They’re like a big cat propped in a tree.
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They’ve always got that knowing Cheshire grin, and if they falter, they always land on their feet.
Goldman Sachs, along with its Wall Street compatriots was instrumental in leading the economy to this low point in our history.
Today, the firm reported record second quarter profits.
Just last year as the credit crisis reached its zenith, Goldman sought shelter and a government rescue as it converted from an unregulated investment bank to a government-supervised depositor bank. It got $10 billion in federal funds for its gesture.
Last Guys Standing
For good measure, Goldman got another $12 billion in taxpayer monies from the government bailout of AIG. This was Goldman’s reward for underwriting a portion of the insurance giant’s mountain of bad debt.
With Bear Stearns gone, Merrill Lynch weakened, and Lehman Brothers bankrupt, Goldman along with Morgan Stanley has become the only game in town. They virtually have the entire field to themselves. No other firm, however, is better positioned or as well capitalized to provide the underwriting and trading services that Wall Street craves.
When Bear Stearns collapsed and Lehman Brothers was about to implode, no one was better situated or had greater access to intelligence than Goldman. After all, their longtime CEO, the U.S. Treasury Secretary Hank Paulson, was the ultimate insider.
Is it any wonder that key players at Goldman started dumping their own stock long before it dipped to record lows, and then tripled their money when they repurchased the shares off the market bottom?
By the end of the first quarter, when other banks and U.S. businesses were reporting stunning losses, Goldman was posting a profit. Now Goldman’s second quarter profits are 65 percent higher than for the same reporting period last year.
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Goldman, the fifth-biggest U.S. bank by assets, climbed 77 percent in New York Stock Exchange trading this year to close yesterday at $149.44 per share. That’s almost three-times the low of $52 on Nov. 20, 2008.
According to the press statement released along with the firm’s chipper earnings report, top results were turned in across the firm's key operations, including trading, equity underwriting and its fixed-income business. Equity underwriting at Goldman boomed during the period as dozens of banks raised money to strengthen capital and repay Troubled Asset Relief Program funds.
Plumply Profitable
With the competition decimated, Goldman has again become the go-to firm on the street. Goldman, which made billions by wagering its capital and fueling the bets with borrowed money, is reverting back to a winning business model that most analysts deemed irretrievably broken after a crisis of confidence gripped Wall Street.
Last year after converting to a Federal Reserve regulated bank, Goldman reported its first quarterly loss since going public, and reduced company-wide bonuses. This year Goldman Sachs has issued new shares, repaid the U.S. Treasury and reaped even higher fees from selling stocks and bonds.
Even though Goldman reduced it workforce by 1 percent, to 29,400 from 29,800, employee compensation has risen dramatically. The company set aside $6.65 billion for compensation and benefits in the period, or 48 percent of revenue, compared with $4.71 billion in the first quarter.
Not bad in a troubled economy where everyone else is tightening their belts.
While its competitors Morgan Stanley, Bank of America – which now owns Merrill Lynch – and JP Morgan, will be reporting their earnings later this week, none are expected to surpass Goldman.
Goldman’s resilience and persistent profitability may raise questions about the firm’s ethics or integrity. But no matter the conclusion, no one can dispute that that they’re still the brightest cats in the alley.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
