Sense on Cents

Goldman Sachs is widely regarded as the top Wall Street bank. What makes Goldman so special? Is everything on the up and up? Is it one massive conspiracy? At the request of a number of readers, allow me to share my perspectives on Goldman Sachs, in general, and my thoughts on Matt Taibbi’s article in Rolling Stone magazine, “The Great American Bubble Machine.”

Goldman Sachs has always had a tremendous investment banking franchise along with outstanding risk management capabilities within its trading operation. That said, in the ’80s and ’90s Goldman was certainly one of the best shops on the street but it had plenty of company. In my opinion, Goldman separated itself from the Wall Street crowd after the repeal of Glass-Stegall which had previously separated commercial and investment banking operations.

With the repeal of Glass-Stegall, most investment banks looked to grow origination capabilities in order to compete with the large commercial banks. At the same time, most commercial banks looked to grow their investment banking and trading operations.

Goldman stood out by taking an entirely different tact. Goldman decided to utilize its capital and balance sheet less so for origination capabilities and much more for principal trading (that is, making bets and taking positions with its own capital). Effectively, Goldman decided to operate much more like a large multi-strategy hedge fund. Goldman took enormous risks both in their proprietary books but also in their trading activity with customers. Goldman made a concerted decision to dominate the markets in which they chose to play.

While Mr. Taibbi paints Goldman as one large conspiratorial machine, I beg to differ.  In fact, the reason why I initially only skimmed the Rolling Stone article is because it oversimplifies the Goldman business model and paints the entire firm and all its employees with a broad brush. (more…)