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Goldman and the Economy
| Thu Oct. 15, 2009 6:49 AM PDT
Do rising profits on Wall Street mean that the economy is finally starting to pick up? Not quite. Here's how Goldman Sachs' soaring third-quarter revenue breaks down:
Goldman's business from fixed income, currency and commodities trading again bolstered its bottom line, with revenue more than tripling. Revenue from its principal investments soared 55% from second quarter after losing money a year earlier.
Investment-banking revenue fell 31% and financial advisory revenue dropped 47%.
In other words, even more than usual, Goldman is a hedge fund with a smallish investment bank tacked onto the side. They made better bets than the other guys, but the kind of business that would indicate a recovering economy is still very much in the tank.
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Rally will not last
Submitted by Walker (not verified) on Thu Oct. 15, 2009 7:45 AM PDT.
All of the knowledgable commentators (Ritholtz, Krugman, CR, Yves Smith) have pointed out that this market rally is entirely a function of three things:
* A bubble (yes, a bubble) in financial stocks with poor fundamentals
* GDP values distorted by a one-time improvement in inventory levels
* A short squeeze.
This will not last. All metrics other than the market are very, very bad.
High-speed trading?
Submitted by Dennis Doubleday (not verified) on Thu Oct. 15, 2009 8:33 AM PDT.
How much of Goldman's trading profit is attributable high-speed trading, that (incredibly) legal form of insider trading. At one point I remember reading that is was something like 2/3 of their profit.
less than 1%
Submitted by Anonymous (not verified) on Sun Oct. 18, 2009 8:05 PM PDT.
Less than 1% of GS profit is from high-speed stock trading. The vast majority of stock trading profit is from agency commissions.
I don't know
Submitted by SteveHigh on Thu Oct. 15, 2009 9:26 AM PDT.
A little optimism, however misguided, never hurts. There are enough microbusinesses (3.6 million, 0-4 employees) in the U.S. to knock a big hole in the unemployment rate if everyone could cheer up and work a little harder. My own business has grown by 250% since Obama's "set aside childish things" speech--I hired one and half new employees.
The only thing we have to fear is fear itself.
Goldman's (and others') profits
Submitted by Anonymous (not verified) on Thu Oct. 15, 2009 9:26 AM PDT.
The presentation of these profit reports that I heard on NPR suggested -- without quite saying so -- that the vast majority resulted from "marking up" assets that had previously been excessively marked down.
In other words, when Bank X previously decided that asset A -- purchased at 100 dollars -- was likely to suffer severe losses, it recognized, let's say, a 50% loss. Income tanked. Now conditions have improved somewhat, leading the bank to decide it should only have marked asset A down 40%. So it recognizes a "gain" of ten dollars. Profit!
Not much of a business plan, in the long run. And not much of an indicator of future profitability, either.
mark to market
Submitted by Anonymous (not verified) on Sun Oct. 18, 2009 8:10 PM PDT.
The vast majority of GS risk systems mark to market. That is how they caught declining subprime MBS values so quickly. Blankfein wrote an Op Ed the other day pushing mark-to-market principles for everything including off balance sheet assets. It's the only way to gain transparency.
Mark to market
Submitted by Boo-urns (not verified) on Mon Oct. 19, 2009 4:34 AM PDT.
is a pretty loose term. If you look at GS's Q2 10-Q filing, you'll see that they made like 17 accounting changes related to the valuation of their assets. Yes, Goldman Sachs "marks to market" most of their assets and liabilities, but they've also introduced a ton more subjectivity into how they use "mark to market" accounting.
For example, in using Tier 2 or Tier 3 accounting (less than liquid markets, or totally illiquid markets), they have much more flexibility in using their own inputs. And a big one was that they're now allowed to use the cost they paid as the main input for Tier 2/3 derivatives. Given that an enormous percentage of GS's assets are Tier 2 (they've kept their Tier 3 stuff low, I suspect because it's a huge red flag for analysts), this matters.
Kevin is essentially right, insofar as he's suggesting that if the markets (particularly the markets for credit assets, which are basically being propped up by the Fed right now) tank again, GS could get blown out again. That's great for GS, because they're making money hand over fist now, but bad for us, because if they fail, the taxpayers lose.
Uh, not really. The vast
Submitted by Nick (not verified) on Thu Oct. 15, 2009 9:40 AM PDT.
Uh, not really.
The vast majority of Goldman's revenues (~60%) came from FICC and equities trading — i.e., the trading Goldman does in its capacity as a market-maker in various assets. Hedge funds aren't market-makers. They're end-users. Completely different (some would say opposite).
Principal investments — what hedge funds do — only accounted for a small share (~10%) of Goldman's revenues. How on earth does that make Goldman a "giant hedge fund"?
And how is Principal Investments not "the kind of business that would indicate a recovering economy"? Gains in Principal Investments indicate that valuations for businesses that Goldman invested in are rising, which indicates improvement in those businesses' prospects. That's kind of what happens in a "recovering economy," you know.
Just because all the cool kids are (mindlessly) calling Goldman a "giant hedge fund," doesn't mean they're right. It makes them more popular, and increases their hits, sure. But they still don't have a clue what they're talking about.
I share your antipathy
Submitted by alex (not verified) on Thu Oct. 15, 2009 11:23 AM PDT.
I share your antipathy towards imprecise language. Last year a friend of mine was mugged, but he insisted on saying he was burgled. Since those are completely different crimes, it obviously invalidated any criticisms he made about the crime situation.
No, you merely have an antipathy to facts
Submitted by The Lounsbury (not verified) on Thu Oct. 15, 2009 3:24 PM PDT.
Insofar as market making operations are old, established and have nothing to do with your analogy.
sorry to hear about your difficulty with analogies
Submitted by alex (not verified) on Thu Oct. 15, 2009 8:05 PM PDT.
Nowhere did I mention or even allude to market making. That makes my point about your narrow-minded obsession with particulars while disregarding the overall situation.
G-S is now happily a financial holding company (after a brief foray as a bank holding company, though the differences are minor). The problem is that under US law that's only supposed to apply to depository institutions. As such they get FDIC guarantees for money they borrow, amongst other privileges. Oh happy day! It cut the interest rate they had to pay by 4% in a classic "heads I win, tails you loose" scenario. US taxpayers are now on the hook for loses they may incur. To add insult to injury they haven't even made any pretense of abiding by the reporting and regulatory requirements of their new status.
Apparently the folks at G-S really are geniuses. They only had to make one truly brilliant investment - they bought the US government.
And how is Principal
Submitted by Anonymous (not verified) on Sat Oct. 17, 2009 10:44 PM PDT.
And how is Principal Investments not "the kind of business that would indicate a recovering economy"?
Principal Investments, like you said, means that GS is the end-user. What it doesn't mean is that because they are making money as principals the economy is improving. They can make money in a principal capacity by betting that a company will do bad - i.e., shorting the company.
not quite
Submitted by Anonymous (not verified) on Sun Oct. 18, 2009 8:15 PM PDT.
A lot of hedge funds are actually market makers. They post bids and offers on various exchanges, provide liquidity, and sometimes take rebates that the exchanges provide. It really is becoming a gray area which entities are exchanges, which are broker dealers, and which are hedge funds.
At least judging from their
Submitted by Boo-urns (not verified) on Mon Oct. 19, 2009 4:51 AM PDT.
At least judging from their Q2 filing, GS's revenues, as you note, came largely from market making in bonds (if I'm guessing, between US Treasuries, Fannie/Freddies, and private label AAA rated MBS). The question is how much of this stuff was "toxic". If a lot, then GS is still bearing a lot of risk at any given time. Which means that if the markets for this stuff (which are currently being supported almost entirely by the Fed) tank, then GS will be caught with its pants down again.
I don't think the comparisons to a hedge fund are ludicrous. Hedge funds do a vast array of different things (including merely trading, as a high number of them have registered broker-dealer arms), and market making is certainly one of them.
With the caveat that "hedge fund" is basically a hazy term, I would say that the basic attributes of a hedge fund are:
1) they are only available to sophisticated investors, i.e. not open to the public;
2) they are not constrained by regulations (such as commercial banks are) in the types of activities they can do;
3) they are not constrained by regulations on their leverage;
While GS does not meet the description of 1), they clearly resemble hedge funds in 2) and 3). Furthermore, if you accept the possibility that GS is taking on outsized risk in their market making activities, then they appear to resemble a hedge fund even further.
Beaten to it: Market making =/= Hedge Fund
Submitted by The Lounsbury (not verified) on Thu Oct. 15, 2009 10:15 AM PDT.
I second Nick, Drum you don't even understand what a Hedge Fund is.... what was the point of the comment?
The high speed trade insider
Submitted by Anonymous (not verified) on Thu Oct. 15, 2009 10:54 AM PDT.
The high speed trade insider trading that Goldman does for itself, is that part of its role as market maker or is that for its role as an end user?
It's not fucking insider trading you illitratre git.
Submitted by The Lounsbury (not verified) on Thu Oct. 15, 2009 3:03 PM PDT.
The trading programs should be banned, but it's not bloody insider trading you stupid git. Insider trading is using "inside" information from the corporation trading. The trading programs are exploiting a technological issue and regulatory gap to deduce market positions.
Jaysus you people are stupid gits.
In any event, you can google "Market Making" to learn something about the term. The auto trading programs are own account.
"They made better bets than
Submitted by The real a (not verified) on Thu Oct. 15, 2009 11:37 AM PDT.
"They made better bets than the other guys"
Did they? I think a lot, if not most, of Goldman's money came from (1) sales to clients and (2) market making. Neither are bets. Some of the rest came from high-frequency trading, which is like betting 1 dollar to win 2 that an event with 60% probability will occur; it's as close to a sure bet as there is.
Are commissions from
Submitted by Jason L. (not verified) on Thu Oct. 15, 2009 12:27 PM PDT.
Are commissions from executing other parties' trades counted as trading income or as financial advisory income?
sorry to hear about your difficulty with analogies
Submitted by alex (not verified) on Thu Oct. 15, 2009 8:03 PM PDT.
Nowhere did I mention or even allude to market making. That makes my point about your narrow-minded obsession with particulars while disregarding the overall situation.
G-S is now happily a financial holding company (after a brief foray as a bank holding company, though the differences are minor). The problem is that under US law that's only supposed to apply to depository institutions. As such they get FDIC guarantees for money they borrow, amongst other privileges. Oh happy day! It cut the interest rate they had to pay by 4% in a classic "heads I win, tails you loose" scenario. US taxpayers are now on the hook for loses they may incur. To add insult to injury they haven't even made any pretense of abiding by the reporting and regulatory requirements of their new status.
Apparently the folks at G-S really are geniuses. They only had to make one truly brilliant investment - they bought the US government.
Fund hedging had been the
Submitted by Charlie (not verified) on Wed Nov. 11, 2009 8:29 PM PST.
Fund hedging had been the typical way to offset the losses. The crippled economy makes every investor to do his or her own strategy on how to deal with the volatile investment. Anyway have heard the Federal Minimum Wage is too expensive for employers to pay mandated minimum wages, or living wages. However, there's another payroll expense that few companies are willing to discuss – that the ratio of worker compensation to executive compensation is astronomically weighted away from the people that are in the trenches, so to speak. In the U.S., the ratio is several hundred to one. That means one exec makes what several hundred employees make. At some point one must ask – are the people making Federal Minimum Wage and needing faxless payday loans to make basic expenses worth that much less than the sort who bankrupted this country in the last couple years?
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