Hank Paulson surely has a hint of a smile on his face this morning. Even as
he earnestly tries to protect
Main Street from suffering too much as a result of the Wall Street crunch,
in the back of his head he’ll know that his his alma mater, Goldman Sachs, just
reported earnings
of $2.85 billion in the third quarter.
For a firm whose hedge funds are imploding, Goldman Sachs certainly seems to
be doing astonishingly well: everything else it touches turns to gold. Profits
were up 79% from a year ago; revenue is up 63%; return on equity is now well
over 30%. The firm made money in mortgages, thanks to its hedging strategy,
monetized the green-technology bubble by flipping a wind-power company for $2.15
billion, and, oh yes, saw investment-banking revenues rise above $2 billion
for the quarter as well. That $1.5 billion write-down on junk-rated loans? Who
cares?
It’s a commonplace to describe Goldman Sachs as a glorified hedge fund, but
in fact it’s much better than that, as these results show. Somehow, its prop
traders can consistently make enormous sums of money with Goldman’s own capital
much more effectively than the same traders can do with other people’s money
when they start up a hedge fund either internally or externally.
Goldman’s results also make it much harder for Morgan Stanley or Bear Stearns
to blame market conditions for their weak earnings. A good investment bank should
be able to thrive on volatility; Goldman certainly seems to be doing so.