There is one thing about the market… it will always win. Last fall, when all the big banks were mired in debt, and we were told the world would come to an end if taxpayers didn’t pony up hundreds of billions in bailout dollars, Goldman Sachs (GS:NYSE) borrowed $10 billion.
Today, just a few quarters later, GS is putting in a record year. And will be giving out the largest payouts in its 140-year history.
How? More Work and Less Competition
You see, because of the banking crisis many banks merged or failed, such as Lehman Brothers. Now there is simply less competition in the world of large banks. And because all the governments around the world are borrowing a record amount, middlemen like GS make record revenue.
Too big to fail is now bigger, richer and unapologetic…
According to London’s The Guardian, “Staff in London were briefed last week on the banking and securities company's prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever. Figures next month detailing the firm's second-quarter earnings are expected to show a further jump in profits.”
You Bite Your Thumb at Me?
You might be outraged at this – blaming GS for making money. But that’s like blaming the bear when it chows down on the new-age hippie. It’s not the bear’s fault that food walks right up to it…
It’s not GS’s fault, it’s the U.S. government’s…
If the free market were left to do its work, those that took undue risks would have been punished, assets sold off and balance sheets rebalanced. But due to government intervention to the tune of $182 billion, and the law of unintended consequences, those who took huge risks were rewarded.
Acording to 24/7 Wall Street, “Goldman Sachs has now paid back the TARP funds which removes the firm from what it must consider the government’s most draconian pay restrictions, those applied to companies living on taxpayer bailout dollars.
“Goldman still has to face an angry Congress which is considering legislation that will allow monitoring and perhaps capping of all pay at Wall St. firms.”
Any guess how the payout structure will look a year from now? I will tell you how – with record bonuses from GS. The anger will fade and the money flowing into politicians’ pre-election coffers from Wall Street will increase.
If politicians can’t work the peasants into a pitchfork and machete uprising in the thick of the crisis, they won’t be able to do it two years later.
As an aside, Bloomberg is also reporting today that Goldman pulled more than $5 billion out of AIG before the insurer collapsed.
“Goldman Sachs Group Inc. and Societe Generale SA extracted about $11.4 billion from American International Group Inc. before the insurer’s collapse as the firms demanded to hold cash against losses on mortgage-linked securities, according to regulatory filings.”
If They Are Too Big Make Them Smaller
Of course, I have the answer to the “too big to fail” model. It’s not about bonuses and greed and all that populus nonsense. It’s about size. If all of these banks are too big, break them up. Limit the percentage of market share they are allowed to have, to say, 5%. Then if one goes under, it won’t kill us.
As it is, the number of large investment banks is down to a handful. They have a larger percentage of the market. They are tied in with politicians. They have been rewarded for taking large, unsustainable risk. And all the same people are making the trades in the same culture…
You think this banking crisis was bad, wait for the banking crisis of 2016….
Editor’s Note: Like GS, I’ve had a very good crisis. My Crisis Traders are up over 60% on average in the last few months. You could make even more over the next few months. I’ve found four undervalued oil companies that are on the China buyout list. Learn all about them in my Free Special Report…
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