Goldman Sachs – how does it work?“If a picture paints a thousand words …” Today’s Daily Telegraph has a wonderfully evocative picture of a fruit machine’s reels spinning to stop on the revenue earned by Goldman Sachs as a 2010 first quarter estimate by “industry estimates.” As someone who used to be a senior director of the Bell-Fruit Group, I have sentimental memories of the cherries that are on the reels and that have nearly hit the pay line. Cherries are symbolic in the fruit-machine game. They usually give the biggest pay-out and are of course what we all want to pick. In this image, the Goldman Sachs money-making machine did not quite scrump the cherries but only because it has the orchard farmer on its tail. One other thing. Hidden deep in its software, the fruit-machine has a “compensator” that over a given cycle only allows the punter to win a given percentage of the “take.” The rest goes to the house.
According to the estimates for the first quarter, the house took $11.1bn, paid out $5.5bn in pay and bonuses and still was left with a bottom line of $3.8bn (up 50%). In my awards for 2009, I listed Goldman Sachs at No 7 as best blood sucker. Though tongue-in-cheek, the natives are getting restless. Some are digging deep into how the firm actually works and alleging something horrible in the woodshed:-
• The US Securities and Exchange Commission (SEC) is prosecuting GS for alleged fraud in relation to its handling of collateralised debt obligation (CDO) instruments (dealt with extensively in the Credit Crunch Diary placed on this website). Specifically, alleged untruths by a GS banker to professional investors.
• The firm has been subpoenaed to hand over documents to the Lehman Brothers liquidator under suspicion that it was partly responsible for triggering the downfall by shorting Lehman stock.
• A number of financial regulators around the world are investigating GS over alleged derivatives mis-selling including the German regulator and the European Union.
• Gordon Brown, the UK prime minister, has announced an investigation by the FSA.
• GS is being investigated for its role in helping Greece as a sovereign state to use accounting tricks to hide its debt pile. Chairman Gerald Corrigan has admitted that complex currency transactions were used in 2001 that “enabled politicians to mask borrowings.”
So, how does the money-making machine work? As with the compensator in a fruit-machine, I have no idea. But someone does and when that someone has to talk and open files, we will all be the wiser, and happier?
jgs - April 20th 2010
