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Happy Birthday, Sweetheart!
There is this widely-held belief that the financial elites are really important to our economy, which leads to the conviction that they are truly marvelous creatures. That’s just nonsense. This post describes several recent disclosures to throw in the face of any diehards you might meet. But stories, no matter how disturbing, can always be discounted by the true believers.
Let’s look closer at one of these firms. Goldman Sachs wants everyone to believe it is the home of the great brains. So, what is it exactly that they do with those great brains? Let’s look at the tape. The 10-K and the 8-K tell all. Oh, wait. We’ll need the results for December, 2008, because those aren’t in either of these statutory filings. They’re in this press release. No, really.
GS has three main business segments: investment banking, trading and principal investments, and asset management and securities services. Investment banking includes these services: mergers and acquisitions advisory services, financial restructuring advisory services, and equity and debt underwriting. Net revenues in this segment in the 1st Quarter were $823 million, 30% lower than the first quarter of 2008, and 20% lower than the fourth quarter of 2008. Perhaps there is some dying off of those large complex transactions.
Asset Management includes two different categories. One is the general brokerage services, and the other is fund management. Here’s a description of the second category from the 10-K:
We offer a broad array of investment strategies, advice and planning. We provide asset management services and offer investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes: money markets, fixed income, equities and alternative investments (including hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies).
Net revenues were down in this segment, too. So, where did those 1st quarter profits come from? All of it came from the Trading and Principal Investment segment. Here is the description, also from the 10-K:
Trading and Principal Investments facilitates client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals and takes proprietary positions through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. . . . In connection with our merchant banking and other investing activities, we make principal investments directly and through funds that we raise and manage.
Principal investments lost $1.4bn in the first quarter (on top of $1.03bn in December, 2008, and about $3.1bn in fiscal 2008, not counting their Chinese bank). Real estate and other corporate lost $1.3bn. Fortunately, trading activities for the benefit of GS produced gains of $8.5bn or so in the first quarter. Here’s the description:
Fixed Income, Currency and Commodities (FICC) and Equities are large and diversified operations through which we engage in a variety of client-driven and proprietary trading and investing activities.
In our client-driven businesses, FICC and Equities strive to deliver high-quality service by offering broad market-making and market knowledge to our clients on a global basis. In addition, we use our expertise to take positions in markets, by committing capital and taking risk, to facilitate client transactions and to provide liquidity. Our willingness to make markets, commit capital and take risk in a broad range of fixed income, currency, commodity and equity products and their derivatives is crucial to our client relationships and to support our underwriting business by providing secondary market liquidity.
In other words, GS trades capital around like monkeys, and justifies it by claiming it provides liquidity. That really takes great brain power. It’s like a continuous game of Tetris with other people’s money, only because you are so integrated into the game, you know where the pieces are long before they fall. Then, you take half the winnings and put it in your pocket. Of course, they do leave some tiny part for the people who put up the money. GS paid dividends of $642mn in fiscal 2008. That compares to $10.9bn in compensation and benefits. Did anyone get their money’s worth from any incidental improvement in liquidity?
The next time someone, like the President or Larry Summers, tries to tell you that Goldman Sachs is providing a service necessary to the economy, ask what they did that was so important. The only seriously profitable part of GS has nothing to offer the nation that we couldn’t get from any random poker table in Las Vegas.
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ZED!
Since the term Ponzi scheme is already taken for Bernie Madoff’s contraption, can we call this a Goldman-Sachs scheme?
Sounds like an Ultra Rich man’s game of chance with the House making the Lions share any profit. I cannot see any “Value” they provide to anyone except themselves..let alone to the country… cut them off from the Tax payer’s teat!
Hey Teddy how’s things up in the City?? Was nice here but is cooling down rather quickly.
GS traded 1 billion shares last week for it’s own account. About 4 times more than for its customers. They are the driving force behind the now becoming well known late day market drives, both up and down. A phenomenon involving complex arbitrage strategies in the ETF complexes.
In other matters GS will have an important say in which regional banks get taken out and taken over or which of their assets are taken over because of the stress test. It must be understood that GS knows everything that the Treasury does and knows everything the Treasury is going to do. Before the Treasury does.
GS will lead all the bear raids during future market declines.
GS now has perhaps more market power than any entity since JP Morgan in his heyday. If trends continue GS bonds will eventually yield less than Treasury’s.
So that’s why we have to shell out the billions.
Happy birthday to your sweety and thanks for this great post: you learn me.
I am always amazed by people who think that the financial elites are useful. In fiscal 2008, compensation and benefits of $10.84bn were spread over 30000 employees (at years end), for an average, an average, mind you, of $363,800. Stunning.
$363,800. Stunning.
Sign me up, I will work for just one year and then let someone else earn some chump change…. /s
I wonder who lost the money which GS
gamedgained? Can’t help but think it at least in part came from our 12 trillion dollar printing spree and the “improved liquidity.”Dayam.
Wonder how many reading teachers / nursing school instructors / in-home health workers $363,800 works out to?
Someone (sadly, not me) has the maths to figure out the opportunity costs arising from diverting the 10.84 billion away from various productive occupations. Were it spent on nursing school instructors, what’s the “throughput” [new nurses per year]? Same with reading school teachers [#/yr], and then what is the actuarial calcualation of the increased earning power per student-year of specialist reading teachers? Same with in-home health care workers [#/yr]….
I’d love to see the wealth that 10.84bn could create in productive use compared to the $642 the
chumpsshareholders got.I couldn’t agree with you more Kirk what a waste of opportunity to make such sums could create so many “Normal” paying jobs, it just might make a dent in poverty in our country. All these asses do is move money around and then say they help the GDP. You have to be shitting me all they are really doing is sucking the life out of the economy and preventing others who would actually produce something worth while, as you said a nurse a teacher even a scientist!
Why can’t we go back to good old commercial banking and make investment banking illegal?
These paper pushers extract money from the economy, they don’t “earn” it. If money is the fuel that makes an economy run, we have a twelve cylinder engine in which most of the fuel is going to one cylinder. Wealth is created by work, and work alone. Paper pushers add little wealth to the economy, but they manage to abscond with far too much of it. Card check and unions would help because it would enable workers to get more of the wealth that they produce. Stockholders should determine executive pay with only actual votes counting, no proxies. The system is broken and needs some serious reworking.
As I have asked before, why does Goldman Sachs exist? Its purpose even at the best of times was to game the paper economy for its own benefit, i.e. that of its employees not its investors. The paper economy has crashed and burned. So again my question, why does Goldman Sachs exist? It adds nothing to market efficiency. Instead it is a predator that feeds on the market.
The parts of GS that actually do something useful, the consulting parts that help out on mergers and acquisitions and some similar things, do require some brains. It doesn’t require significant capital.
It appears that by being a private investment bank they were (probably) able to hide the true size of their profits and therefore fool their customers into thinking they were doing great with the few pennies tossed their way.
But, now that they’re a holding bank, I have to wonder if they will be able to keep up that charade.
Madoff fell apart in the crisis. Will G-S fall apart in the good times?
The Bill Moyers Journal on PBS was right on point again this past week with Simon Johnson and Michael Perino as guests.
http://www.pbs.org/moyers/jour…..pecor.html