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Goldman's 2Q Earnings: A Record U.S. Taxpayers Can Be Proud Of

It's a shame to waste a crisis: so goes the popular current saying. Those words must be posted in every executive suite, cubicle wall and bathroom mirror at Goldman Sachs, because the financial giant managed to report record profits for second quarter 2009, notwithstanding the deepest recession in 70 years. But they should be breaking records, considering all the help they've gotten from the U.S. taxpayer. We should all post a copy of the earnings release on our refrigerators.

Goldman really is a great firm. I have never owned the stock, sadly, except through index funds. When I worked on Wall Street, many years ago, I tried to get a job there, but managed only a courtesy interview through friends.

I believe that Goldman was the first financial firm to earn a billion dollars in one quarter, somewhere in the middle 1990s. Since that time they have pulled away from the pack of US brokerage firms.

And today they report record earnings for second quarter 2009 of $3.4 billion (before the dividends they paid on the CPP preferred stock under the TARP program). But still, several of their divisions set revenue records, because customers have been shifting their business to Goldman, partly the result of big competitors going under. It also helps that the markets are still somewhat shaky, making the trading businesses inherently more profitable.

However, their 2Q 2009 earnings release notes that by the measure of "value at risk" (VAR), the company's risk levels expanded to record levels as well.

But it's not all Goldman's doing. All you taxpayers out there had a hand in these record profits, too, and while you won't be getting a bonus from the $6.7 billion in compensation booked for the quarter, you can all share the warm feeling that mortgaging your kids' future put Goldman over the top, and kept lots of investment bankers working (the firm was able to limit headcount reductions to just one percent during the quarter.)

To be fair, Goldman has repurchased its TARP preferred stock ($10.04 billion, part of which ($426 million) is the dividend due thereon to the Treasury). And apparently the firm is in negotiations to repurchase the TARP warrants, probably worth about $1 billion. (I wrote about this last week.)

But what's bugging me about this situation are some of the side transactions that you and I have had to pony up for:

  • Goldman received $13 billion, in payment for swaps agreements, from the $180 billion bailout of AIG - those payments that had to be made to keep the system intact, and keep the counterparties from going under.
  • The firm also borrowed $21 billion under FDIC guarantees. No word in the earnings release on the status of that.
Goldman agreed to the unusual buy-backs last September to obviate the need for the two officers to sell stock on the open market, the company said in March. "Stock sales would easily have covered their requirements but, given the turbulent market conditions, we and they were concerned that such sales would be misconstrued by the market as indicating a lack of confidence in Goldman Sachs."
So these two wanted to raise cash, and were ready and able to sell their stock, but Goldman was worried about what impression we might draw from the facts.

I'm sure Goldman made its record profit fair and square. No questions on that; they are the top firm these days. But it's very important that you, the taxpayer, and Goldman Sachs, and other financial firms, too, acknowledge and understand just how valuable the TARP rescue package and the other breaks were in keeping them all afloat.

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