Goldman Sachs reported giant $3.5 billion quarterly earnings so suddenly we should all believe everything has turned around in bank and financial companies. The sector's stocks shot up in anticipation of the news. Indeed Goldman was the best of the banking group at taking low interest government bailout money and investing it in trades at lucrative spreads. But these earnings numbers hide the fact that most banks aren't lending as much as building up their loss reserves.
The Goldman news aside most people I talk to sense the economy is about to suffer a setback--the stimulus programs stopped the free fall, but the still frozen credit markets fail to grease business expansions. People are saving what they can or paying down debt not spending. And the banks won't write down all their toxic assets for fear of creating more financial panic. The short-term trend outlook is dicey at best.
For those real estate borrowers counting on a near term economic recovery to cushion their down side, hopes fade along with all those economic forecasts about a second half upsurge. Yes, remember those fearless predictions from the beginning of the year? They can be tossed in the trash heap with the ones last year about economic recovery that should have started six months ago and those others about "soft landings." You get the idea--everything is getting pushed further out.
The mantra has been that economic recovery will track ahead of jobs growth, but the unemployment numbers get increasingly disheartening as companies ask surviving workers to pick up more slack with fewer benefits. Stimulus funds all those road construction projects that create traffic jam ups at 10 pm, but doesn't stop the free fall in office occupancies and rents. GM and Chrysler get through bankruptcy but then announce more job cuts. It's reported that the venerable "Business Week" is worth only a $1. I remember the days when pr guys got bonuses for placing executive interviews in that now obsolete publication.
As far as pr, Goldman continues to win plaudits off its trading acumen and AIG struggles with asking for government approval of more bonus payouts. Goldman's success comes at least partly at the expense of taxpayers who bankrolled their recent gains before the company gave back its TARP and bailed them out of AIG credit default swaps earlier in the year. It's a great business for the traders betting on spreads, but doesn't do much to capitalize future business growth. This is the same recent Wall Street model that sent us into our recent collapse. And AIG wouldn't exist without taxpayers, but since we bailed them out from oblivion and they think they are operating on the old bonus model so pay up.
These types of investment mindsets are indicative of why the economy will falter more before it slogs to any recovery. Until we start harnessing our public and private capital to fund long-term growth and get out of the casino, we don't have a chance.
Unfortunately I agree with you on this post. A friend called me today and asked if I had heard the news about GS earnings, and before she had a chance to continue I mumbled something to the effect of "well I didn't see any new credits in my brokerage account this morning" which I think annoyed her but nonetheless is true.
American tax payers put up a good part of the dough for GS to speculate with our dollars. And its great they made money but there isn't any benefit from this profit to those who lent the money.
As you commented, the casino continues. The ridiculous circus acts taking unlimited amounts of risks to sell more tickets is exactly what created the financial storm we're now experiencing and Goldman continues to fly from the high wire.
I'm a true capitalist, I really do like to see businesses succeed, and GS certainly did enjoy some new success. They've built a wonderful business and some would say they are the only company in America who has more mensa capacity than the American Mensa Society. Goldman was smart enough to see an opportunity to profit from the stupidity of the government and did.
Its not Goldman's fault, to their credit, that the United States government is/can be so stupid they scream bloody murder at market makers when markets contract and then blame market participants for "bad practices" while simultaneously handing these same participants a check for them to continue with their "bad practices" while continuing to scolding them.
Kuddos to Goldman Sachs, but until the banks are FORCED to rid themselves of "toxic assets" sitting on their balance sheets our credit markets, and particularly commercial real estate, will remain inactive and stalled. Unless congress mandates a removal of these assets visa-a-vis a sale of the assets then banks will continue to hold these assets and wait for markets in these securities to correct. Only then, with new liquidity, will banks be able to resume lending in any meaningful way.
Posted by: Chris T | July 15, 2009 at 12:47 AM
great post. WSJ had a good article by Zucker man about this too.
http://online.wsj.com/article/SB124753066246235811.html
Posted by: Living Off Dividends & Passive Income | July 16, 2009 at 08:07 PM
GS is a "good company" or "smart"? Why, because they made money? If you peel back a layer of the onion, you'll learn that GS was actually pulling the strings with the bailout package and that whole rigged process. They aren't necessarily smarter, they're less scrupulous. They're crooks. They are rigging the system to their favor. It's a shame, and unfortunately for them, they sell their souls for the "riches".
Posted by: aupanner | July 17, 2009 at 11:45 PM