Goldman Sachs blasts bonus bonanza

Goldman Sachs attracted the words 'blasts bonus bonanza' on Bloomberg as soon as it became clear that it had declared a net profit $3.44 billion ahead of analysts' expectations.

American public opinion has been won over for Goldman's old aggressive bonus policy. Goldman gave each of its employees a bonus totalling $386,429. It is a wholesome lesson to those bankers who are thinking hard about how to pull the world out of this much misrepresented recession, which is a decidedly mild affair compared to the economic blizzard of the 1930s.

There is now no 30 per cent fall in US GNP, as in those terrible years. Nobel economics prize winner Paul Krugman should note than the present single digit fall in US GNP has nothing to do with GNP falls of 80 years ago. A great Princeton historian demonstrated to him his lack of grasp of elementary state arithmetic which academics call statistics.

The evolution of the Goldman Sachs story is the most eloquent demonstration that what counts most in banking is the ability to position an institution to take immediate advantage of opportunities as they arise. What counts most in banking is the ability to exploit opportunità as described by Machiavelli, and not to get lost in the intricacies of the mathematical extrapolation of bank profit figures.

Goldman Sachs and Warren Buffet have again demonstrated to all investors that money is to be made when as a great Rothschild said 'blood is on the streets". Money is to be made on a stock exchange when most people are losing it.

Buffet, with his legendary touch, did just that. He bought into Goldman last September when the unexpected fall of Lehman Brothers caused the freeze in financial markets. Goldman was humbled with the rest of Wall Street last autumn, and it had to use $10 billion of government Troubled Asset Relief Programme money. It has now repaid it along with dividends on preferred shares issued to the government.

How has Goldman managed to make this miraculous recovery? Its share price has soared 77 per cent this year, and let investors note, it is still well off its record high of $250.7 reached in 2007. The reasons are not too hard to spot.

Goldman knew how to keep up the morale of its currency trading unit, for it knew the best chances for currency trading is when there is abnormal commotion in the world's markets. Morale in banking, which is always under severe strain, and more so in a crisis, is best guarded by preventing government putting caps on executive compensation pay.

Important currency trading opportunities come during times of stress, and high finance happens to be, unfortunately, a university where lessons are given once.

When last autumn Goldman raised billions in new capital both privately and from the US government, it was not a surefire success affair. Further stock price falls remained a serious risk, at least till December. In the first quarters of this year, profit was already sizable, its leverage ratio 14, compared with the 26 times at the end of 2007. This was nothing like the 177 leverage HSBC had at one time.

There are dangers in the marvellous rebound of big swinging Goldman. Other banks might think they can perform similar tricks just by trying.

They are mistaken. Its exceptional saga has just been described in a new book, but the Financial Times is incomparably the best publication for an analysis of its affairs.

It certainly enjoys a banking mystique like that experienced by the Medicis in Renaissance Florence, or the Rothschilds in the London of Disraeli. Goldman is at the centre of an influential network supplying US Treasury Secretaries, and a governor of the Bank of Italy, like Mario Dragi.

The danger of Goldman is that its newly won power is coming to be regarded by some as a menace to American democracy. There are meaningful smiles by Bloomberg newsmen when they describe some new Goldman financial manoeuvre. If US Treasury Secretary Tim Geithner and his counterparts in the world decide to make such a global bank pay for its new found privileges that would be a negative development for Goldman and for any other prominent global bank.

In the meantime, watching the Goldman share price is great fun. Its principal working lesson is that an ambition to be wealthy is a prerequisite for the successful banker, along with motivation to accept the political and cultural responsibilities that come with wealth.

Mr Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S and P.

johnazzopardivella@hotmail.com