14 July 2009

There's gold in them thar banks

Thanks to a good quarter, the average employee at Goldman Sachs is on track to earn $900,000 this year. This only months after the US government bailed out the big banks with $125 billion.

I like this, though. It shows restraint. You'll note that the average pay will be under $1 million. Very crafty of those bankers to stay off the radar like that. And to think some people say that their inflated sense of self worth clouds their judgment when it comes to managing public perception.


Gypsy at Heart said...

Out of a healthy sense of self-preservation and of course the arteries, I shall not EVEN GET STARTED ON GOLDMAN SACHS.

Life Hiker said...

Would someone please explain to me what Goldman Sachs DID to make these profits and pay these salaries? I only have an MBA and CPA, so keep it simple!

"Finance" has gotten all out of proportion to "Industry". We should tax the crap out of them.

Big Al said...

How did Sachs make the profits? Good Question. They certainly don't make it easy to figure out how they make (or, occasionally, lose) money. Revenue from dozens of disparate trading groups and businesses are combined in single line items on their financial statement, as opposed to being broken down into smaller pieces.

This quarter, the firm’s fixed income, currency and commodities unit, or FICC group, brought in $6.8 billion, or half of the firm’s revenue. There was little way of knowing, from the outside, whether that cash came from a few risky bets on distressed securities or on trading large quantities of low-risk products like Treasury bonds.

David Viniar, their CFO, said on their conference call that the strong profits were driven by a number of factors including “a focus on more liquid, plain-vanilla transactions.” That would seem to indicate low-margin and low-risk trading — and you’d need a LOT of that kind of activity to reach the big numbers that Goldman reported.

Going deeper, Mr. Viniar said on the call that a higher-than-normal portion of revenue this quarter came from the credit and currencies part of the trading unit. He said the firm benefited from higher volatility, which helped its traders capture larger margins.

But Kian Abouhossein, an analyst from JPMorgan Chase, seemed skeptical of that explanation. He said on the call that currency trading volatility was down significantly in the second quarter, not up.

“There was a lot of activity, and you had pretty good trending markets, which is always good for us,” Mr. Viniar said in response. That seemed to suggest that Goldman’s revenue surge was driven by volume, not volatility. But it’s still not entirely clear.

Investors naturally want to know if Goldman is profiting from bets on esoteric or high-risk financial products that have the potential to lead to blowups.

But on Tuesday, Goldman repeated the message that it is generating its cash from low-risk activities, saying that its “value at risk” each day in the second quarter averaged just $245 million, a fraction of its $819 billion in assets under management. It also has a $170 billion pool of cash and liquid securities standing by to put out any fires.

Are we looking at deja vu all over again?

Big Al said...

One additional comment regarding Goldman . . . they are making an INCREDIBLE amount of money on trades. They have invested a LOT of money to build the fastest computer systems and create the fastest algorithms and house the computer systems right at the NYSE such that Goldman is buying & selling trades at the same price in less than 1 second. For each of these transactions they're profiting $0.05.

You may ask, "A nickel a trade, huh? Is that all?". Doesn't seem like much until you realize they are losing ZERO, repeat ZERO money because their h/w and s/w allows them to make a minimum nickel profit on every trade that's done within that less-than-1-second window.

And if they're making all these trades within that 1 second window of time, can you say "market manipulation"?

Eric said...

Good post Ron. I was very frustrated/interested by the news as well. I think GS has positioned themselves very well in these troubled times, not that I agree with it at all. Consider if you will their ex-CEO Henry Paulson who now has almost sole control over the bank bailouts. Also, other investmennt banks such as Morgan Stanley and Bear Stearns who use to be competitors but are no longer viable businesses. It's starting to smell funny...

Anonymous said...

I have applied to Goldman Sachs.

I'm really not very good at what I do- in fact, I'm an *incredible* screw up- but I'd still like to be highly compensated for my contributions.