As the credit crisis rolls on it scoops up villains and victims on a regular basis. This week Goldman Sachs became, according to whom you read, both. After announcing blow out earnings the debate over the role of Goldman in the credit crisis began anew. (A good round-up of much of this debate.)
Prior to the earnings report Goldman had already been a topic of conversation due to a piece by Matt Taibbi in Rolling Stone that characterized the firm as a “vampire squid” that has had a role engineering many of the recent market bubbles for their own benefit.
This meme had penetrated the mainstream media and the backlash is at hand. No firm wants to see it self pilloried on television by the likes of Bill O’Reilly, Glenn Beck and Jon Stewart. In addition, some people like Janet Tavikoli are calling for Goldman to remit to the Treasury some of the profits it has earned in the form of a “bailout tax“:
The American public is owed part of the profits Goldman was able to make because of the largesse of our Congress.
What has drawn the most attention are the plans Goldman is making for compensation. If current trends continue Goldman is back on track to pay pre-crisis like bonuses in 2009. The firm seemingly recognizes this by trying to fudge their employment figures to make the per-employee statistics seem more benign.
Goldman’s stock is nearly back to where it was prior to the economic crisis, and it is one of the best peforming stocks in 2009. So for now, shareholders are happy with the status quo. However that status quo includes a compensation system favors the few over shareholders.
According to statistics from Yahoo! Finance Goldman insiders own some 14% of the company. Certainly higher than many companies, but by no means does it represent a controlling stake. In contrast, institutional investors own some 68% of the stock. John Carney at Clusterstock in an interesting article documents the way in which Goldman allocates its bonus money. Despite the gaudy per-employee statistics, the fact is that
The biggest hitters get to eat the most pie.
It’s this contrast between private reward and public risk that gets to the heart of the matter. Because Goldman would not exist in its current state were it not for the beneficence of the Federal Government. Again Matt Taibbi, this time at True/Slant, notes the many ways in which the firm has benefited from a raft of government programs. That has not fazed the company. In a piece by Robert Reich highlights comments from Goldman officials saying their “business model has not changed.”
To some degree, there is some scapegoating going on. Goldman was not alone in this pursuit of growth and profits. It was endemic to the industry. The Epicurean Dealmaker writes:
In fact, I would argue that investment banking’s obsession with growth, as an industry, has contributed immeasurably to the enormity of the systemic clusterf**k in which we currently find ourselves entangled.
Now Goldman by dint of its many connections in the government is an obvious target. However the firm has its supporters. Erik Falkenstein at Falkenblog notes that Goldman generates alpha, and that alpha is going to get attributed to the firm’s employees whether we like it or not. The Economist notes that much of Goldman’s profits came not from proprietary trading but from simple market making that has become more profitable as its competitors pull back. Justin Fox at the Curious Capitalist writes:
At Goldman the focus has been on hiring the smartest group of people employed by any American institution, and putting them to work—in the most collegial atmosphere of any major Wall Street firm—in the relentless pursuit of arbitrage opportunities (a.k.a. money).
Many of Goldman’s supporters would like us to believe that Goldman is simply playing the game smarter than the rest of its competiton. However, that game is not being played on a level playing field. It is some sort of hybrid where politics intersects with finance.
So in this post-crisis(?) era what exactly is Goldman Sachs? One could argue it is too big, too risky and too greedy.
Is Goldman too big? Let’s pose the question another way. Does any one doubt that if Goldman announced it was in trouble, would it not get bailed out? The only question would be how quickly it happened. Many both in and out of government view Goldman, as currently constructed, as being too big to fail.
Is Goldman too risky? Let’s look at Goldman’s publicly announced risk profile. Felix Salmon and his colleague John Kemp at Reuters show that Goldman is now taking more risk with its portfolio than it ever has. The firm does not seem at all chastened by the past year. It may very well be the case that Goldman sees opportunities in the wreckage of its competitors. Taking advantage of that situation is fine, but now that risk is being borne, in part by the US Treasury.
Is Goldman too greedy? Robert Lenzner at Forbes writes in a “paean to its leadership”:
The Goldman Sachs culture is brilliant, but it’s long-term and short-term greedy.
The fact of that matter is that the current crisis represents a great opportunity for the firm to ratchet down its compensation expenses if it so chose. The argument for high compensation is that competitors will poach their best employees. Goldman’s competitors: other Wall Street firms, hedge funds and private equity firms are today all hamstrung. Goldman employees can’t easily walk across the street for a boost in pay. So the firm is seemingly happy to return to the pre-crisis, status quo of 2006-2007.
Like the ending to some bad soap opera, Goldman and its supporters would like us to pretend that that the past year never happened. That Goldman, like its competitors, did not get caught up in the vortex that was the credit crisis. That it did not receive both direct and indirect government aid when it needed to. That Goldman was in fact mortal.
The problem for Goldman is that it now needs to deal with the consequences of those decisions. As the saying goes: “You can’t be a little bit pregnant.” Either Goldman is a too big to fail bank holding company that needs to bring its risk profile in line with other banks. Or it is a shining example of capitalism that in theory existed a year ago. In that case it needs to remove itself from explicit and implicit Federal guarantees.
One need only look at this headline from humorist Andy Borowitz to see which way the wind is blowing:
Goldman Sachs in Talks to Acquire Treasury Department
To be realistic neither its shareholders nor the government is going to force Goldman to make any tough choices in the near future. Regulatory reform seems stalled at the moment, in part due to the need to explain this situation. So for now Goldman will get to have its cake and eat it too. For that, it will continue to be the poster child for much of what is wrong with the current system.
*No position in Goldman Sachs (GS).