Is Goldman Sachs Making Too Much Money?

There's no shame in making money. Making money is, after all, every company's goal. And when our companies do well, that's generally good for the country. Under normal circumstances Goldman Sachs would have every reason to brag about it's first quarter profits. But now—with Goldman facing charges for securities fraud and apparently seeking to block financial reform legislation—the bank's windfall profits seem to raise the question of whether it's making its money legitimately.

Goldman reported an impressive $3.3 billion first quarter profit today. That's its second highest quarterly profit since going public in 1999, and it comes after earning a record $4.79 billion in the fourth quarter of last year. It's also an increase of 91% on the year. And on revenue of $12.8 billion it's a tidy 26 cents profit for every dollar it earned, which is actually down from the from the almost 50 cents of profit it made for every dollar of revenue the quarter before. Of course, these profits have nothing to do with the 2007 trades the Securities and Exchange Commission says are fraudulent. And Goldman's reputation as the gold standard of banks is well-earned, so it should be no surprise that it's doing well. But you still have to wonder just how it's making so much money in an otherwise anemic economy.

Goldman's first performance is unusually good, but Wall Street banks on the whole are doing exceptionally well. As Annie Lowery points out, last week J.P. Morgan posted quarterly profits of $3.3 billion on $28.2 billion of revenue—a handsome 12% net margin. Lowery notes that the financial sector margins are extraordinarily high compared with most other sectors. And with the exception of a brief period during the credit crunch, financial sector profits have far outpaced the rest of the economy since the 1980s. That suggests that the industry isn't competitive—if it were you'd expect banks to undercut each other in an effort to steal business away, driving profit margins down. In comparison, Exxon Mobil made astounding $19 billion of profit last year, but did it on $300 billion of revenue—a 6% margin, which is closer to what you would expect from a moderately competitive industry.

There's no question that the banking industry performs a vital function. By providing "liquidity" to the rest of the economy—ensuring that different sectors of the economy have the money to invest in promising projects—it keeps the economy running smoothly. That's why the collapse of the banks hurt so badly, and why the bailout was necessary to keep the economy from shutting down completely. But it's not clear that windfall profits in the financial sector necessarily benefit the rest of the economy. Its recent profits don't seem to have done much to stimulate the rest of the economy. Instead, they suggest that the game is rigged. They're in part a product of a system that allows the banks to make money by inflating bubbles and then guarantees their profits when the bubbles burst. Goldman, after all, owes part of its profitability in the downturn to payouts and interest-free loans from the government, rather than to its investment acumen alone. So while we should cheer when our financial firms make money, it strengthens the case for financial regulation when they're the ones at the table winning every hand.

Related Articles

Human skeletal stem cells isolated in breakthrough discovery

It's a development that could one day lead to much better treatments for osteoporosis, joint damage, and bone fractures.

Image: Nissim Benvenisty
Surprising Science
  • Scientists have isolated skeletal stem cells in adult and fetal bones for the first time.
  • These cells could one day help treat damaged bone and cartilage.
  • The team was able to grow skeletal stem cells from cells found within liposuctioned fat.
Keep reading Show less

How exercise helps your gut bacteria

Gut bacteria play an important role in how you feel and think and how well your body fights off disease. New research shows that exercise can give your gut bacteria a boost.

National Institutes of Health
Surprising Science
  • Two studies from the University of Illinois show that gut bacteria can be changed by exercise alone.
  • Our understanding of how gut bacteria impacts our overall health is an emerging field, and this research sheds light on the many different ways exercise affects your body.
  • Exercising to improve your gut bacteria will prevent diseases and encourage brain health.
Keep reading Show less

Giving octopuses ecstasy reveals surprising link to humans

A groundbreaking new study shows that octopuses seemed to exhibit uncharacteristically social behavior when given MDMA, the psychedelic drug commonly known as ecstasy.

Image: damn_unique via Flickr
Surprising Science
  • Octopuses, like humans, have genes that seem to code for serotonin transporters.
  • Scientists gave MDMA to octopuses to see whether those genes translated into a binding site for serotonin, which regulates emotions and behavior in humans
  • Octopuses, which are typically asocial creatures, seem to get friendlier while on MDMA, suggesting humans have more in common with the strange invertebrates than previously thought
Keep reading Show less