Questions About Goldman's Great Quarter

by Chris Sturr | April 15, 2009

Interesting times at Goldman Sachs.

In September of 2008 it became part of the US banking system (now the country’s fifth largest bank), making it eligible for TARP funds, but also putting itself under much greater regulatory scrutiny. Lately that has also meant facing some limits on executive compensation.

The company reported that it earned $1.66 billion in the first quarter of 2009.

The company is now frantically raising capital to try to repay $5-10 billion of the $28 billion of TARP money it has received.

A few questions:

What happened in December? Or more precisely, what happened to December? It seems that the company has decided that instead of starting its fiscal year on December 1, as it has traditionally done, it will now start it on January 1st. That means that December 2008, its worst month in history (about $1.3 billion in pre-tax losses), is missing from the official reports.

How is it making so much money? The company says it’s because it’s one of the only players left to handle everyone’s trades. But some analysts find it more likely that the company is making increasingly risky investments with its own money — the kind that brought the entire financial system crashing down in first place. Even though it should be under greater regulatory scrutiny now, the regulators are still playing catch-up.

From Reuters:

Some analysts believe that argument and say that Goldman is playing an important role in buying and selling client assets now even as competitors are not. Spokesman van Praag notes that banks are under enormous pressure to keep financing markets open and liquid, which Goldman is doing.

But to many investors, the combination of a 5 percent increase in assets during the quarter and the jump in value-at-risk, a measure of risk, signal that Goldman is likely trading more of its own funds.

“I’ve never seen such high value-at-risk figures out of Goldman before, even in 2006. I would be astonished if they weren’t taking more risk,” said one hedge fund manager who requested anonymity because he is not authorized to speak to the media.

Goldman is maintaining a $164 billion pool of available funds that it said could be used to buy assets, signaling to many investors that the bank is still willing to snatch up assets with its own funds.

CATCHING UP

If so, regulators may balk. The bank has nearly $1 trillion of assets and it became a bank holding company rather than an investment bank in September, meaning it should face much more government supervision, particularly when it comes to risk taking.

“As long as their bets are paying off, and regulators are still figuring them out, they won’t have to change,” said Karen Shaw Petrou, managing partner at regulatory consulting and research firm Federal Financial Analytics in Washington. “But the regulators will eventually catch up with them,” Petrou added.

Finally, how much of their current profit is a result of getting full payment for its previous financial bets from AIG? The failed insurer and recipient of some $167 billion in taxpayer dollars has so far paid Goldman Sachs $12.9 billion since the government bailout.

As Elliot Spitzer asked,

But wait a moment, aren’t we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion capital infusion, and aren’t they sitting on more than $100 billion in cash? Haven’t we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn’t they have accepted a discount, and couldn’t they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

–DF

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