Goldman: Goldman Sachs is certainly in rude health. Its high profits and pay levels are a tribute to good management, clever people – and a mighty financial rescue effort from governments and central banks around the world.
Only last September Goldman changed its legal status to crawl under the protective wing of the US Federal Reserve. Then there was a question of whether the broker could support its $1.1 trillion assets without official help.
The bank’s balance sheet is now 18 per cent smaller – and is doing very well for itself. The quarter’s reported 23 per cent return on equity is impressive enough, but understates underlying profitability. If the annual pay level set aside for the average Goldman employee was a generous $200,000 rather than the jaw-dropping actual $770,000, ROE would have been more like 40 per cent.
Government policies have helped make trading, which accounted for 65 per cent of Goldman’s revenues, so profitable. Leave aside the government’s support of the insurer American International Group, a big Goldman counterparty. The whole business would be much less lucrative without policy interest rates at close to zero and ample central bank financing of troubled assets.
Goldman may set the standard, but other banks with big trading operations can also be expected to report strong results. From the perspective of this risk-seeking part of the financial system, policymakers seem to have resolved the financial crisis brilliantly.
Elsewhere, though, the evidence is mixed at best. Unemployment is rising and output is still down. An upward turn may be coming soon – some economists are even whispering about a sharp recovery starting before the end of the year. But it’s not here yet.
One reason to doubt the imminent arrival of good times is that the rescues have not been nearly as helpful to the plain old banking business as to trading. The pain and capital strain have hardly let up for banks that have to write down mortgages, credit card debt and small business loans. Without the rescues, the whole financial system would be in worse shape. But it’s fair to wonder whether the aid went where it was most needed.