The Journal Beats Down Goldman

When one of your ardent supporters likens your business model to that of Fannie and Freddie you have problems. That is how the Wall Street Journal on its editorial pages described the Goldman Sachs that has emerged from the financial crisis.

From the Journal:

Of course, if the feds do let CIT fail, this will only confirm that the only certain survivors in the current market are banks big enough that the government figures it must bail them out. Just ask the many small banks that have been rolled up by the FDIC at a rate of two a week since the beginning of the year, with eight so far in July alone. That can only strengthen the likes of Goldman, which apparently needs no help printing money anyway.

Goldman’s traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman’s own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.

Goldman will surely deny that its risk-taking is subsidized by the taxpayer — but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it’s not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs — or should we say Goldie Mac? — enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.

The Journal goes on to suggest that Goldman’s newly acquired special status entitles the taxpayer to some say in the way the company operates which is strong stuff indeed coming from them. They suggest that absent a policy that no bank is too big to fail — an impossibility in their opinion — the rarefied atmosphere that Goldman and the other chosen few inhabit should be subject to either a proscription against proprietary trading or a special FDIC bailout tax perhaps tied to leverage.

In other words either rein them in by limiting their range of operations or make their business model so expensive as to cause them to, if not abandon it, then limit its scope. A backdoor approach to protecting ourselves against the risk that we have agreed to assume on behalf of these institutions.

Given all of this vitriol from not only the WSJ but plenty of other more liberal media, I don’t quite understand why Goldman didn’t decide to lay a little low when it comes to the subject of compensation and bonuses. They were going to earn what they earned but announcing that they intend to pay out half of it in the form of bonuses smacks of trying to pick a fight. One would think that after all that’s gone on, particularly given the beating they took from Congress, they might have decided to pull back for a couple of years and let the dust settle a bit.

I can come up with two pretty much diametrically opposed theories as to why they’re forging ahead as if the world hasn’t changed. One is that they believe they’ve won and can’t be touched. Two is that they think the jig is going to be up sooner rather than later and it’s better to grab as much money while you can. Given the Journal’s divergence from orthodoxy, I tend to favor the second theory.

The last paragraph of the Journal’s editorial is very smart:

No one welcomes the pain and dislocation if CIT files for bankruptcy. But U.S. policy toward financial companies cannot avoid all hardship, or the result will be a de facto cartelization of finance, with a resulting loss of competition and dynamism that have long been an American strength. The divergent fortunes of CIT and Goldman Sachs show how much we changed when we stepped in to save certain banks in the name of saving the system.

That change that accompanied saving the financial system is likely to redound detrimentally to the managers and employees of our financial institutions.