'Blowout Profits' for Goldman Sachs? Capitalism Ain't Supposed to Be Like This

Posted by Joshua Holland, AlterNet at 8:24 AM on July 14, 2009.

Editor's note: this originally appeared on AlterNet's blog, PEEK.

A few short months ago Goldman Sachs was deemed too big to fail, and allowed to sink its fangs into the public vein. Not only did it receive direct assistance from lowly tax-payers like you and I, the gaggle of Goldman alumni that run the Treasury Department and implemented the Troubled Asset Relief Program funneled tens of billions to insurance giant AIG to assure that it could cover about 13 billion in Goldman's losses. Goldman paid back the TARP loans -- because caps on executive pay are a form of socialism, of course -- but is still making hay on the public dime, specifically on the sale of $28 billion worth of subsidized debt courtesy of the FDIC.

But today, as the New York Times put it, "up and down Wall Street, analysts and traders are buzzing" about the fact that Goldman is reporting "blowout profits" to the tune of $3.4 billion in the 2nd quarter. In a masterful bit of understatement, the Washington Post notes that "the New York investment bank profited from turmoil in the financial markets, the absence of former rivals and the continued support of the federal government."

It's good for Goldman's shareholders and great for its traders -- according to the WaPo, "Goldman said it set aside $6.65 billion for employee compensation in the second quarter." But for everyone else? Not so much. And not only because of the costs borne by the public, not only for the moral hazard this kind of crony capitalism represents, not just for the unfairness inherent in the pervasive reverse socialism we're seeing these days, but also because of the lessons that support has left unlearned. Protected from the fallout of their bad bets, Wall Street's casinos are open for business again. Just this week, Bloomberg reported that Morgan Stanley was trotting out another "collateralized debt obligation" backed by shaky loans that's again getting a AAA rating (if you have no idea what that means, see my piece from last October titled, "How Wall Street's Scam Artists Turned Home Mortgages Into Economic WMDs").

Now, let's just consider for a moment what's supposed to happen when businesses make catastrophic decisions, take on too much risk and get burned (never mind bringing down much of the global economy with them, as in the present case). We were told that if any of these "money center" banks failed, we'd end up living in a Mad Max-like dystopia, but let's think for a moment what other scenario might have played out had we just let the fuckers face the music.

From today's WaPo:

As large banks continue to nurse their wounds -- many self-inflicted -- some of the Washington area's less exposed community bankers are using the financial chaos to draw in new business, even by pursuing new branch locations in the midst of the recession.

Alexandria-based family bank Burke & Herbert Bank & Trust, which has $1.9 billion in assets, saw $45 million in new deposits during one two-week period last fall. It hopes to lure more by opening new outposts.

Here's the CEO, E. Hunt Burke:

"Show me any bank that's in trouble, and I can show you some place they took a risk and got caught, whether it be in subprime loans, or by getting too heavy in housing developments that dried up," Burke said. "Burke & Herbert didn't follow any of those paths."

[...]

The bank said that as of July 1, it had increased its reserves for potential loan losses to $11.3 million, from $9.9 million at that date last year. Loans delinquent for 90 days or more, otherwise declared as uncollectible, accounted for 0.5 percent of the bank's total loans, up from 0.09 percent at the end of 2006.

I'm sure Alexandria-based Burke & Herbert is a dreadfully dull business and working there is nothing like the high-flying life on the Street, with its multi-million dollar bonuses and attendant Masters of the Universe lifestyle. But banking is supposed to be dull and bankers are supposed to be boring and cautious. Instead of keeping Wall Street's hustlers in caviar on the public dime, we should have put a few banking giants into receivership and sold off their good assets in an orderly manner to staid, dull community-based banks like Burke and Herbert -- banks that would fulfill the core function of a banking system: taking deposits and lending money to people who have a good chance of repaying it.

I'm not one to fall on my knees and pray to the Gods of Capitalism™.  I think of it much as Churchill regarded democracy: as the least bad system around. But it is supposed to be efficient at allocating resources, and in classical economic terms, we have created a market failure by handing trillions  into the hands of irresponsible actors.

With the exception of Goldman's shareholders and employees, we're all big suckers today.

*Also see: "Let the Banks Fail: Why a Few of the Financial Giants Should Crash".

Tagged as: goldman

Joshua Holland is an editor and senior writer at AlterNet.