And we thought investment banking was dead. In fact, if Goldman Sachs’ second quarter result this morning is anything to go by, it is alive and sucking.
That’s a reference to the now notorious description of Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” – contained in a 10,000 word article by Rolling Stone journalist Matt Taibbi, published last week.
Taibbi blames Goldman for orchestrating the last five asset bubbles, including the one that led to the Great Depression, plus the carbon emissions trading bubble yet to come. It is a completely over-the-top, but quite well-researched piece of sustained invective.
The second quarter results from Goldman don’t exactly refute the Taibbi central claim that Goldman is “a huge, highly-sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth – pure profit for rich individuals”.
The bank reported a 46% lift in net earnings to US$13.76 billion, of which an astonishing (for a financial crisis) US$6.65 billion was paid out in compensation and bonuses to staff.
Shareholders, meanwhile, get crumbs from the table – a dividend of 35 cents a share or US$192.8 million. That’s less than 3% of the amount paid to staff. But they probably aren’t complaining: the share price has tripled since November, from $52 to $150 a share.
Another of Matt Taibbi’s central accusations is that Goldman paid US$14 million in tax last year – 1% of its profit, and less than a third of CEO Lloyd Blankfein’s salary. That’s true – I checked.
Tax provision in the second quarter of 2009 is US$1.6 billion, about double the same quarter last year (US$745 million). Obviously there was a big difference last year between quarterly tax provisions and tax actually paid at the end (US$14 million), so we’ll see what happens this year with that.
Although this morning’s profit report from Goldman paints a picture of the world’s leading investment bank suddenly returning to its old health and power, there’s a debate about how sustainable it is.
Standard & Poor’s says it’s not because almost 80% of its second quarter profit came from one division – proprietary trading (US$10.8 billion out of US$13.8 billion). The Lex columnist in The Financial Times commented that if it’s a vampire squid, then it is a cephalopod swimming with one tentacle, and may yet be cut down to size by the US Government (“calamari anyone?”).
Not much chance of that, I would say, but the analysts at S&P believe that sort of trading revenue will be hard to maintain.
Against that, the prominent banking analyst and famous bear, Meredith Whitney (she has her own firm) sparked a buying flurry on markets around the world yesterday when she predicted that Goldman would earn US$4.65 a share in the second quarter, when the consensus forecast was still just US$3.48. It turned out to be US$4.93.
More importantly, Whitney’s report said Goldman has plenty of room to run. She believes the firm will continue to benefit from the financial crisis, especially from the surging municipal debt market. That’s because US state budget deficits are set to balloon and Goldman, as the biggest debt underwriter, will benefit from their pain (that’s a bit Matt Taibbi-ish of her).
Speaking of proprietary trading, there’s another story running in the US about Goldman Sachs at the moment that has the financial world agog: it’s the case of Sergei Aleynikov, a 39-year-old Goldman computer programmer who has been arrested by the FBI on charges of stealing software at the heart of Goldman Sachs’ trading platform.
According to the authorities, the program rapidly processes market moves and uses sophisticated mathematical formulas to make automated trades. Aleynikov’s theft is a bit like a KFC employee stealing the secret recipe for the 11 different herbs and spices.
Aleynikov joined Goldman in 2007 and left in early June. He was arrested on July 3 at Newark airport and now proclaims his innocence.
But naturally enough attention is now turning to the secret Goldman trading code.
Here’s what the FBI complaint says about it:
“The financial institution has devoted substantial resources to developing and maintaining a computer platform that allows the financial institution to engage in sophisticated high-speed, and high-volume trades on various stock and commodities markets. Among other things, the platform is capable of quickly obtaining and processing information regarding rapid developments in these markets.”
At Aleynikov’s bail hearing, the prosecutor told the judge that: “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”
Which Goldman Sachs would never do, of course.
This article first appeared on Business Spectator.
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