Friday, August 7, 2009

Even with the Benefit of Hindsight ... Who Knew?

Hindsight, they say, is 20/20 - but who today can say they KNEW last fall that Goldman Sachs would rake in tons of money since becoming a bank holding company?

Certainly not me. I absolutely cannot brag about my prescient vision in this matter. I totally believed that when they transformed from high rolling investment bank to boring but regulated bank they'd be scaling down the risk, and thus, the scale of their profits. Here's how Goldman characterized the shift in a press release:

“'While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,' said Lloyd C. Blankfein, Chairman and CEO of Goldman Sachs."

I bought the story that regulation would provide "prudential supervision." So did the Wall Street Journal:

"With the move, Wall Street as it has long been known -- a coterie of independent brokerage firms that buy and sell securities, advise clients and are less regulated than old-fashioned banks -- will cease to exist. Wall Street's two most prestigious institutions will come under the close supervision of national bank regulators, subjecting them to new capital requirements, additional oversight, and far less profitability than they have historically enjoyed."

The NY Times was in rare agreement with the WSJ on this topic:

"The move alters one of the models of modern Wall Street, the independent investment bank, soon after the federal government unveiled the biggest market intervention since the New Deal. It heralds new regulations and supervision of previously lightly regulated investment banks, as well as an end to the outsize paychecks that helped shape the image of the chest-thumping Wall Street banker."

Bloomberg felt similarly:

"The change may lead to less risk-taking by the companies and possibly lower pay for their employees."

"Far less profitability."

"End to the outsize paychecks."

"Less risk-taking... and possibly lower pay..."


When looking at Goldman's move to bank holding company last fall, the financial analysts all seemed to sing a song of caution.

Thus, we were all surprised when Goldman's huge second quarter profits were announced recently. ABC News noted that the profits caught people off-guard, "vastly surpassing analyst predictions of a $2 billion profit."

The LA Times noted: "burnishing its reputation as Wall Street's premier banking firm, Goldman Sachs Group reported a record quarterly profit that topped expectations and underscored the speed with which the firm has rebounded from last year's financial crisis."

Apparently, analysts last fall failed to pick up on a crucial statement Blankfein made in his press release: how becoming a bank holding company would give the firm "access to permanent liquidity and funding..." - which leaves them the freedom to risk big with OPM, knowing the feds will be there to tidy things up, should their bet go bad.

With one of the most profitable quarters on record, Goldman has truly spun gold out of the bust. Becoming a bank holding company is anything but "boring" when Goldman is involved.

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