In the midst of his 2012 presidential campaign, Mitt Romney penned an opinion piece for The Wall Street Journal about his time at Bain Capital. Mr. Romney shared his view on problem-solving:
“When you see a problem, run toward it or it will only get worse.”
The recent brouhaha surrounding Goldman Sachs Group Inc (NYSE:GS) and its involvement in the aluminum and commodities markets, as investigated by The New York Times lately and Reuters in 2011, sparked a thought similar to Mr. Romney’s in my head:
“When Wall Street sees profit opportunity or market inefficiency, it runs to it.”
While it’s easy to rile the masses about Goldman Sachs Group Inc (NYSE:GS)’s actions by extrapolating the costs of its operations and estimating how much consumers ultimately suffer for these practices, one of the most important quotes in The New York Times article is, “Goldman Sachs says it complies with all industry standards, which are set by the London Metal Exchange, and there is no suggestion that these activities violate any laws or regulations.”
Sure, Wall Street employees can sometimes become excessively greedy and even break the law on occasion, but getting mad and cursing the names of firms that are playing within the rules of the game may be an overreaction.
Should we be happy that Goldman Sachs Group Inc (NYSE:GS) and its comrades exploit inefficiencies in various markets? Should we pat The New York Times and Reuters on the back for exposing one of Wall Street’s latest profit engines? To both questions, I would answer yes. The combination of the profit-driven psyche of Wall Street and extensive investigative journalism ultimately lead to an improved economic environment in the future.
It’s all about perspective
While negatively trumpeting Goldman Sachs Group Inc (NYSE:GS)‘s involvement in the aluminum storage business grabs attention, it’s important to remember the scope of these activities and what it actually means to Goldman Sachs as a company and as a stock.
If Goldman Sachs were to fully take advantage of the regulation allowing financial companies to engage in these commodities activities, by law, the investment could not even comprise more than 5% of the firm’s assets.
Goldman Sachs Group Inc (NYSE:GS) is a massively diversified entity with roughly 75% of its earnings coming from areas other than its “Investing and Lending” segment, which houses the firm’s hoards of investments, loans, and most likely, these storage investments. Goldman’s investment portfolio is filled with so many of these smaller-scale ventures that the sum of the group’s parts is great enough to withstand the loss of some. Bottom line: Even if Goldman Sachs was no longer allowed to engage in this particular business, shareholders probably wouldn’t even feel a pinch.
In the world of investment banking, the scene is constantly changing because of increased competition, better technology, decimalization, etc. — and yet, Goldman Sachs Group Inc (NYSE:GS) and the likes of JPMorgan Chase & Co. (NYSE:JPM) have continued to thrive and win.
For example, equity trading used to be a cash cow for Wall Street firms, but the tide has shifted. JPMorgan Chase & Co. (NYSE:JPM) CEO Jamie Dimon estimates that margins for the equity business have fallen 90% over the past 30 years. When opportunity diminishes, Wall Street, particularly Goldman Sachs and JPMorgan Chase & Co. (NYSE:JPM), has continually shown the ability to pivot toward the “next big thing” — whether it was junk bonds, mortgage-backed securities, or synthetic CDOs.