Let's Talk About How Goldman Makes Money; 1 in 6 in USA Unemployed or Underemployed

Discussion in 'Economics' started by ByLoSellHi, Jul 17, 2009.

  1. While South Korea, Japan, China and other nations spend on R&D on how to design and build the best 'stuff' in the world, we and the U.K. rot away while the self-interested design and build financial products that won't be wanted or needed very soon - a few profit immensely, short term, at the expense of the nation, long term.

    The Joy of Sachs

    Published: July 16, 2009


    The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?

    First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.

    Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.

    Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.

    Let’s start by talking about how Goldman makes money.

    Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.

    Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.

    Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.

    And Wall Streeters have every incentive to keep playing that kind of game.

    The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose.
    If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.

    And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.

    I won’t try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts, especially the government’s assumption of A.I.G.’s liabilities. What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.

    You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.

    Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.

    If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole.

    The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.
  2. Another post full of negativity? You slowly but surely give out the impression that you are a little depressed boy sitting somewhere in the Midwest, having been burned by your subprime mortage, and you now feel you have to go on a crusade against WallStreet, China, and what is next?

    The article you posted DOES NOT support the point that what Goldman does is bad for America. The p&l GS pumped out did not come in the slightest from structuring any derivatives. Nor did it come from any illegal activities. It came from sales and trading by some of the brightest. Dont get me wrong, GS is not my god. But a company that currently maintains a full oil tanker fleet to circumvent the technicalities of how oil futures currently trade
    is something no other bank does (correct me if I am wrong). This among uncountable other examples is something I respect GS for. To be clear, I dont respect GS for its traders but for the foresight of its senior management, who guide senior traders to take risk when no other banks take risk and to reduce risk when everyone is as bullish as it gets. How can you or Krugman blame GS for the fact that they sold off their structured Mortgage derivatives while all other idiots did not get what was going on with a crumbling housing market.

    GS did (almost) everything right yet everyone seems to hate GS, why? A simple answer: Envy!!! There are always winners and losers. The whole capitalist system is build on the premise to reward those who take risk and maximize gains within the legal framework. Since when is there anything wrong with that?

  3. show me where GS acted illlegally and I openly admit I respected the wrong bunch of people. Or maybe GS should have donated all their net p&l to people like you? You seem to be heavily opposed to capitalism and are unwilling to accept the drawbacks that such system comes with. May I suggest ET is the wrong place for you then?

    This is my last post in response to ANY of your past or future posts, you pump out posts that you are simply unable to argue. Its unfortunate you continue lowering the average quality of posts but go ahead if you really can't help it.

  4. That's the biggest bullshit I've heard to date. Obviously with just about every Goldman alumnis stationed in every cabinet in Washington D.C. I guess you really can't go wrong. Ironically, even the Corleones think Paulie went too far when he bent backward to help out his alma mater but decided to kill its archrival (what was its name?)...oh yeah, Lehman Sisters. Had it not been Paulie and his astute stooges, I doubt GS could be standing so forthright with a straight-face at the moment. They're all mafia!
  5. Goldman Sachs is a US Government sponsored and supported hedge fund. What most of you non trading twats fail to realise is how they are actually influencing "markets" daily. If you have Bloomberg look at their daily SLP participation, particularly for end of March, April, May and June, and their sudden drop off the list recently. Unfortunately most individuals are too naive to see/read in between the lines. If you have Capital IQ or some other decent data look at Goldman's changes in Tier III assets each Quarter from Q3 2007. In any case their latest results reveal everything, how do you match the VaR they published vs daily P&L they declared ?

    American public well and truly deserves the SH!T STORM thats going to hit 'em. :cool:


  6. EVERY point you made is 100% correct. So what? Why is it bad to be well connected? Anything unconstitutional about it? Have you ever benefitted because you knew someone while someone else lost out? Again GS has done NOTHING illegal. If you start to argue about ethics then maybe we should abolish half of corporate America and China and Europe and and and...

    Seriously, stay with facts not emotions.

  7. I disagree...

    Firstly, pretty much every single bank is doing the physical crude contango trade (specifically, the well-publicized cases include Phibro, which is a Citi unit; JP, who are doing the trade in heating oil). It's not nice, as they're effectively taking money from the suckers who bought into the USO ETF, but, and here I agree with you, that's banks doing what they're supposed to do.

    However, I think you're very wrong when you say that 'the article DOES NOT support the point that what Goldman does is bad for America'. That's precisely Krugman's point. GS, the smartest. and its weaker brethren have managed to pull one of the biggest heists in history. To me Krugman's analogy is that the banks have been selling something like Vioxx to the public at large for years, claiming it's immensely beneficial for everyone taking it. 10 years down the road the majority of patients suddenly start dying and their deaths are linked to the drug that they have been taking. Now what do you think should happen in this case to the drug peddlers? Krugman's point is that what actually happened was vastly suboptimal and is only going to lead to more bad drugs and more deaths in the future.
  8. lol, you dont even understand how they made their money yet you assert they acted illegally? Funny!!! Some of you guys are so obviously controlled my envy and outright reject facts.

    What is wrong with GS being a whaler in program trading? If you trade NYSE stocks or the like why dont you file a law suit if you think GS wrongly took away from you? Otherwise I suggest you shut up and get your facts straight.

    I NEVER said GS acted ethically. But this is not the point. If you start arguing about ethics then where do you stop?

  9. Yeah, why dontcha ask Michael Corleone whether it's illegal to bribe your way into what could potentially be a massive embezzlement of public funds? But, as Cygnus already pointed out, Goldman Sachs owns Washington, or was that other way around? Is one douche bag any better than another? Anecdotal evidence provided so far suggests otherwise. Well, that should be a no-brainer anyway. The whole point is that even if there were any illegalities on the part of Goldman Sachs, the government will not pursue any criminal investigation since they're part and parcel complicit in the matter.

    BTW China doesn't get our TARP money. So who gives a fuck about what they do, morally or otherwise?
    #10     Jul 17, 2009