those off and then watch GS still make money without government guarantees. As for those consipracy theorists thinking GS is somehow getting super secret government help, I have a URL you should go to and never return from. Zerohedge.com. Go now, run along.

Posted by Structured Products Guy | Report as abusive

@ fresno dan
All debt adds leverage. Deposits are debt, therefore all banks are leveraged. Without leverage a bank is not a bank, it’s a no leverage private equity fund, of which ZERO exist. 16 to 1 is not that much more than what is considered normal at a bank. GS’s only deposits would be guaranteed by the SIPC, and the reality is most deposits at GS would greatly exceed the $500k guarantee that the SIPC offers. The only exposure the government has to GS is that if GS went under they may decide to bail them out. But that is an inevitable exposure that the government now has to every bank.

@ all people who hate GS
They paid back the government TARP funds and the government made a profit. The Fed should just remove their commercial bank status, close the discount window and take back all their TGLP financing. What are all the whiners & haters gonna do when GS is still making money hand over fist then? Because that is what is going to happen. As for the conspiracy theorists….. I think maybe Blankfein was the second shooter on the Grassy Knoll, AND he may have been responsible for the dissapearance of Jimmy Hoffa.

Posted by Structured Products Guy | Report as abusive

Hello Rolfe.
Few facts :)

1. Long-Term Capital Management failure in 1998 was about gamble on Russian’s bonds that yielded 117%. It had little to do with derivatives.

2. Last crisis was caused by problems with mortgages MBS. The derivatives came later as result of problems with MBS.

I agreed that Goldman & Co became useless from general public perspectives.

Most banks using gov credits to gamble on all sort of markets. New government requirements and shareholders keep them away from uncertain investments to real economy.

Welcome to new capitalism. USA society went thoguh great suffering as direct result from businesses activities of investment banks (citi, BofA, Goldman etc), insurance companies (AIG) and financial companies. Nobody of big CEO/CFO went to jail, almost all of them kept unjustified bonuses and salaries.

After that we gave them enormous amount of public money to keep them afloat and they gamble with this money rather than lend them to real economy.

Posted by Sergey | Report as abusive

Lets be frank, we know that GS and the other major banks are pretty contemptuous of the little people who bailed them out last year as after ruining so many other peoples lives the banks tainted high flyers didn’t waste a second to stick their greedy snouts back in the bonus trough and obscenely belch for more . The foul stench of this gluttony wafts over Wall Street.

We also know that porcine Billionaire hedge fund founder Raj Rajaratnam and his cronies at IBM , Intel and McKinsey & Co are just the tip of the iceberg in terms of the true level of criminal insider trading going on. We’re putting the swine before the real pearls in society and its making people physically sick and yet the politicians seem reluctant to stop doing this.

It seems the bankers and Wall Street high flyers are really doing their best to harmfully stereotype and draw the heat back on themselves . I hope that heat turns into burning rage at street level as its disgusting to have these greedy amoral creatures heralded as our redeemers when honest folk are still losing their jobs and being put out onto the street because of the recklessness and greed lionised on Wall Street.

Not no, but hell no. Bailing out Goldman was the last thing the government should have done. The money should have gone into just the banking industry, not the investment. Joe Q. Public losses his money when he makes bad investments, so should the Wallstreet Investment Houses!

Posted by gmg | Report as abusive

Why can’t I print this? I’m using Firefox. I’m happy to use Print Preview in order to print the post without all the irritating comments (although it would be nicer to be given the option to do on the site); but all I get is the first page and then it’s blank. Maybe some people read everything online but in practice I have to print things out to read later. The content is great, but you need to work on your site presentation.

Posted by JAFDC | Report as abusive

Not only NO, but HELL NO. Just unearthed the cover of the Economist mag from the tech bubble days with Greenspan on the cover as a baywatch lifeguard. “Greenspan to the rescue.” History will remember then as the first chance to save the US economy that was ignored. The 2nd will be remembered as last Fall when GS was given the key to the US treasury and the OK to create the perfect Ponzi scheme using the US taxpayers.

Posted by Pamela Keeley-Gassmann | Report as abusive

Two of the most relevant facts you left out:

1) Goldman did not want the TARP funds and was forced to take them by Treasury.

2) They paid the funds back with interest and a premium on the warrants.

The “trade” the govt made on Goldman was the most profitable thing it has ever done.

Posted by Joe | Report as abusive

goldman used 70 billion dollars of tax free interest free money to buy up the bottom of the market, when it was in solvent and outta cash….Goldman should have, would have gone under, the money it received was to free up credit save mortgages etc,,,,instead they gambled with it, paid the “boys” bonuses

Goldman is the Oligarchy thaty runs America and appartently dictates to Obama what he must do to seve them. Change?..hahahahahahahahas

esta es la verdadera realidad aci es como manupulan al gobierno las grades bancos y destruyen al pequeno y acen desapareser la media clase bien benidos al 3 mundo

Posted by jose a | Report as abusive

Long-term Capital Management was about derivatives. They were using derivatives to bet that the difference in interest rates between major economies would narrow. They hardly owned any bonds at all. If they had gone bust over bond trading it would not have mattered as they would not owe huge future payments, just what they borrowed to trade the bonds. But, because they used derivatives they owed other financial institutions billions in future payments, which is what the problem was. It was the derivatives that allowed them to have excessively high leverage so that crisis was a result of derivatives, or one could say the lack of a central clearing company for derivatives.

Posted by Alex | Report as abusive

Hey @ fresno dan Agree that Goldman should pay back all the money they got from various government and Federal Reserve programs. Close the discount window. Then force Goldman to mark to market all assets including all SIV’s…… Any derivatives market that they do more than 50% of the underwriting should be subject to anti trust legislation. Energy trading and other divisions should be examined to see if they are manipulating the market. If so, damages should be assessed against Goldman……. Oh, yes lets not forget that Goldman paid back TARP loans using CDS money from AIG which wouldn’t have happened without Fed and Government bailouts. While we are at it, all legislation passed that was lobbied for by all the failed Financial Corps should be reexamined and repealed if found those legislation’s were contributory to the meltdown. THEN we’ll see what the merits of Goldman and others really are.

The truth is out there but the only place you will find out about it is from Mike Stathis. He has been banned by the media despite his world-leading expertise.


Posted by Gary | Report as abusive