Goldman Sachs – Wait, How Did THAT Happen?

Goldman Sachs Tops Expectations

First Published: July 20, 2009

The financial markets are continuing to stabilize gently, but it really isn’t worth looking for anything to happen this year in terms of growth or profit for any of the wealth creation industries in the West. We know that, we have been told it often enough. Anyway, the investment banks who would have had periods of growth right about now are still punch drunk from the bailout that happened as 2008 was drawing to a close. Lehman Brothers went bust. Bear Sterns nearly followed it. All over Europe banks were bailing out other banks and then having to be bailed out by the government – witness the situation in the UK where Lloyds TSB bought out Halifax Bank of Scotland and then had to be bailed out itself as it took hold of HBOS’s balance sheet and found that it was weighed down with toxic assets.

Against this background, what would you say if it were to be reported that an investment bank had just reported record profits? Yes, I know, and most people would agree – although they might clean up the language slightly in mixed company. Yet somehow, Goldman Sachs – which, let’s remember, had to have some of that bailout money in order to keep afloat last autumn – has just reported second quarter earnings of $3.44 billion. That is pretty high during a recession. It’s pretty high during a stagnant market. In fact, it is incredible at any given time, and yet here we are during the worst financial depression since just after the Second World War and Goldman Sachs reports profits that make it look like they could pay back everyone else’s bailout money as well as their own some time soon.

Just how has this happened? And what’s more, if they needed bailing out only half a year ago and yet can turn around a huge profit in such a short space of time, should they really be paying out bonuses that make even the President of the United States’ salary look fairly cheap? If Goldman Sachs have just returned second-quarter earnings of $3.44 billion then they have enough to pay a pretty hefty bonus to every American taxpayer – after all, the taxpayer played a pretty sterling role in this recovery by making sure Goldman Sachs didn’t go to the wall.

Well, OK, we understand, that isn’t how finance works. But there is going to be a lot of scrutiny on Goldman Sachs, not least on its third quarter. Seemingly, the year in finance is going to see the market reversal at least slow down, so with those favourable conditions we should expect to see the same kind o f performance again from Goldman Sachs, wouldn’t you think? If not, then it seems something strange has been happening. Sure, they have successfully underwritten some pretty healthy projects recently, but a 65% rise on the second quarter last year seems to be in the realms of fantasy, and if there is any special knowledge involved in such wealth creation, maybe they could share it with a world that really needs it right now.