Why Bash Goldman Sachs for Making Money?

Given the public outcry over news of Goldman Sachs's (GS) recent record earnings, you'd think many people would prefer Goldman had lost money. Does that really make sense?

I can understand why some people are upset, since I've heard from many of them. Their argument is that Goldman Sachs, like other recipients of funds from the government's Troubled Asset Relief Program, might well have failed without taxpayer assistance. Now, without the slightest sign of being in any way chastened, Goldman bankers have gone out and earned so much that they stand to receive huge bonuses that rival those at the height of the credit bubble for which they deserve at least some of the blame.

But let's think about this for a moment from Goldman's point of view.

I don't think anyone there would dispute that Goldman benefited, perhaps disproportionately, from steps the Treasury and Federal Reserve took to stabilize the financial system. The rescue of insurance giant AIG may not have had any direct benefit (Goldman insists that it was so well insured against an AIG demise that it wouldn't have lost money had AIG failed) but to the extent AIG's rescue helped prop up the financial system, Goldman and all other banks benefited. Like others, Goldman was able to issue government-backed debt to help maintain its liquidity. Goldman not only survived, but seems to have taken market share from competitors.

But Goldman did not seek the capital injections it received under TARP. Like the other large recipients, its chief executive was summoned and told the TARP funds would be coming, and the terms on which Goldman would have to accept them were dictated by the Treasury. Those included the interest rate Goldman would pay and the grant of warrants. Treasury had to make strong banks as well as weak ones take the money so as not to trigger runs on the weak banks. In that sense, by taking the TARP money, Goldman (and other strong banks, like JPMorgan Chase (JPM)) rendered the U.S. a service.

It's also worth bearing in mind that Goldman bankers will be in line for large bonuses because the firm made a lot of money. This is not a case, as AIG was perceived to be, of paying bonuses to people who lost money, costing shareholders and taxpayers billions. Goldman seems to have made most of the profits on its trading and underwriting businesses. In other words, it earned it. And if you think that's so easy, look at all the rivals that didn't fare nearly so well.

Goldman was also in the vanguard of banks that repaid their TARP money, with interest. So far the firm hasn't cost the taxpayers a dime. The government is still negotiating how to value the warrants. But as long as it holds them, the government is like a shareholder. Those warrants just got a lot more valuable thanks to Goldman's blow-out quarter. If only all the government's investments worked out so well.

Goldman is hardly alone on Wall Street in making lots of money this past quarter. Just about anyone with the courage to invest in mid-March (as I strongly recommended at the time) has enjoyed a great run. There are plenty of hedge fund managers who will continue to haul down massive bonuses, but without the outrage Goldman has generated.

I'm not saying compensation in the financial industry makes sense. There may well be ways to align pay and bonuses with the long-term interests of firms and the financial system as a whole, which would be all to the good. But until the problem is addressed systemically, it hardly seems fair to pick on one firm just because it's so successful.

I've said before that rather than complain about the success of investment bankers, you might as well invest in them, as I have. For about $160, you can own a share of Goldman Sachs. That's not to say I'd be buying it now, after such a great quarter. In fact, I've been reducing my position (as I've reported), and, given the recent results, clearly sold too soon. But I'm not complaining. As both a shareholder and a taxpayer, I hope Goldman — and the other big banks — do well. That's the only way to restore the financial system to health.