Will Goldman Sachs be a case study in 'Moral Hazards'? Goldman is increasing its risk-taking at a time when taxpayer dollars are still in its coffers.
Goldman Sachs Group Inc., unbowed by the securities industry’s worst year since the Great Depression, increased its trading bets at the fastest rate on Wall Street.
Interesting time to increase your risk. Here is some perspective on the amount of risk.
Goldman Sachs’s so-called value-at-risk, the amount the New York-based bank estimates it could lose from trading in a day, jumped 22 percent to $240 million in the first quarter, twice what Morgan Stanley stands to lose, company reports show. VaR climbed 2.8 percent in the same period at JPMorgan Chase & Co. and dropped 14 percent at Credit Suisse Group AG.
Keep in mind the measure that they use - value at risk (VaR) - has been criticized:
It isn’t designed to capture the risk of rare and extreme losses. For that reason, some critics such as Nassim Taleb, author of the “The Black Swan,” say the metric is inadequate.
If Goldman is still using VaR as a measure then that tells me that no lesson has been learned. But this quote from Goldman CEO Lloyd Blankfein is very insightful:
“Nothing that happened this year altered the core of what Goldman Sachs is,” Blankfein told investors at a Nov. 11 conference in New York. “We won’t stop doing the things that made us a leading investment bank.”
But would Blankfein being singing a different tune if they didn't receive some much help from Fed and Treasury. Let's count the ways: 1) AIG pass-thru to Goldman - $12.9 billion, 2) TARP money - $10 billion, 3) FDIC guarantee/subsidy of Goldman debt - $2 billion. That is over $24 billion in government assistance - a nice chunk of change.
But this is more troubling:
“Goldman is Goldman because they’ve done that,” he said. “If they can get paid to take a risk, they’ll take it. You don’t get paid for doing safe stuff....whereas Goldman just said, ‘No, we’re still playing the game we’ve always played,’”
That is right "playing the game we've always played." Do you blame them? They know that their downside is protected because of Fed's and Treasury's fear of "too big to fail." They know that they will be bailout so why not increase your risk taking. They've got nothing to lose and everything to gain. I am surprised other financial conglomerates haven't figured this out or maybe they have we just don't know it yet.
This could be a case study in the making for "moral hazard".