Here's an interesting exchange between one of our readers and the Here Is The City editor about the profits made by Goldman Sachs and the bonuses that will be paid to staff as a result.

Reader

'Goldman Sachs is, by definition, too big to fail. This means that it will always be guaranteed by the taxpayer. This means that they operate, effectively, with no downside risk. If their downside risk is limited by guarantees offered by the taxpayer, their upside profiteering potential must be similarly limited. You cannot have your cake and eat it.

Whether Goldman would factually have required the taxpayer support or not is completely irrelevant. Their upside profiteering potential should have been, and should be, limited regardless of whether or not they received a penny in taxpayer support. First, had the support not been there, Goldman would have gone under with the rest of the sector. Second, because of the systemic nature of the risk, merely the fact that any bank received support meant that every bank benefited, regardless of whether they themselves received direct support or not.

Goldman Sachs is profitable, not because of the talent and merit of its management, but because of the structural position it occupies in one of the vital sectors of the economy. Even a chimpanzee could run Goldman Sachs because of its structural position. Goldman's profitability, therefore, is based on structural and market inefficiency, and not on the ability of its management. Rewards should be paid for personal merit and not for inherited positional advantage in an inefficient market.

Even though, relatively speaking, Goldman has been better managed than some of its peers, it cannot simultaneously benefit from taxpayer support and its inherited structural position and continue rewarding its managers as if its profitability were entirely the result of inspired management exercised in free, competitive markets where risks and rewards are inalienably linked'.

Ed

'Goldman's survival was only threatened  (briefly) last year because Lehman was allowed to fail (How ironic is that ?).
 
But a quick look at AIG and Royal Bank of Scotland is surely enough to act as a deterrent to anyone thinking of recklessly chasing the 'dream' now.

Finally, the US government is already limiting the upside potential for firms like Goldman to overreach, by the moves it is making in the direction of a systemic regulator, and the restrictions that will be imposed on leveraging the balance sheet. In my view, the firm should be free to continue to operate within the parameters of the new reality'.

Reader

'My point is actually very simple. The banks were guaranteed against systemic risk, with taxpayer money. The sector is being subsidised by the taxpayer, in the sense that whenever banks take large and foolish enough risks as to put the entire economy in danger, the taxpayer has to step in, with a huge cost, and pay the damages.

If and when this is the case, upside has to be similarly limited. We cannot have a sector where hired management takes home the lion's share of profits while leaving the taxpayers to clean up the mess they created.

Bankers' fees have no relationship to their actual input. Banks are able to generate huge profits only by virtue of the structural position that the banking sector occupies in the economy. The financial sector is not like any other market - therefore, 'free market' arguments do not apply. When banks are allowed to grow too big and profitable, this will damage the economy because of, e.g., brain drain that robs actual productive sectors from critical human capital.

Politicians and the public sector are scrutinised very closely with regard to how they spend taxpayers' money. The financial sector should be similarly scrutinised and regulated. If bankers wish to continue to pay themselves oversized bonuses, let them go work on sectors where competition is free and real and where profit needs to be generated with your own merit'.

Ed

'My point is simple too. Goldman was not reckless, remained profitable last year and didn't want / need the money the US government foist upon it to suit itself, and ultimately the taxpayer. The firm should not be penalised because other companies acted like fools, and the government sat idly by and watched them do so.

And, in the end, there wasn't any risk to the US taxpayer from Goldman anyway. In fact, the government got $425m in dividends for doing effectively nothing - and got to haul CEO Lloyd Blankfein in front of that lamentable Congressional Committee! And the upside for the taxpayer ? It's called taxes - corporate and personal. If Goldman continues to do well for the rest of the year, US taxpayers will receive their just reward'.

Other Reader Comment

1. 'No firm should be too big to fail anyway. Tax payers should not be bailing out businesses. Consider giving the market a chance. Failure is not necessarily a bad thing. Success should be rewarded, and failure punished'.

Even A Chimpanzee Could Run Goldman Sachs - Reader Comments

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