For Goldman, a Swift Return to Lofty Profits

[WoodPeckr]

Obama stimulus plan working, maybe too good?....

For Goldman, a Swift Return to Lofty Profits

By GRAHAM BOWLEY and JENNY ANDERSON
Published: July 12, 2009

Most of Wall Street, and America, is still waiting for an economic recovery. Then there is Goldman Sachs.

Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently paid back its government bailout money, will report blowout profits from trading on Tuesday.

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.

“They exist, and others don’t, and taxpayers made it possible,” said one industry consultant, who, like many people interviewed for this article, declined to be named for fear of jeopardizing business relationships.

Startling, too, is how much of its revenue Goldman is expected to share with its employees. Analysts estimate that the bank will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees, or more than $600,000 an employee. Top producers stand to earn millions.

Goldman was humbled along with the rest of Wall Street when the financial markets froze last year. As a result, it lost money in the final quarter, a rarity for the bank. Along with other big banks, it was compelled to accept billions of dollars in federal aid, which it paid back last month.

Amid the crisis, it also converted from an investment bank to a more regulated bank holding company.

Goldman declined to comment over the weekend, pending its Tuesday earnings report.

But if the analysts are right — and given the vagaries of Wall Street trading, any hard forecast is little more than a guess — the results will extend a remarkable run for Goldman that was marred only by the single quarterly loss last fall of $2.12 billion.

Goldman Sachs is betting on the markets, but the markets are also betting on Goldman: Its share price has soared 68 percent this year, closing at $141.87 on Friday. The stock is still well off its record high of $250.70, reached in 2007.

In essence, Goldman has managed to do again what it has always done so well: embrace risks that its rivals feared to take and, for the most part, manage those risks better than its rivals dreamed possible.

“It is, in many respects, business as usual at Goldman,” said Roger Freeman, an analyst at Barclays Capital.

Traders said Goldman capitalized on the tumult in the credit markets to reap a fortune trading bonds. It profitably navigated a white-knuckled run in stock markets. It bought and sold volatile currencies, as well as commodities like oil. And it reaped lucrative fees from the high-margin business of underwriting stock offerings, which surged this year as other, more troubled financial institutions raced to raise capital.

Whether Goldman can keep this up is anyone’s guess. With so much riding on trading, the risk is that the bank might make a misstep in the markets, or that today’s moneymaking trades will simply vanish. The second half of 2009 looks tougher, many analysts say.

Goldman is not the only bank that appears to be returning to health. JPMorgan Chase is also emerging as one of the strongest players in this new era of American finance. JPMorgan and several other big banks are expected to report strong second-quarter profits as well this week, again in large part based on robust trading results.

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. The giants Citigroup and Bank of America, still in hock to the government, are struggling to regain their footing. Banks like Merrill Lynch, now owned by Bank of America, ran into trouble trying to replicate Goldman’s success.

Richard Bookstaber, a former hedge fund executive and author of a “A Demon of Our Own Design,” wonders if Goldman’s resurgence will prompt other banks to push once again into riskier forms of trading, possibly at their peril.

“Someone takes risks and makes money — maybe they were smart, maybe they were lucky,” Mr. Bookstaber said. “But then everyone else feels like they need to take the same risks.”

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.”

On Wall Street, where money is the ultimate measure, Goldman is both revered and reviled. Its bankers and traders are sometimes referred to as the Bandits of Broad Street. An executive at a rival bank characterized Goldman traders as “orcs,” the warlike creatures of Middle Earth in Tolkien’s “The Lord of the Rings.”

Even mainstream America is taking notice. An article about Goldman in a recent issue of Rolling Stone, by Matt Taibbi, characterized Goldman as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Goldman dismissed the article as the ramblings of conspiracy theorists.

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.

Goldman’s chief executive, Lloyd C. Blankfein, has described the crisis as “deeply humbling.” But his bank bounced back with remarkable speed. In the first quarter, it posted profits of $1.66 billion. Now, the second quarter looks even better.

“They are a trading firm,” said an executive at rival firm, barely able to hide his jealousy. “It’s what they do.”

 

[WoodPeckr]

On a related note, look at what NYC is doing...

Shhh! Mayor Bloomberg quietly authorizes $69 million in bonuses for managers over two years

BY Frank Lombardi
DAILY NEWS CITY HALL BUREAU | Saturday, July 11th 2009, 4:00 AM

What budget crisis?

After crying poverty for months, Mayor Bloomberg authorized fat raises Friday for 6,692 of his managers and nonunion employees, worth $69 million over two years.

The raises, which will cover virtually all his City Hall staffers, but not himself, will match those given to District Council 37, the city's largest municipal union.

There will be a 4% raise retroactive to March 3 of last year, and a compounded 4% raise - or 4.16% - retroactive to March 3 of this year.

Those getting the raises will get lump-sum retroactive checks covering 16 months.

The seven deputy mayors will get raises ranging from $16,978 to $18,541, with the salary of First Deputy Commissioner Patricia Harris rising to $245,760.

Top commissioners will get a $23,247 raise, bringing their salaries to $189,700.

The raises only affect workers in mayoral agencies, not the Department of Education.

They also do not apply to the mayor and other elected officials, whose salaries are set by city law.

The mayor's official salary is $225,000, but the billionaire accepts only $1.

The raise was announced in a written statement by Bloomberg Press Secretary Stu Loeser, on a Friday afternoon, a time frequently reserved for news meant to slip under the radar.

Bloomberg has been warning of layoffs and other drastic action for months, citing plunging tax revenues and a shriveled up economy.

The budget is balanced through next June, with more than $2 billion in a health fund that could be tapped in a crisis. Multibillion-dollar gaps loom for the following years.

Loeser's statement stressed that the salaries of some unionized civil servants are higher than those of their supervisors, discouraging desire for career advancement.

A unionized police deputy chief - one-star - makes $180,749, while a managerial assistant chief - two-star - makes $166,106, Loeser said.

In the Fire Department, such salary differentials have left 20% of managerial staff chief positions unfilled.

flombardi@nydailynews.com

 

[onthebottom]

The banks pay back their loans and go back to making money... now how about those union laden car companies?

OTB

 

[fuji]

It's hard to say whether banks really make money or not. In the S&L crisis American banks lost more money than they had made in their entire history up until that point. I have not seen the figures for this most recent crisis, but it would not surprise me if American banking is at a net loss position again, net over the entire history of the United States.

Banking is a highly risky business with an odd distribution of profits and losses: Good profits in most years matched by catastrophic losses in rare years.

There is some evidence that in the long run the catastrophic losses exceed the profits over time, and that the "profit" bonuses that banks pay their employees are undeserved.

Instead, the argument goes, all those profits should be plowed into a reserve fund that will be available to cover the catastrophic loss when it arrives--possibly in 40 or 50 years time.

By this line of argument the true long run profits on banking are very, very slim and the bonuses paid out are not actually earned, but, rather, are being paid essentially fraudulently on the basis of fraudulent or possibly just erroneous accounting practices relating to long-term risk.

 

[Malibook]

Wow, I agree with Fuji.
Maybe there is some hope for me.

 

[Malibook]

Thank goodness that the US government bailed out AIG so that they could pay Goldman 100 cents on the dollar for the over $13 billion they were owed.
That could have been a disaster for Goldman's bonuses.

Goldman Sachs CEO Lloyd Blankfein was involved in the talks to save AIG.
The deal was orchestrated by treasury secretary Paulson, former CEO of Goldman Sachs.
Liddy, the new CEO brought in the run AIG used to work at none other than Goldman Sachs.
I'm sure they are acting in the best interests of the public.

 

[fuji]

Malibrook,

For those who don't quite follow, here is what I call the "banking game":

Roll a pair of dice. If it comes up any combination other than snake-eyes declare a profit of $100 and pay out half the profits as a bonus--$50 to you. Put the rest of the money back into the business as capital.

If you roll snake-eyes, however, declare a $3000 loss. If the business does not have enough capital to cover the loss then ask the taxpayer for a bail out.

The underlying "business" here is profitable. On average for every 35 profits of $100 there will be one loss of $3000, so long run it earns $500 over 36 rolls, or an average of $13.86 per roll.

The profits "per roll" however are mostly illusory: The $50 bonus vastly exceeds the REAL long-run profit of $13.86 and with that bonus payout this operation net loses $34.74 per roll, which will eventually be extracted from the tax payer.

This, I claim, is more or less equivalent to the banking system--a highly risky business which earns a premium in most years, but faces a large and uncompensated risk once every 30-60 years.

But since accounting is done "per year" a bonus is paid on the "profit" in the good years and the eventual catastrophic loss leaves the busines bankrupt and in need of a taxpayer bailout.

If the analogy holds that implies that the bonuses and high salaries banks pay are, long run, coming out of the taxpayer's pocket, and are essentially a form of theft.

 

[Rockslinger]

In the S&L crisis American banks lost more money than they had made in their entire history up until that point.

Hope this is not true for the banking industry as a whole. I did hear that the airline industry has not made a dime since its inception. I also wonder if GM in the end ever made any money in its entire 70 year history.

Isn't the Goldman profit good news? We do need healthy profitable banks in our economic system.

 

[slowandeasy]

[i
.

Startling, too, is how much of its revenue Goldman is expected to share with its employees. Analysts estimate that the bank will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees, or more than $600,000 an employee. Top producers stand to earn millions.

How could they not be profitable given the bailouts they received.
Funny, how quickly they have gotten back to their old way of business of paying out huge bonuses to their employees.

WTF?? $18 billion in bonuses? Given what has happened, this just seems obscene.

 

[fuji]

Hope this is not true for the banking industry as a whole.

It was true for the American banking industry as a whole at the time of the S&L crisis--it had gone negative during the depression, clawed its way back out, and then negative again in the S&L crisis. It rebounded subsequently and I don't know if the present crisis has put it back into the hole.

Remember that Goldman is counterbalanced by AIG, Lehman, Bear Stearns, Fannie Mae, Freddie Mac, the monolines, etc.

Yes it's good news that somebody is making money, but Goldman's profits do not make up for the huge losses elsewhere.

I do not actually have numbers on whether the American banking industry has been profitable since its inception at this point.

Bear in mind that it has UNQUESTIONABLY returned substantial value to the American economy. Whether it has been profitable or not is a question of whether bankers have been overpaid for the value they've created.

Per the "banking game" analogy above it is quite possible that they have been paid far more than the value of the wealth they have created, which is to say, they may have essentially defrauded other Americans.

 

[WoodPeckr]

WTF?? $18 billion in bonuses? Given what has happened, this just seems obscene.

Why expect different when many of the same Bankster weasels are still in charge.

 

[Rockslinger]

whether banker have been overpaid for the value they've created.

I ask the same question of baseball players, movie stars, rock stars, etc.

 

[WoodPeckr]

I ask the same question of baseball players, movie stars, rock stars, etc.

Apples & oranges......not the same situation at all.

 

[Rockslinger]

Apples & oranges......not the same situation at all.

It is all the same. You are worth what someone is freely willing to pay you. (Some SP's make $60 an hour and some SP's make $5,000 an hour.) Unionists are a different breed because they have the legal power to extort so nobody pays them anything out of free will.

 

[WoodPeckr]

Not the same at all.
The Banksters pay themselves what they please, while the others have someone else pay them for services rendered....

 

[fuji]

what someone is freely willing to pay you

In this case, however, when the catastrophic loss arrives it threatens to throw the whole economy into a depression and so taxpayers have little choice but to step in and bail the system out.

Given the certainty that it is the taxpayer who will be on the hook for the catastrophic loss when it arrives, isn't the taxpayer entitled to do something about it in advance?

That would specifically mean increased regulation on banks to prevent the shenanigans associated with the "banking game" whereby fake "profits" are extracted from the bank and paid to the employees. By all rights that money should instead be put into some macro fund to be used to pay for that inevitable future bailout.

 

[onthebottom]

It was true for the American banking industry as a whole at the time of the S&L crisis--it had gone negative during the depression, clawed its way back out, and then negative again in the S&L crisis. It rebounded subsequently and I don't know if the present crisis has put it back into the hole.

Remember that Goldman is counterbalanced by AIG, Lehman, Bear Stearns, Fannie Mae, Freddie Mac, the monolines, etc.

Yes it's good news that somebody is making money, but Goldman's profits do not make up for the huge losses elsewhere.

I do not actually have numbers on whether the American banking industry has been profitable since its inception at this point.

Bear in mind that it has UNQUESTIONABLY returned substantial value to the American economy. Whether it has been profitable or not is a question of whether bankers have been overpaid for the value they've created.

Per the "banking game" analogy above it is quite possible that they have been paid far more than the value of the wealth they have created, which is to say, they may have essentially defrauded other Americans.

Banking is a fantastically profitable business, even factoring in the losses...

OTB

 

[chiller_boy]

In this case, however, when the catastrophic loss arrives it threatens to throw the whole economy into a depression and so taxpayers have little choice but to step in and bail the system out.

Given the certainty that it is the taxpayer who will be on the hook for the catastrophic loss when it arrives, isn't the taxpayer entitled to do something about it in advance?

That would specifically mean increased regulation on banks to prevent the shenanigans associated with the "banking game" whereby fake "profits" are extracted from the bank and paid to the employees. By all rights that money should instead be put into some macro fund to be used to pay for that inevitable future bailout.

Although I hesitate to say this, but wouldn't very stringent regulation prevent the need for the inevitable bailout? And if that is not the case then all this talk about how banking needs to be private and out of taxpayer hands is just so much hogwash.

 

[fuji]

Banking is a fantastically profitable business, even factoring in the losses...

OTB

That does not appear to be a true statement for the underlying enterprise, though it would appear to be true for those who are paid bonuses. As of the mid-1980's American banks had negative net profits over their entire history, when you include failed banks. I can't see how that is "fantastically profitable".

I suspect they may be in the hole again, when you include the failed banks in the total.

The source of your confusion is the "banking game" above: Banks make good profits every single year right up until the year when they catastrophically lose much more than they ever made. Therefore in most years profits seem good, even though over the long term there are actually no profits at all.

 

[slowandeasy]

Apples & oranges......not the same situation at all.

Complete Bullshit, it's not apples and oranges. Unfortunately, those of us who think so are in the minority because the rest of you idiots happily pay $100/ticket to see a professional sports game, or $80 for a hockey jersey made in China at a cost of $5, or go to a movie theater and pay $12+ per ticket to see a movie, and think its a great value.

If the fans were not such lemmings, we would see a huge correction in these overpaid salaries to athletes.

Similarly the obscene pay for executives will follow.