The Goldman put

by John Quiggin on October 17, 2009

From the NYT on the remarkable profitability of Goldman Sachs

A big reason for Goldman Sachs’s blowout profits this year has been the willingness of its traders to take big risks — they have put more money on the line while other banks that suffered last year have reined in such moves. Executives say there are big strategic gaps opening up between banks on Wall Street that are taking on more risks, and those that are treading a safer path.

Hmm. I’d be willing to take big risks if I knew the Fed and the US Treasury were standing by, ready to pick up all my losing bets. In the circumstances, the guys at GS doubtless stand amazed at their own moderation in creaming off a mere $20 billion for the year.

Looking at this more seriously, the effect of the crisis has been to drastically weaken US financial regulation. In place of the Greenspan put, a generalized commitment to protect the financial sector from the consequences of its own bad behavior, we have the Goldman put, where a single firm runs the show, in the general manner of the United Fruit Company. This kind of situation is ideally suited to the rhetorical and forensic talents of Glenn Greenwald, and he doesn’t disappoint.

{ 15 comments }

1

bob mcmanus 10.17.09 at 12:12 pm

I don’t think either Grant or Harding personally benefitted during their time in office, so the true dollar value of his service to GS will have to wait until a few years after he leaves office, but I feel comfortable in calling Barack Obama the most corrupt President in American history.

2

engels 10.17.09 at 12:54 pm

Paul Krugman: The Joy of Sachs

The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us? First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.

3

Luis Enrique 10.17.09 at 1:47 pm

I would really like to know some specific details about how Goldmans is making its money, and how these money making activities relate to favourable decisions by the government, thanks to Goldmans having captured the polity. Where is the profit coming from?

Is it just that a well capitalised investment bank, prepared to take risks, in the current environment, can make hay? In which case the goverment is helping Goldmans out in a general way by ensuring that a) it is well capitalised and b) has the confidence to take risks, with the expection of assistence if things go wrong.

Or, are all these former Goldmans bankers staffing goverment agencies, and all these phone calls with Geithner, eliciting more specific forms of assistance? What is Goldmans getting away with, that it ought not?

If the government wasn’t stuffed with Goldmans bankers, what would be different? What is Goldmans currently doing now, that it wouldn’t be doing if we had a more independent government willing to hurt Goldmans?

I’d also like to know more about how Goldmans is making its money, because I’d like to assess the claim that what Goldmans is doing is hurting America. Is it making money by storing up trouble for the future, and making the economy vulnerable, like all the banks did by stuffing their balance sheets with securitized mortgages … or is Goldmans just making tons of money from trading activity that isn’t hurting America, other than a large entity making monopoly profits (like Apple) could be said to be hurting the economy. What’s it doing that’s structurally dangerous? Who is it stuffing, and how?

(I’d need some help from somebody more knowledgable to know what forms of non structurally dangerous profiteering there may be, but I have in mind things like simply being the only game in town that can, say, handle a $500m corporate bond sale, and hence charging fat fees for doing so.)

I read Simon Johnston and Glen Greenwald, and I agree, it doesn’t look good … but aside from the observations that a) Goldmans is coining it in, and b) Goldmans has lots of influence, I wish I had a better understanding of exactly what Goldmans is doing with that influence and exactly how it makes money from doing things we’d rather it didn’t do. My ignorance may just reflect, well… my ignorance. If somebody could provide links to some examples, I’d be grateful.

4

Henri Vieuxtemps 10.17.09 at 2:09 pm

5

bob mcmanus 10.17.09 at 2:50 pm

6

P O'Neill 10.17.09 at 3:24 pm

And for one of the two major political parties, the biggest problem facing Goldman Sachs is the tax rates that it faces.

7

David Wright 10.18.09 at 12:38 am

If, as Krugman asserts, what Goldman does is bad for America, Americans can hedge this risk by investing in Goldman. (My investment in Goldman at the end of 2008 has more than doubled.)

8

Anders Widebrant 10.19.09 at 4:55 am

@David Wright, oh come on. The consequence of a Sachsian economy is precisely to put vast amounts of people in a situation where they can’t invest in anything at all.

9

Anders Widebrant 10.19.09 at 5:04 am

Although I guess, returning to the original post, it could be argued that Americans collectively have invested heavily in Goldman indeed — the problem is that they won’t see much return on their money (discounting the value of the financial system not collapsing).

10

Luis Enrique 10.19.09 at 11:31 am

Thanks for the links.

I don’t think the Rolling Stone article answers my questions. I’m not just interested in how the banks got too-generous bailouts, or how they hyped up internet stocks, or how their directors pay themselves lavishly, I want to know how the banks are currently generating multi-billion dollar revenues in a fashion that the government ought to be putting a stop to, but isn’t, because it’s in Goldman’s pocket.

The link @5 is very interesting. If I understand it correctly, Goldmans uses its position – primarily its information advantage – to trade profitably on its own book.

So for example, say a stock which the current owner bought at $10 rises in price to $20 and is sold to a new buyer, the “honest” model would have the buyer pay $20, the current owner receive $19 and Goldmans take $1 commission. Whereas what’s happening is more like Goldmans knows which way the market is moving, buys the stock at $15 (giving the current owner $15) holds the stock until the price reaches $20 and sells it to the buyer, taking $5 out of the process. So Goldmans acts like a market maker who, rather than staying neutral and making money off the spread between the buy and sell prices, whichever way the price moves, knows which way the prices are going and loads its book either long or short, as befits. And we know it’s doing this, because it is reporting trading profits of a magnitude that cannot be explained any other way.

If this is true, Goldmans is “hurting America” because it’s effectively making a transaction tax on all trades – on net, sellers of securities get less than they would otherwise receive, and buyers pay more. Goldmans is a big fat rent extractor. If this really is happening, somehow somebody needs to conclusively demonstrate that it is, and figure out how to stop it.

However, bad as it is, I don’t see how this is structurally dangerous. Many people have suggested a Tobin tax on transactions, and nobody thinks that tax would endanger the system … so why would it endanger the system if Goldmans is taxing the system (extracting rents)? I can see there would be a systematic risk if the way Goldmans trades constitutes making very large bets that it wins 99% of the time, but when the 1% comes around, it’ll bring the house down. But is that picture really consistent with the idea that Goldmans is just sitting in the middle of the order flows, creaming off a profits from its information advantage? That doesn’t require big bets. I don’t see how that entails making system-threatening bets.

11

Henri Vieuxtemps 10.19.09 at 12:14 pm

You could also follow Matt Taibbi’s blog. Here: http://trueslant.com/matttaibbi/

12

Luis Enrique 10.20.09 at 5:39 pm

I’m probably talking to myself here, but I found another – and different – explanation of how the banks are making money right now, here

quote: So the money is just being shuffled from one Federal bank account to another, with each Wall Street bank skimming off $1 billion per month for itself? “Pretty much.”

13

engels 10.23.09 at 12:15 am

Here’s another good one:

Guardian: Public must learn to ‘tolerate the inequality’ of bonuses, says Goldman Sachs vice-chairman

Bankers’ soaring pay is an investment in the economy, Lord Griffiths tells public meeting on City morality

14

engels 10.23.09 at 12:47 am

From Niall Ferguson Too Big to Live (Why We Must Stamp Out State Monopoly Capitalism):

…The sequence of events described above provided a belated vindication for one of the central tenets of Marxism-Leninism. It was the German Social Democrat theorist Rudolf Hilferding whose 1910 book Finanzkapital predicted that increasing concentration of financial capital would lead ultimately to crisis, followed by the socialization of the banking system. […]

Lenin argued… that a “financial oligarchy” was becoming increasingly powerful not only economically but also politically, establishing “a close network of dependence relationships over all the economic and political institutions of present-day bourgeois society without exception” and promoting foreign policies based on imperialism – the export of finance capital to the less developed world. However, this concentration of power was merely the prelude to that takeover of capitalism by the state which Lenin believed would be the next stage of the historical process. […]

It is not often that I quote Lenin approvingly. But one of the lessons of the recent – and in my view continuing – financial crisis is that not everything the Marxists said was wrong…

15

engels 10.24.09 at 2:01 pm

Moral philosophers will be pleased to see from the above article that Goldman Sachs’ Vice-Chairman is a believer in Rawls’ Difference Principle:

Speaking to an audience at St Paul’s Cathedral in London about morality in the marketplace last night, Griffiths said the British public should “tolerate the inequality as a way to achieve greater prosperity for all”.

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