Goldman Sachs wins, everybody else whimpers

Rico says that, with his non-existent stock portfolio (it went in the divorce), he doesn't actually care, but it's nice to see, in an article by Graham Bowley and Jenny Anderson in The New York Times, that Goldman Sachs has apparently figured out how to make money:

Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently paid back its government bailout money, will report blowout profits from trading on Tuesday. Analysts predict the bank earned a profit of more than $2 billion in the March-June period, because of its trading prowess across world markets. If they are right, the bank’s rivals will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have rebounded so drastically only months after the nation’s financial industry was shaken to its foundations. The obsessive speculation has already begun, along with banter about how Goldman’s rapid return to minting money will be perceived by lawmakers and taxpayers who aided Goldman with a multibillion-dollar cushion last fall. “They exist, and others don’t, and taxpayers made it possible,” said one industry consultant, who, like many people interviewed for this article, declined to be named for fear of jeopardizing business relationships. Startling, too, is how much of its revenue Goldman is expected to share with its employees. Analysts estimate that the bank will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees, or more than $600,000 an employee. Top producers stand to earn millions.
Goldman was humbled along with the rest of Wall Street when the financial markets froze last year. As a result, it lost money in the final quarter, a rarity for the bank. Along with other big banks, it was compelled to accept billions of dollars in federal aid, which it paid back last month. Amid the crisis, it also converted from an investment bank to a more regulated bank holding company. Goldman declined to comment over the weekend, pending its Tuesday earnings report.
But if the analysts are right— and given the vagaries of Wall Street trading, any hard forecast is little more than a guess— the results will extend a remarkable run for Goldman that was marred only by the single quarterly loss last fall of $2.12 billion. Goldman Sachs is betting on the markets, but the markets are also betting on Goldman: Its share price has soared 68 percent this year, closing at $141.87 on Friday. The stock is still well off its record high of $250.70, reached in 2007.
In essence, Goldman has managed to do again what it has always done so well: embrace risks that its rivals feared to take and, for the most part, manage those risks better than its rivals dreamed possible. “It is, in many respects, business as usual at Goldman,” said Roger Freeman, an analyst at Barclays Capital.
Traders said Goldman capitalized on the tumult in the credit markets to reap a fortune trading bonds. It profitably navigated a white-knuckled run in stock markets. It bought and sold volatile currencies, as well as commodities like oil. And it reaped lucrative fees from the high-margin business of underwriting stock offerings, which surged this year as other, more troubled financial institutions raced to raise capital.
Whether Goldman can keep this up is anyone’s guess. With so much riding on trading, the risk is that the bank might make a misstep in the markets, or that today’s moneymaking trades will simply vanish. The second half of 2009 looks tougher, many analysts say. Goldman is not the only bank that appears to be returning to health. JPMorgan Chase is also emerging as one of the strongest players in this new era of American finance. JPMorgan and several other big banks are expected to report strong second-quarter profits as well this week, again in large part based on robust trading results.
But to a degree unique among its peers, Goldman has turned the crisis to its advantage. Its perennial rival, Morgan Stanley, has refused to gamble in the markets and, as a result, is expected to post a humbling quarterly loss. The giants Citigroup and Bank of America, still in hock to the government, are struggling to regain their footing. Banks like Merrill Lynch, now owned by Bank of America, ran into trouble trying to replicate Goldman’s success.
Richard Bookstaber, a former hedge fund executive and author of a A Demon of Our Own Design, wonders if Goldman’s resurgence will prompt other banks to push once again into riskier forms of trading, possibly at their peril. “Someone takes risks and makes money— maybe they were smart, maybe they were lucky,” Mr. Bookstaber said. “But then everyone else feels like they need to take the same risks.”
While others are shying away from risks, Goldman is courting them. A common measure of risk-taking at Goldman and other banks is known as value at risk, which estimates how much money a firm might lose on a single day. At Goldman, that figure rose by more than 20 percent in the first quarter. Analysts predict Goldman’s V.A.R. ran high in the second quarter as well.
“It’s taking opportune risk that others aren’t taking,” said Charles Geisst, author of the forthcoming Collateral Damaged and a Wall Street historian. “They are scooping up all the risks that are available.”
On Wall Street, where money is the ultimate measure, Goldman is both revered and reviled. Its bankers and traders are sometimes referred to as the Bandits of Broad Street. An executive at a rival bank characterized Goldman traders as “orcs”, the warlike creatures of Middle Earth in Tolkien’s The Lord of the Rings.
Even mainstream America is taking notice. An article about Goldman in a recent issue of Rolling Stone by Matt Taibbi characterized Goldman as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Goldman dismissed the article as the ramblings of conspiracy theorists.
For all its success, Goldman is not impregnable. In addition to the federal money it took last fall, it benefited from the government’s bailout of the American International Group, being paid 100 cents on the dollar for its $13 billion counterparty exposure to the insurer, and it has $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Goldman’s chief executive, Lloyd C. Blankfein, has described the crisis as “deeply humbling”. But his bank bounced back with remarkable speed. In the first quarter, it posted profits of $1.66 billion. Now, the second quarter looks even better.
“They are a trading firm,” said an executive at rival firm, barely able to hide his jealousy. “It’s what they do.”

Rico says someone should check the files at Goldman Sachs for that deal with the devil they've obviously signed...