And the Winner is---Goldman Sachs!

Fred N. Sauer writes an insightful analysis about the reasons why Goldman Sachs always wins. In spite of declines in trading revenue, decreases in fixed-income and commodities trading and losses and reduced profits, Goldman Sachs always rises to the top. Sauer looks at Goldman Sachs's "Mysterious Business" statements from 2007 to 2009 and explains how unusual they are.

His conclusion after making many interesting comparisons: Goldman Sachs "is just a gigantic hedge fund for the benefit of Goldman Sachs's employees and most favored clients."

Why Goldman Sachs (and Warren Buffett) Always Win
By Fred N. Sauer - National Legal and Policy Center

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In 2007, Trading and Principal Investment Revenue was $29.714 billion and then precipitously dropped to just $8.095 billion in 2008. This is a decline of 72%. So, for starters, let's say 72% of their assets had declined in value. Anyone who was working in the financial industry at this time knows that almost every market locked up, and went illiquid including money market funds. What could have happened to markets for Goldman Sachs more esoteric assets? Since, total debt in 2008 was $820 billion and total assets were $884 billion, any material decline in their assets' value and or liquidity would put them in a desperate position. It would also put their lenders of the $820 billion in a desperate position. Were they insolvent and broke?

We prefer to turn to an expert for a final opinion on the matter:

Well, as a matter of fact, it (Goldman Sachs) did not survive this crisis. It was saved by the United States taxpayers who through the Federal Reserve breathed life into its dead corpse.

Lender of last resort indeed. The Federal Reserve pulled back the curtain yesterday on its emergency lending during the financial panic of 2008 and 2009....

We learn, for example, that the cream of Wall Street received even more multibillion dollar assistance than previously advertised by either the banks or the Fed. Goldman Sachs used the Primary Dealer Credit Facility 85 times to the tune of nearly $600 billion. Even in Washington, that's still a lot of money. Morgan Stanley used the same overnight lending program 212 times from March 2008 to March 2009. This news makes it impossible to argue that either bank would have survived the storm without the Fed's cash.

How does this happen? Suppose you are a personal investor who wants to borrow money against your stock portfolio. If your stock portfolio is worth $100,000, you could borrow 50% of this value and buy another $50,000 of stocks giving you a total portfolio of $150,000. Goldman Sachs had total shareholder equity of $64.369 billion in 2008. Using the same margin requirements, they would have been allowed to borrow $32.184 billion and then purchase another $32.184 billion in equities resulting in total equity of $96.553 billion. But, they were able to somehow borrow $820 billion. So, it turn out that the purpose of this firm is solely to make as much money as possible for their employees with the United States taxpayers guaranteeing their losses and absorbing all their risks. It is just a gigantic hedge fund for the benefit of Goldman Sachs' employees and most favored clients.

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Read the entire article here