The incredible resurgence of US investment banking giant Goldman Sachs has captured headlines around the world. Less than nine months after the global financial and banking systems looked to be on the brink of collapse, Goldman has managed to produce a stunning profit rise for the second quarter.
Profit during the quarter jumped 33% to US$2.7 billion, mainly thanks to the strong performance of its trading division. Less than 12 months after most analysts and commentators declared the high-risk investment banking model was dead, Goldman Sachs has completed a miraculous resurrection.
Of course, Goldman Sachs had plenty of help, in the form US$10 billion in bailout money from US taxpayers. This money has now been paid back, but there’s little doubt these funds were crucial in getting Goldman off its knees.
Contrast the taxpayer money given to Goldman and the extraordinary profits it is making with the situation at CIT Corporation, which lends to a million small and medium businesses in the US. It also has a small Australian business in equipment financing and banking services.
Not surprisingly, given the state of the US economy, CIT is struggling and received US$2.3 billion of government funding late last year. But its position has gotten worse since then and regulators have been painfully slow to come to CIT’s aid.
As a result of these delays, the lender’s problems have gotten worse. As nervous borrowers became aware of CIT’s problems, they began drawing down on their lines of credit, draining the bank of hundreds of millions of dollars.
Analysts are warning that its collapse would have a shocking affect on the millions of SMEs its supports.
“When CIT disappears, there’s a whole class of small- to medium-sized businesses that will not have any financing, and they will have to be shut down,” Christopher Whalen, managing director of Institutional Risk Analytics, told Bloomberg yesterday.
“[US Treasury Secretary Timothy] Geithner needs to get back on the plane, stop travelling for a while, and focus on the most important source of non-bank financing for small and medium businesses.”
The big end of town – Goldman Sachs – might be getting the headlines, but the demise of such as crucial player in the SME space deserves more attention and urgent action from the US Government.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
