AT its nadir last November, Goldman Sachs’s share price closed at $52, nearly 80 percent below its high of around $250. By then, many of its chief competitors — Bear Stearns, Lehman Brothers, Merrill Lynch and UBS — were dead or shadows of their former selves. Even Morgan Stanley, long considered Goldman’s archrival, had nearly died. But somehow, less than five months later, on the heels of a surprisingly profitable first quarter of fiscal 2009, Goldman Sachs is once again riding high, with its stock closing Tuesday at $115 a share
The question many Wall Streeters are asking is just how Goldman once again snatched victory from the jaws of defeat. Many point to Goldman’s expert manipulation of the levers of power in Washington. Since Robert Rubin, its former chairman, joined the Clinton administration in 1993, first as the director of the National Economic Council and then as Treasury secretary, the firm has come to be known, as a headline in this newspaper last October put it, as “Government Sachs.”
How can one ignore, the conspiracy-minded say, the crucial role that Henry Paulson, who followed Mr. Rubin to the top at both Goldman and Treasury, played in the decisions to shutter Bear Stearns, to force Lehman Brothers to file for bankruptcy and to insist that Bank of America buy Merrill Lynch at an inflated price? David Viniar, Goldman’s chief financial officer, acknowledged in a conference call yesterday the important role the changed competitive landscape had on Goldman’s unexpected first-quarter profit of $1.8 billion: “Many of our traditional competitors have retreated from the marketplace, either due to financial distress, mergers or shift in strategic priorities.”
But he was largely mum on American International Group, which, Goldman’s critics insist, is the canvas upon which the bank and its alumni have painted their great masterpiece of self-interest. A few days after Mr. Paulson refused to save Lehman Brothers last September — at a cost of a mere $45 billion or so — he came to A.I.G.’s rescue, to the tune of $170 billion and rising. Then he decided to install Edward Liddy — a former Goldman Sachs board member — as A.I.G.’s chief executive. Goldman has since received some $13 billion in cash, collateral and other payouts from A.I.G. — that is, from taxpayers.
Why kill Lehman and save A.I.G.? The theory, we now know, was that the government felt it needed to save the firms, including Goldman Sachs, that had insured many of their risky ventures through the insurer. Indeed, had Mr. Paulson decided not to save A.I.G., its counterparties would have suffered serious losses. Lehman’s creditors will be lucky to get back pennies on the dollar.
In a conference call he held last month, Mr. Viniar made the shocking claim that Goldman “had no material exposure to A.I.G.” because the firm had “collateral and market hedges in order to protect ourselves.” If so, then why did Goldman need the government’s help in the first place? During yesterday’s conference call, Guy Moszkowski, an analyst from Merrill Lynch, asked Mr. Viniar what role the $13 billion Goldman has collected from A.I.G. had on its first-quarter showing. But Mr. Viniar would have none of it: Profits “related to A.I.G. in the first quarter rounded to zero.” Hmm, how then did Goldman make so much money if that multibillion-dollar gift from you and me had nothing to do with it?
Part of the answer lies in a little sleight of hand. One consequence of Goldman’s becoming a bank holding company last year was that it had to switch its fiscal year to the calendar year. Previously, Goldman’s fiscal year had ended on Nov. 30. Now it ends Dec. 31.
As a result, December 2008 was not included in Goldman’s rosy first-quarter 2009 numbers. In that month, Goldman lost a little more than $1 billion, after a $1 billion writedown related to “non-investment-grade credit origination activities” and a further $625 million related to commercial real estate loans and securities. All told, in the last seven months, Goldman has lost $1.5 billion. But that number didn’t come up on Monday. How convenient.
Which leaves us with the real reason Goldman has cleaned up this year: the huge misfortunes of its major competitors. Those other firms have disappeared or have become severely wounded, and as a result have more or less been sitting on their collective hands since the collapse of Lehman last September.
As part of its busy day on Monday, Goldman also announced it was raising $5 billion of equity capital and that it intended to pay back the $10 billion from the Treasury’s Troubled Asset Relief Program that Mr. Paulson forced on the bank last October. Being free of the TARP yoke will give Goldman yet another competitive advantage: the ability to pay its own top talent and new recruits whatever it wants without government scrutiny.
This is significant, since it is unlikely any of Goldman’s remaining competitors will be able to make a similar move anytime soon. There is a reason Bill Gates once said Microsoft’s biggest competitor was Goldman Sachs. “It’s all about I.Q.,” Mr. Gates said. “You win with I.Q. Our only competition for I.Q. is the top investment banks.” And then there was one.
http://www.nytimes.com/2009/04/15/opinion/15cohan.html
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