Monday, 13 July 2009

Can it be business as usual ?

Goldman Sachs, is reporting its quarterly results tomorrow (Tuesday). There is rampant speculation that they will report “blowout profits” – something in excess of $2 bn in the quarter. Remember, not so long ago, they received money from the government to stay afloat and they repaid it back recently. They were also a beneficiary of the bailout of AIG – they had significant dues from AIG which would have all been a write off, but for the government bailout of AIG and them paying their creditors like Goldman Sachs.

Along with the speculation on results, there is the inevitable speculation on bonuses. Analysts are falling over themselves in predicting the size of the Goldman bonus pool.

There is no doubt that Goldman Sachs made all this money by taking significant risks and managing them better. Everybody else on Wall Street envies them. Many hate them for their success.

In some ways Goldman Sachs are in no man’s land. If they report poor results, the markets will kill them (remember their shares have risen by 68% this year). If they report fantastic results, surely the government, the public and everybody else is going to wonder, how is it possible to make huge profits just months after virtual meltdown.

To me, this is a signal that “business as usual” has reappeared far too soon. After what all has happened, it just cannot be allowed to be so. Where Goldman Sachs goes, surely others will follow. There will be increasing clamour for everybody to lay their hands off and to let them carry on as before.

If Goldman Sachs does indeed report the expected “blowout results” its an urgent wake up call for governments around the world to focus on how this industry will be run – what regulation, what structures, what they will be allowed to do and what they will not be allowed to do.

One thing is certain. The world cannot afford to let them carry on “business as usual”.

6 comments:

  1. Ramesh ... for someone like me who knows very little about the financial market ...all the chaos seemed to be abstract ...and like you said ... the comeback to normal business seems to be too soon ....thanks for breaking it down for people like us !!

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  2. totally agree with LEB.. is it really that scary, i mean the business as usual bit?

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  3. This result will baffle everyone and you have rightly said "business as usual" will be bigger worry.

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  4. @blogueur - The chaos was indeed all abstract ! Nobody understands this rarified world - not even the players themselves !

    @AJCL - if they get back to their old ways, these guys really have the capacity to bring down the world - governments no more have the size and ability to step in to save economies. Nobody should be allowed to become "too big to fail".

    @Adesh - How do you make such bumper profits without taking huge risks - which is exactly what brought the crisis in the first place.

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  5. Actually, I think more than allowing banks and institutions to become too big to fail, it's more about having proper checks and failsafes in place. Stunting growth shouldn't be the objective. Something or someone will always be too big to fail. And every once in a while such failures are required and will happen for a cleansing of the system. All systems to tend to get corrupted over time.

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  6. Not so sure Ajay. Too big to fail is too dangerous for the world. Don't want to stunt growth in any manner, but then they'll have to be broken up into separate pieces which all grow independently. The best check and balance is that any entity that did stupid or insane things is allowed to die. But the "too big to fail" concept prevents this from happening.

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