Goldman Sachs: business as usual

Big banks like Goldman Sachs have become flush with free money and have been announcing mega-results for the third quarter of last year. They have also started to pay huge bonuses again for bankers and directors. So it’s business as usual for capitalism - at a time when a record number of Americans (32million) are on food stamps, unemployment of various sorts has reached 16% of the workforce and people are losing their homes.

Goldman Sachs is looking to face down a storm, as they dish out bonuses from a $19bn pot. The big banks in the US and Europe have been announcing mega results for the third quarter of last year. The banks are once again making money. This is not because the banks are making money on loans to industry or individuals. On the contrary, banks are continuing to cut back on lending there.

So how are they making money? It’s a combination of two things. First, they are able to obtain very cheap money. The central banks of the world have cut the interest rates they charge the banks for borrowing to virtually zero. At the same time, they have launched massive programmes of purchasing the ‘toxic’ assets of the banks in return for cash. These programmes of what is called ‘quantitative easing’ have stuffed the bank’s balance sheets with cash. This cash is just printed up by the central banks.

So big banks like Goldman Sachs have become flush with free money. What have they done with it? They have bought government bonds first. These bonds yield 3-4% a year and have been paid for by the free cash given to the banks for their ‘dud’ assets by the central banks and their governments (i.e. the taxpayers). This is a perfect circle of financial trickery.

But the banks have also started to buy stocks and shares everywhere, as well as other so-called ‘risk assets’ like various commodities (oil, copper, wheat, gold etc) and emerging market debt. The prices of these have rocketed upwards. This adds to the wealth of the banks in their balance sheets.

So the banks have become giant hedge funds, betting taxpayers’ money on a rise in the stock market, government debt and commodity markets. In that sense, it is ‘business as usual’. The banks have resumed the role that they had adopted at the start of the credit crisis in 2007 – betting on the prices of financial assets financed through borrowing. So far, it’s working because governments are financing it all for virtually nothing.

It’s certainly business as usual for the top bankers’ bonuses. With several top banks gone bust or taken over, the survivors have now increased their market share and are able to rack up bigger profits. Goldman Sachs is the world’s top investment bank, namely it does not lend money to the likes of you or me; it uses its funds and the funds of other institutions to invest in stocks and shares, bonds and other financial assets and make bets on these markets going up or down.

In the third quarter of 2009, GS made $3bn profit out of $12bn in revenues collected. It has repaid the money it borrowed directly from the government ($10bn), with interest. But it used that money and more to take advantage of financial markets where others had gone bust.

What is not realised is that GS, just like the other banks, did this with taxpayers’ help. They were able to borrow $28bn guaranteed for any losses by the government. Also, when the world’s largest insurance company, AIG, went bankrupt, they owed, among others, Goldman Sachs about $13trn. Normally, creditors are lucky to get any money back if a company goes back. But GS got paid back in full with government funds. The US government was so worried that AIG’s collapse would bring down the whole pack of cards; it bailed out all the creditors to the tune of $120bn.

Why all this government help? The heads of the big banks are closely connected to the heads of the government. In the US, the Treasury Secretary Timothy Geithner used to work for Goldman and so did White House economics supremo, Larry Summers. Under Bush, former Treasury Secretary Hank Paulson, who arranged the AIG bailout for GS and the decision to buy $700bn of ‘toxic’ assets from the banks, used to be the head of Goldman Sachs.

Overall, GS has got free money worth around $70bn in the last year. It has paid back about $20bn of that. But in the meantime, it has been able to make over $30bn in profit! What is GS doing with those profits? It is paying its bankers and directors around 50% in straight bonuses. This year, GS employees will get about $19bn in bonuses on top of their salaries – at a time when a record number of Americans (32m) are on food stamps, unemployment of various sorts has reached 16% of the workforce and people are losing their homes.

Of course, the bonuses won’t be shared out equally: some will get more than others – indeed, some traders will pocket over $25m in one swoop. But that is the essence of Goldman’s philosophy, at least according to its vice chairman of the international board, Lord Brian Griffiths of Fforestfach. As the good life peer of the British House of Lords and a practising evangelical Christian, recently put it: “we have to tolerate inequality as a way to achieve greater prosperity and opportunity for all”. There we have it: unfairness and the ‘trickle-down’ theory all restored as though nothing had happened – business as usual.

The Christian Lord , who is also author of a book entitled Morality and the Marketplace, did recognise the moral obligation that taxpayer-financed GS directors had to the world: “To whom much is given, much is expected and there is a sense that if you make money, you are expected to give”. This call for charitable works by GS has been well expressed in GS funding of top private schools in America and in purchasing VIP tables at $22,000 each for the Formula One motor racing after-race parties. Truly a wonderful philanthropic gesture.

There is much blather from politicians about ending the ‘bonus culture’ and ‘reining in the banks’. But it will come to nothing. There is an obvious solution. Bring them all into public ownership and make them democratically accountable to the elected institutions with a measure of control for the workers in them. Then the top bankers and their bonuses can be reined in; then the risk of excessive borrowing and speculation can be stopped; then banks can be made to lend money to the small businesses and individuals who desperately need it. It seems an obvious solution – does it not? But that would not be business as usual.