How Goldman profits from the credit crunch

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Interesting post on Goldmans in the Guardian today. In the aftermath of another stellar quarter from the investment bank, the Guardian is asking “how does Goldman Sachs do it?” Their conclusion is that its a mix of good risk management and good internal regulation.

For a start, the bank is extremely good at managing risk. Some have likened Goldman to a huge hedge fund because it is prepared to use its balance sheet to take positions in almost anything you care to mention: commodities, mortgages, currencies, equities, commercial property. Quite often the bank uses money stumped up by the people who work there, but it also raises funds from debt markets, clients, private investors and – more recently – from the U.S. Federal Reserve, which is currently providing collateral for all the U.S. banks because of the credit squeeze.

But unlike some European banks, where the activities of traders have gone more or less unnoticed by management (the same was true of Britain’s Barings, which let Nick Leeson run amok), Goldmans affords prime position in its hierarchy to the chief financial officer and senior risk managers who monitor staff so closely that at any one time the bank can assess its worldwide risk and reward profile down to the last dollar.

The Guardian, 22 Jun 2008

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I am always a little sceptical about fawning articles like this one. I distinctly remember the same types of articles about Enron before it collapsed. Nevertheless, Goldmans does seem to be a cut above the rest when it comes to managing risk and dealing with this crisis.

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But, it’s early days yet. Let’s wait until this credit crunch has played out before we start passing out the gold stars.

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