Understanding Goldman Sach’s Earnings
By Barry Ritholtz - October 15th, 2009, 4:17PM
Rolfe Winkler has an interesting pair of charts (below) showing GS’s earnings. However, Rolfe seems to reach a very different conclusion than I do: Letting Goldman roll the dice
He chalks up their gains up to their “Casino” — but Goldman’s trading revenue has been remarkably consistent. They excellent information flow, and tremendous discipline.
If it were really a roll of the dice, it would be far more erratic . . .
Remember, the casino takes money from the suckers — the House usually wins:
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Updated chart!
October 15th, 2009 at 4:25 pm
Maybe I’m feeling a bit under the weather and can’t think straight today but that second chart looks to be labeled wrong.
~~~
BR: good catch — Rolfe updated it
October 15th, 2009 at 4:27 pm
I generally agree with your position on Bonuses. However, without Government support GS (and other banks) would have gone bankrupt during the crisis. Employees who found themselves at companies in industries that did not merit government support, and whose companies went bankrupt suffered severe compensation penalties. Even if they were the world’s best at thier job! Therefore, I think the merit = bonus logic should be suspended in 2009 for banks. Nice coverage of the topic, by the way!
October 15th, 2009 at 4:29 pm
dmlopr- what 500,000 billion per employee sounds excessive?
also- Dylan Ratigan Says-
“giving people $23 trillion in taxpayer money, especially the banks, it makes their stock price go up.”
there we have it- could not have said to better myself
October 15th, 2009 at 4:42 pm
When you are acting as the house, you aren’t subject to the vagaries of the dice role. Getting a cut of each trade can produce pretty cconsistent income.
October 15th, 2009 at 4:59 pm
I would think that the insane level of volatility in equity, gov’t bond, corporate bond, currency, and commodity markets contribute to af firm like GS’s ability to make large returns…
Agree?
October 15th, 2009 at 4:59 pm
BR, it’s fixed!!! (but I understand your position given your close affiliation).
October 15th, 2009 at 5:03 pm
Is our nation better off with Investment Banks?
Is our economy healthier?
Are our governmental institutions less corrupt?
Do we sense that we live in a land of equal opportunity?
I just saw Geithner live on TV. He literally is discussing rearranging the deck chairs at a time when he should be concerned about the sinking ship. Investment Banks will have free reign – with perhaps a sprinkling more of stock options and a dash less of cash in their bonuses and all in due time while he holds meetings to discuss how many Angels should be placed on each pin. Geithner is so inside the bank’s clutches that he is simply unable to entertaining a thought that is outside of that box.
I truly hope the rest of this nation is as mad as hell as I am!
October 15th, 2009 at 5:22 pm
Barry,
with all due respect, what are you smoking? How can Goldman be making this money without taking high risk, high variance bets? The analogy to Goldman being the house is totally flawed. They’re more like the bookie who’s completely one-sided on the favorite. Yes, they’re making a lot of vig (trading profits), but that is nowhere near enough to earn $24b in profits through 3 quarters. And if the underdog happens to win, Goldman will be wiped out (again).
What Goldman is doing is extremely smart: they are taking free money from the government and lending it out as fast as possible, to maximize their risk-to-capital ratios while staying within the regulatory leverage requirements. After all, they keep all the profits, and if another black swan occurs, their losses are capped. Goldman is basically exploiting the shit out of an externality.
But that doesn’t mean we should be lauding them, since they’re creating more systemic risk.
Or to put it another way, how can you possibly claim that Goldman is making $24b through Q3 2009 on trading profits alone? how can you possibly claim that they’re making that much money (which is more than they made during boom times) without generating enormous amounts of systemic risk?
October 15th, 2009 at 5:46 pm
This was an elitist post, BR. That “excellent information flow” is another term for information asymmetry. [BR: Precisely]
This is borne of superior connections to policymakers, superior resources, and superior skill. That’s great for Goldman, but bad for everyone with less skill (namely, almost everyone else). It’s getting harder for most Americans to make ends meet, and when the rules of the game appear set up to transfer wealth to those who need it least, it feels sickening.
You’ve had an excellent last few years. But remember that these years have been very difficult for most. And that jealousy is harder to cope with when one is struggling. This post makes it seem as if the transfer of wealth from the rest of the nation to a handful of knowledgeable elites is justified, because the elites have superior skill. Perhaps a touch more sensitivity might be in order.
~~~
BR: I don’t do sensitivity or political correctness or diplomacy or self editing. Its not who I have been my whole life.
I do full throttle, straight shit, let the chips fall where they may. No flowers or frills or mealymouthed modifiers.
I couldn’t do it any other way, even if I wanted to . . .
October 15th, 2009 at 5:47 pm
You know, we’re always hearing that these whackadoodle salaries are justified because these guys are so freaking brilliant and create so much value. But I’m sorry, 2008’s performance where the company essentially collapse was go freaking spectacular that it justified the kind of salaries these guys got in 2002? It justifies 2/3 of what they got in 2006? I don’t know how anyone can look at this compensation graph and believe it’s anything but a form of looting our national GDP.
And yes, Goldman is running a casino. But it’s unlike anything you’ve ever seen in Vegas. It’s a “Heads I win, tails me and my buddies crash the entire financial system and I STILL win” kind of casino.
Say what you will about Vegas, but no multi-billion casino owner is stupid enough to bet the house on a game he doesn’t understand. Maybe they should be that stupid, though! They’re certainly too big to fail. I’m sure the state of Nevada would bail them out.
Christ, you know you’re in trouble when your nation’s casino owners have more integrity and business sense than the professional sector you’ve entrusted to oversee the proper allocation of capital for your ENTIRE FREAKING COUNTRY.
October 15th, 2009 at 5:51 pm
Ok everyone, let’s get pissed at the bonuses they’re going to receive at Google as well. Look, no one seems too upset about something as abstract as “clicks per page” or other b.s. at Google. But whatever you do, don’t bring up Goldman Sachs getting bonuses. Can we please move on from this nonsense?
We saw great, strong earnings again today and some nice economic numbers to support this rally going higher. Can we focus on what’s obviously going RIGHT instead of whining about what some here perceive as going wrong?
October 15th, 2009 at 5:53 pm
is there a wanger filter?
October 15th, 2009 at 5:56 pm
Barry: Can you please add an “ignore” feature to this blog? Please?
October 15th, 2009 at 6:01 pm
Rikky, Mannwich: Why a filter? That’s what kills me with the Failure Caucus, they don’t want to hear any good news – and we’re getting a lot of it. They’d rather stick their heads in the sand, cursing GS, than actually paying attention to the abundance of good earnings news we’ve been seeing and rapidly improving economy. Actually, there is a filter. Turn off your computer, go down into your bunker and throw darts at all the bankers, Obama, Bernanke, etc. See how easy that is – just ignore everything, that must make life better in your gloomy eyes.
October 15th, 2009 at 6:03 pm
By all means, Harry, since its only about making money in a rigged game while the people around you are going under, please, just continue with your pasttime and ignore reality. Have a great time counting your chips and sniggering at all the “losers” out there in the real world.
October 15th, 2009 at 6:09 pm
mathman: I’m not “sniggering at all the losers” just the ridiculous doomers here who refuse to acknowledge that companies are seeing some positive growth now. You know what that leads to? If you said “hiring” you are correct – give yourself a pat on the back. That’s what we should all be excited about – good companies posting great earnings. That will lead to hiring, creating more demand and a mini boom economic cycle. Nope, instead let’s just whine about GS bonuses. Please.
October 15th, 2009 at 6:09 pm
Barry – I agree. I would very much be in favor of an ignore button for your blog.
Harry – It’s not that we don’t want to hear or read good news, we see that in the MSM all day. The issue is that (to put it bluntly) most of us think you are a complete idiot and none of want to hear what you have to say.
October 15th, 2009 at 6:18 pm
Thor: Well there are plenty here who want to hear what I have to say. What good would an ignore do? So anyone who disagrees that the government is running us into the ground or that Goldman Sachs is evil or that economic numbers are always “rigged” can just be put on ignore? If you just want to trade ideas with other members of the Failure Caucus, just start your own site with an ignore button so your bunker buddies can all commiserate without the “annoyance” of actual good news.
October 15th, 2009 at 6:21 pm
HW – So the people who don’t think you are a complete moron can continue to read your pointless drivel. Why do you care if most of us want to ignore you?
Oh wait, are you still telling that lie about how people on here are emailing you all the time about how your advice has made them lots and lots of money? There are folks here who are still waiting for you to produce a couple of these for us.
October 15th, 2009 at 6:23 pm
@Thor: Please stop. Please. Don’t feed it.
October 15th, 2009 at 6:28 pm
It’s hard Manny, very hard. I apologize.
October 15th, 2009 at 6:31 pm
Remember, the casino takes money from the suckers — the House usually wins:
———-
That’s funny, the huge numbers and the consistency give me a different conclusion: they are the house.
It’s exactly because of infatuations such as this one that leaders can run countries to the ground.
October 15th, 2009 at 6:33 pm
years 4-5-6-7-8-9 done with 40-1 leverage, come december per law they are required to reduce there var…………..ain’t saying they won’t do well…………..yet, the houses in vegas are looking for gamblers also, if oil continues upward to GS’s 85 well, those guys in vegas will be fewer
October 15th, 2009 at 6:35 pm
In my book megahuge consistent returns mean they are the house.
Infatuations such as this one are dangerous. The leaders feed on them.
October 15th, 2009 at 6:54 pm
On bonuses………..we are so ego centric imho……..why is the euro safe and the dollar not………europe is in the same boat we are………..oh in europe they fired all the management of banks and replaced them with new folks………they don’t have money in politics………….europe’s been thru 30-40 boom busts in there history………us, well, two, and our response……..bonuses for the foxes…………if you think no one in the rest of the world see’s the irony and does not completely understand what is going on………well, we got some empty rooms in vegas and plenty of chairs at the table………..
October 15th, 2009 at 7:02 pm
Thor: Ignore me and my over bloted ego? How dare you ever think such a thing possible, why I am such pompus blabber mouth that I don’t even know what I am saying most of the time.
Also a “complete” Idiot? That would imply I have reached the level of perfect idiot and I am not there yet!
Look the good news is banks get US tax payers money to pump the market to levels it should never reach, but they still have so much money they have to do something with it, why not give it out in bonus?
October 15th, 2009 at 7:23 pm
i like Wagner better than Wanger- FWIW-
at least Wagner is funny-
Wanger- not so much- and he may even have a point- but delivery is key when you want people to pay attention to what you are saying-
sorry to put this out there- but- Wanger- what is your vision of America- what are the negatives and positives- what can be improved upon to make it better-
if you were in charge- what would you do to the people behind the crashing of the economy and the fleecing of the common man-
do you have a vision- do you see anything wrong?
enlighten us
October 15th, 2009 at 7:35 pm
BR says: If it were really a roll of the dice, it would be far more erratic . . .
au contraire barringo. you can have consistent “winnings” if the odds are stacked in your favor. think of goldman as an experienced card counter playing in a game of blackjack where there’s only a single deck. give me that kind of scenario and i’ll produce consistent revenues for ya. you’ll note i said “experienced” and not genius or even smart; one doesn’t need to be either of the latter to make $$$ in this kind of game.
October 15th, 2009 at 7:41 pm
Ahab: First order of business, I would have all public school erect a 12 foot bobble head statue of either Barak Obama or Ben Bearnake. Then I would hand out text books about how these two saved us from certain finacial disaster and how the HOG Economy was started on a series of mini-booms.
And to help people get behind and believe in this new mini-boom economy I am working on an Indicies Fight Song. Rahhh Rahhh Rahhh
Also if you convert to my side I will send you a “The Indicies Will Lead The Way” Lepel pin – FOR FREE, but shipping and handling is only $19.99
October 15th, 2009 at 7:43 pm
Consistent earnings were the hallmark to Bernie Madoff, as well.
October 15th, 2009 at 7:44 pm
hallmark of, not to….sheesh
October 15th, 2009 at 8:39 pm
I still want to know what happened during the December quarter of last year…
You know, when GS was shitting their pants all over the street. Man, were those days short lived.
How well would those punks be doing without TARP? Not this fucking good I can assure you. No one does that well consistently taking that much risk. No one. Not unless they are rigging the game.
We all know this. Its all out in the open but people are too blind to see.
My other question is why you are even defending them BR, this isnt about bonuses. Maybe you’re just trying to fill seats. I dont know. Its not about conspiracy either. As Armstrong has said, there is not a grand conspiracy… The only conspiracy is their goal to make money and create guaranteed trades. They do this by BUYING political influence and STACKING the ranks with their people. People who are in a position to know shit before we do.
GS is such a fraud that I am disgusted that I ever dreamed of working there.
And one more thing, back to TARP. Arent these fuckers supposed to be “bank holding companies”? Name one other “bank” out there that can fly taking that much RISK. Name ONE.
Alright, back to hiatus.
October 15th, 2009 at 8:49 pm
@ Thor
BR won’t put an ignore button because it would drive traffic down, what % of posts are in response to something stupid that HW says?
We have our own ignore buttons on our fingertips. It is amazing how fast people leave when they realize they have no audience. People feed the beast and give him reasons to keep posting his mindless drivel.
HW gets an inordinate amount of attention for someone who brags about taking a position that is now hugely profitable, after the fact and when someone calls him out on it, he disappears.
I suspect based upon the quality of his posts, his lies about his positions, performance and clairvoyance, the illogical conclusions, the over sensitivity when someone calls him out on his lies, the pointless cheer leading, not to mention the obnoxious bullying, that he is a very young person sitting in his mother’s basement laughing his ass off because he has this board actually responding to him as if he were a serious person.
People who respond to him give him a legitimacy that he hasn’t earned and does not deserve.
October 15th, 2009 at 8:57 pm
@ I-Man
The real problem is that all of this is legal. Just like when Paulson pocketed his $500 million tax free when he was “forced” to sell his GS stock to take the position at Treasury.
The other point is that now that their smaller competitors have been wiped out, they now have a larger piece of the pie.
This stuff has been going on for decades, and every year their risk taking and profits and bonuses get higher and higher, there is a revolving door between Wall Street and the US government. Since the crash, all of these cozy relationships have been exposed but nothing will be done. They will continue to get unfair advantages because that is how business is done in America.
It is all legal. Better to concentrate our efforts on something that can be changed.
October 15th, 2009 at 9:00 pm
@HW
Name one person who wants to hear what you have to say here on this blog. The Yahoo people, who actually have an ignore button, think you are the biggest loser and couldn’t wait for you to leave.
Name one person.
October 15th, 2009 at 9:13 pm
Yup, GS IS the house..
October 15th, 2009 at 9:19 pm
And we are not “whining about their bonuses. We are publicly SHAMING them for being arrogant assholes who don’t get that people in this country are unemployed while they run off with their billions instead of doing their damn JOBS and funding new business growth…
October 15th, 2009 at 9:55 pm
I LOVE Harry Wagner!!!
October 15th, 2009 at 10:01 pm
DSS – Yes, you make total sense. I can’t argue one bit with you because you are right. Hell, I even made a comment about not responding to him this morning. Obviously though, no matter how hard I try, he always seems to pushe that one button that drives me nuts. I shall endeavor to try harder.
October 15th, 2009 at 10:17 pm
“Remember, the casino takes money from the suckers — the House usually wins:”
Um Barry, the house always wins (in the long term). Sorta a law of nature, you know probabilities and such. Having a computer sitting on the exchange making thousands of trades per second (no this couldn’t be front running) is very much like the casino that always wins. No big deal, except it is stealing, and you don’t even get the lights, sirens, free drinks, pretty girls and a thank you. The money just disappears into the vampires squids bonus pool. Such a deal, and they wonder why the small investor isn’t back buying stocks.
ME, I’m not pissed. But I don’t think you can run an economy when the rich steal from us poor folk, at least not to the current level. Going to end up with way too many hungry folks, and hungry folks aren’t good citizens. The unwashed masses have a habit of getting mighty touchy when hungry.
October 15th, 2009 at 10:51 pm
dss: “@HW Name one person who wants to hear what you have to say here on this blog” My mom likes listening to me, but she is not a member of this blog.
Hmmm Makes me wonder if I could get her signed up she would show you how cool I really am.
And for your information arogance is a virtue.
Thor: “I LOVE Harry Wagner!!!”
Your free “The Indicies Will Lead The Way” lapel pin is being shipped – Wear it with pride please
October 15th, 2009 at 11:17 pm
Thoughts:
- I hate that Harry is right and I’m wrong (went net short 2 months ago). But, if we keep goading him with semi-personal attacks, won’t he at some point become the braggart we imagine him to be? Whose fault is that? Yes, I think the economy is a sham and that the whole system fucks over most people. But, the current state of affairs isn’t something Harry or F411 created or wished on anyone.
- It looks to me like people spend whatever money they can get their hands on. If the government gives fresh credits to people and takes shit onto its books, people will spend that new money. The cycle begins anew. It ends when the government takes away the punch bowl again, when the music stops. It’s a con game. But “not playing” is as risky to your wealth as any other choice. You have to play.
- Bernanke told us that a “committed government” can find a way to reflate. He will not stop until either (a) another absurd bubble forces him to raise rates or (b) fiscal conservatives snatch power. Given the state of the GOP (fucking idiots) and the libertarians (too few), I doubt (b) will happen. Therefore: there’s going to be another bubble in *something*. (Looks like housing again already…)
- Despite what Jim Rogers says, I’ll keep a few puts. I’m too tone-deaf to hear ringing at the tops. I will stay long some low-debt, profitable companies and stay short some worthless pigs.
October 15th, 2009 at 11:58 pm
wunsacon – why do you think housing will be the next bubble?
October 16th, 2009 at 12:01 am
DELETED
October 16th, 2009 at 12:37 am
Thor, lo and behold, prices already look bubbly again to me. Thanks to ridiculous supply constraints and $8k sales promotions, our government has accomplished what it sought out to do and which I hardly thought possible. I’ll just have to wait for this bubble to implode once again. If it doesn’t, then my longs will compensate me a little.
Harry, I didn’t realize you were this easy to “egg on”. … People are “right” for periods of time. (Sometimes for the right reasons. Often not.) And then they’re “wrong” for periods of time. (Again, sometimes for the right reasons. Often not.) I believe in data and in constantly trying to improve my understanding of things. And just hope one day to end up luckier than smart.
October 16th, 2009 at 12:51 am
Harry, there are:
- People who bet right for the right reasons. (Jeremy Grantham)
- People who bet wrong (or suboptimally — e.g., not fully exploiting the bounce) despite a lot of otherwise good reasoning. (Perhaps most people on this board.)
- People who seem to embody the phrase that “it’s better to be lucky than smart”.
- The, um, unfortunate remainder.
I “believe in” or “trust” the first two groups more than the rest. While your reasoning is better than some of the bulls I saw here in 2006-2007, I disagree with much of it. I’m afraid I can’t put you in the Jeremy Grantham camp.
Of course, this is all my subjective viewpoint.
October 16th, 2009 at 1:23 am
wunsacon: This is an easy game. How do you think Barry is on every talk show? Everyone, listen. Let go of your ego and emotion, it’s destroying you wealth building ability. Barry learnt this long ago, that’s why he’s driving a Ferrari and you’re not. Go with the game. It’s giving you easy money for months now. You can argue about the economy or GS bonuses, who the fuck cares? I think we’re in an economic mini boom and making lots of money. It’s really that easy.
October 16th, 2009 at 5:05 am
I think he wasn’t saying that they were gamblers at the casino, but that they owned the casino.
Big difference.
October 16th, 2009 at 8:30 am
To me, the chart says “Merry Christmas, Goldman Sachs”
They are in the casino and they are not the house… but the dealer is throwing the game for them, because they own him. He is handing out the house’s money to them.
October 16th, 2009 at 12:32 pm
No one ever accused Rolfe Winkler of having particulary insightful views. I know for a fact that I’ve probably forgotten more about accounting than Mr. Winler ever knew.
Here’s some facts:
http://truthingold.blogspot.com/2009/10/re-goldman-sachs-earnings.html and
http://truthingold.blogspot.com/2009/10/goldman-sachs-tightens-its-grip-on-our.html
October 16th, 2009 at 1:47 pm
“Excellent information flow”
Riiiiiight.
Helps when you have a 29 yo punk who worked for you ‘hired’ as the SEC Enforcent Division COO too.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atecAvrD1.X4
Perhaps you can let me know when we cross the imaginary line in the sand that justifies calls for torches and pitchforks, and molotovs through the windows of 200 West St.
Though I would expect that as part of the build out of the new HQ, the Security Division probably had infrared remote controlled .50 cal machine guns installed on parapets out front.
October 16th, 2009 at 3:44 pm
Goldman Sucks is no different than a stacked deck, a fixed horse race, or tilted roulettee table.
BR or anyone else will never convince anyone that Lord Blankfein and Jamie Dimon are geniuses at what they do, nor their traders who for all the reasons above listed are not only trading on inside information they are manufacturing it, being given the money to bet with from the american taxpayer or a printing press.
Without the backstop of a rigged game, they would be an ash heap today. a fate devoutly to be wished for.