Goldman Sachs Windfall Confirms Success of U.S. Rescue, Like It or Not

Some people just won't take yes for an answer.

As it became clear that Goldman Sachs, the world's premiere investment banking business, would record a second straight highly profitable quarter, articles like this one in the New York Times took note of a fresh round of criticism of the various federal programs aimed at rescuing the financial system - and banks along with it. The $3.44 billion earned by Goldman in the three months through June proves, opponents contend, that it did not need the $10 billion of taxpayer cash that it received.

What the critics, comprising those who dislike big, intrusive government and those who just dislike banks, fail to acknowledge is that the programs achieved something not all that common for government endeavors: success. The financial system has been stabilized (knock on wood), and most of the banks that took the stopgap funding have either paid it back already, as Goldman did, or are in a strong position to do so.

The heavy debt load of many financial institutions and their extensive exposure to one another meant that their survival was by no means certain without initiatives like the Troubled Asset Relief Program. As one investment advisor sees it, if the naysayers had been listened to, the nation's financial stability still might be under threat and the Treasury probably would be far poorer.

"Goldman is a metaphor for the whole financial sector," said David Ellison, who manages portfolios of financial stocks for FBR Funds in Boston. "If banks had not gotten that money, we would have had much higher unemployment and a lower stock market. Who knows what would have happened? This was a way for the government to smooth out a big downturn. People have jobs, they're paying taxes. That's a good thing."

Although he and his investors benefit when it does well, Ellison is not an apologist for the banking industry, which he considers to be populated with geniuses who have a penchant for doing idiotic things. He would prefer a more stringent regulatory regime that protects the public and saves bankers from themselves. It would also save many investors from themselves and from the bankers, he said.

"Stop thinking the capital markets are smart," Ellison urged. Investors placed too much faith in the fancy derivative products that were the focal point of the crisis last year, he said. Their designers "probably knew they wouldn't work," he remarked. "They wanted to keep the gerbils spinning on their wheels."

As regulations are beefed up, the gerbils are bound to slow but not stop; money will keep circulating through the economy, albeit in a less frenzied manner, and banks will still get a big piece of the action. Ellison expects the climate to be favorable for investors in the long run, especially in banks that have not been paragons of prudence and common sense under a less firm hand.

"This is a very healthy process," he said. "The real opportunities are in lenders that have lent poorly in the last five years and will start to lend correctly and continue to do so for the next few years. Those stocks should outperform the industry and markets."

Look here for more of Ellison's thoughts on the banking sector and some of his stock picks.