My FT column this week returns to Goldman Sachs:
A decade ago, when Goldman Sachs was a private partnership, it had $6.5bn in equity and its 220 partners, most of whose money was tied up in the firm until they retired, took good care of their pot of gold.
The bank’s trading and principal investing division – the part that took the most risks with partners’ capital – was balanced with its fee-based investment banking and asset management divisions. Trading contributed about a third of its revenues in the two years leading up to its 1999 initial public offering.
After it sold shares in the IPO to outside investors – pension and mutual funds hold about 80 per cent of its equity – it steadily increased its appetite for risk. Its fixed income and currency division has become dominant, bringing in two-thirds of Goldman’s revenues in 2006 and 2007 (and 78 per cent in the first nine months of this year).
In last year’s crisis, the US government made clear that it stands behind Goldman and other big investment banks. It received a $10bn (€6.7bn, £6.0bn) capital injection from the Treasury (since returned) and $21bn of its debt is backed by the Federal Deposit Insurance Corporation. It is now a financial holding company whose regulator and lender of last resort is the Federal Reserve.
So, if Goldman Sachs took on more risk when its equity was held by outsiders than with its partners’ own money, what can we expect now that the government implicitly accepts that it is “too big to fail”? Goldman has an even bigger incentive to risk other people’s money.
You can read the rest here and comment below.
