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Goldman Sachs ‘Shooting Fish in a Barrel’

Posted by Larry Doyle on November 5, 2009 9:37 AM |

Those who take risk do not always win. A variety of mathematical models dealing with risk address and negate the chance of almost uniform success by one party. While those on Wall Street would promote the overwhelming risks in the industry, I would maintain that Wall Street circa 2009 is not in the risk business. How so? Let’s review results from the firm regarded as the best at managing risk, that is Goldman Sachs.

The Financial Times provides insights into the Goldman Sachs ‘casino’ in writing this morning, Goldman Benefits From Trading Bonanza:

Traders at Goldman Sachs recorded only one daily loss in the third quarter, highlighting the trading bonanza sweeping Wall Street as central banks continue to pump billions of dollars into the financial system.

The performance – revealed on Wednesday in a regulatory filing – compares with two losing trading days in the previous quarter and confirms that the authorities’ drive to revive markets after the crisis is yielding huge windfalls for some banks.

Before the crisis, banks regularly recorded trading losses on several days in a quarter.

Goldman made more than $100m in profits on 36 of the 65 days in the three months to September and recorded more than $50m in profit on more than eight out of 10 trading days, the filing shows.

To lose money on a total of only three days over the last two quarters defies rules of logic, assuming that markets are free, fair, and balanced. Even in Vegas the house doesn’t win at that rate. The question begs then as to the nature of the supposed risks being taken by Goldman and every other Wall Street firm. Beyond the risks, we also need to question the very nature of the markets themselves. When a firm makes money 98% to 99% of the time, don’t tell me they’re taking risk. They are doing nothing more than ‘shooting fish in a barrel.’ How so?

Let’s revisit what Larry Fink, the king of Wall Street himself, said about the risks, or lack thereof, taken within the financial industry. I addressed Fink’s assessment this past July in writing, “The King of Wall Street Takes on the Casinos”:

Revenues and profits are a function of volumes and margins.

Any businessman worth his salt works tirelessly at increasing his own volume and margin while necessarily narrowing those of his competition. I see a classic case of these competitive forces at work this morning in a report from the Financial Times, BlackRock Chief Attacks Wall Street Earnings:

Larry Fink, BlackRock’s founder and chief executive, on Tuesday took aim at the “luxurious” trading profits enjoyed by Wall Street banks, saying that they have taken advantage of reduced competition to charge their customers more for even basic trades.

“There are fewer players. There is very little capital being committed by these dealers,” Mr Fink said.

Little doubt The King of Wall Street, Larry Fink is irked by the ransom being charged by those running the Wall street ‘casinos.’  The king says as much in stating:

“They’re just taking the spread between the bid and the ask [the price gap between buyers and sellers] and they are making very luxurious returns,” he added.

In layman’s terms, the King is denigrating those working the Wall Street ‘casinos’ as the equivalent of toll takers on the Triborough Bridge. Who likes paying increased tolls? Nobody, and especially not a king.

The size of the tolls and the regularity with which they are being collected by Goldman Sachs does not equate with risk-taking. This dynamic is totally consistent with behaviors and revenues generated in an oligopoly.

Oligopolies are fabulous for those running the business, but certainly not healthy for customers and the public at large.

Wall Street and Goldman Sachs in the risk business? I don’t think so.


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