Commentary: Government Golden Goose Good For Goldman Sachs Profits
Though it may now be debatable that what’s good for General Motors is good for America, it’s even more of a stretch to suggest that what’s good for Goldman Sachs is good for America and represents some economic barometer.
If anything, Goldman’s handsome profits are a barometer of the government’s bailout of the financial system, from the straight-up handout mechanism called TARP to the Federal Reserve’s less direct, but probably more beneficent, policy of rock bottom interest rates and other favorable lending facilities.
The massive stock market rally from April to June and the fixed income bonanza triggered by a flight to safety no doubt helped.
Goldman’s profits are good for Goldman and perhaps a few other financial institutions, whose stock prices may benefit from the collateral impact.
Goldman Profits In Detail
Borrowing money from Uncle Sam for virtually nothing and then loaning it at a 300-400-basis-point margin should be profitable. Of course, with weak loan demand and tightened borrowing standards, Goldman is hardly throwing money at the crowd, although it is turning away people at the door.
This is not government aid that has to be paid back. It is a gift that keeps giving.
Imagine if GM was able to that, if the federal government essentially subsidized its production cost and thus fattened its profit margin.
Goldman’s far profits are more likely to gush up to senior management than trickle down to business and consumers, who are still feeling the crunch. If Uncle Sam helped facilitate a huge reduction in the rate of my mortgage or home equity loan, I’d have a lot more cash on hand. In the current environment, thought, that does not mean I would go on a spending binge or spread it around.
Financial firms can also count on more support in the months ahead, as they collect billions in fees from the government’s massive foreclosure mitigation program, as they restructure mortgages. The big four banks (JPMorgan Chase, Citigroup ,Wells Fargo , Bank of America )control more than half of all loans being serviced. Some three to four million million loans could fall under the Obama administration’s Making Home Affordable program.
At best, Goldman’s profits may be a very, early leading indicator of some bottoming of the economy, but if the company isn’t doing well after all of the support-direct and indirect—we should be worried.