On the one hand, Goldman Sachs made $3.19 billion in the last three months. On the other, Citigroup lost $3.2 billion and Bank of America lost $1 billion. And the difference is, while Citi and BofA are still getting clobbered by losses on consumer items like mortgages and credit cards (to the tune of $8 billion and $9.6 billion, respectively), Goldman is reaping the benefits of its trading business:
Bumper third quarter profits at Goldman Sachs and another loss for Citigroup on Thursday highlighted the gap between the financial resilience of Wall Street and the woes of Main Street, fresh evidence that two Americas are emerging from the crisis. The diverging performance of investment banks such as Goldman and the retail banking operations of the banks such as Citi is problematic for an Obama administration that wants a strong Wall Street but is also under pressure to tackle the plight of ordinary people.
As Kevin Drum noted, “[Goldman] made better bets than the other guys, but the kind of business that would indicate a recovering economy is still very much in the tank.”
But the problem is not simply that Goldman is making money trading currencies, commodities, and risky over the counter derivatives. It’s that Goldman is doing it thanks to significant government support. As National Economic Council Director Larry Summers explained, “there is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support.” And indeed, Goldman “has had a lot of help”:
Critics charge that the lion’s share of Goldman’s profits comes from making big bets using cheap dollars printed by a Fed…It received $13 billion in the costly, widely questioned September 2008 rescue of insurer AIG. It has sold $22 billion in federally guaranteed debt under a plan the feds started to restore capital markets activity.
Perhaps most troubling is the fact that, in order to gain access to much of the government’s financial rescue effort, Goldman converted from an investment bank to a bank holding company (essentially an institution that, at least in part, takes deposits and lends). But its business activities “haven’t changed at all.” In fact, Goldman’s earnings report shows no sign of any lending activity whatsoever.
As Alan Schram, the Managing Partner of the Los Angeles based investment firm Wellcap Partners, wrote, “now that they are a regular commercial bank they actually trade more, which makes sense: if the US Treasury covered my losses, I would also be happy to take major risks.” And in the meantime, Citi and BofA’s mounting losses reveal that consumers aren’t any better off.