Jeremy Warner: Who said investment banking was dead? Not Goldman Sachs

April 15, 2009

Outlook Reports of investment banking's death seem greatly exaggerated to judge by the latest quarterly results from Goldman Sachs. OK, so the super-charged profits of two or three years back, when investment banking was firing on all cylinders, are gone, but Goldman is once again making good money in many areas of activity – particularly fixed income, currency trading and commodities.

Net revenue from these activities broke all previous records in the three months to 27 March, more than compensating for the downturn in advisory, asset management, underwriting, equities and the now customary writedown in the value of assets held on the balance sheet. Pushing the year end back a month conveniently allows Goldman to "lose" December's $1.3bn (£871m) loss in last year's results. Nonetheless, these are impressive numbers, given the backdrop. The breadth and diversity of Goldman's business is coming into its own.

As revenues are squashed down in recession-hit areas of activity, they are rising up elsewhere. Somehow or other, the financiers always seem to win. The sheer size of the liquidity pool – up nearly 50 per cent to $164bn – make these profits seem more than just a one-quarter wonder. Once the environment is reckoned safe enough to apply the monies to less liquid assets, profits should rise further still.

All this is going to come as a bit of a shock to those who blame our current economic travails entirely on the antics of Wall Street and the City. Whether or not they are the true culprits, it is certainly the case that many investment bankers seem to be weathering the storm better than the innocents of the non-financial sectors now being pummelled by the recession. So much so, that Goldman Sachs increased its compensation pool in the three-month period by 18 per cent on the first quarter of last year to $4.71bn, this to be spread around 7 per cent fewer staff, making the effective average increase in remuneration per employee more like 25 per cent.

Is this entirely wise for a bank which has taken some $10bn of taxpayers' money? Goldman has always insisted it never needed the money in the first place, and yesterday's figures certainly seem to provide some support for this view.

In the panic that followed the collapse of Lehman Brothers, all US banks were required to take money from the Troubled Asset Relief Programme (Tarp) budget, the good alongside the bad, and the solvent with the insolvent. Some banks plainly needed bailing out more than others. By making participation obligatory, the authorities hoped to avoid stigmatising the more troubled banks.

With the banking crisis now apparently easing, Goldman is determined to repay the money as quickly as possible, thereby removing itself from the full glare of political scrutiny and accountability. Like Barclays in Britain, Goldman believes that commercially and competitively, it will do better once out from under the dead hand of government.

Yesterday's sale of $5bn of new equity to help repay the money would seem to suggest that the US Federal Reserve has already given Goldman the nod. Goldman Sachs would not have been so bold unless it believed that the Fed was open to persuasion. Completion of the current round of "stress-testing" by the Fed should confirm Goldman as strong enough to survive without the support of Tarp. Even so, Lloyd Blankfein, the chief executive, would be unwise to count on the Fed's co-operation.

The problem of stigmatisation remains as acute today as ever. If some banks are allowed to repay their Tarp money, a form of apartheid is established between the strong and the weak. What's more, the politicians may rather like the control over Wall Street that the Tarp money gives them. And finally, it is not yet at all clear we are out of the woods. The banking crisis could return in even more acute form. It wouldn't look good at all if banks that had paid back their money had to be rescued a second time.

Yet it is obviously not a good use of taxpayers' money to have it tied up in organisations which self-evidently don't need it, especially when there are so many other causes across the US economy crying out for an injection of tax dollars. You have to believe that sense will prevail. Trouble is that once the politicians become involved, almost anything can happen.