Goldman Earnings Fail to Inspire as SEC Threat Looms

Goldman Sachs posted a robust quarterly profit of $3.46 billion, besting even the most optimistic analysts' estimates for earnings. Revenues were also 36% higher year-over-year to $12.78 billion. Nevertheless, investors yawned and pushed the sell button, forcing the stock slightly lower in early morning trading. Perhaps investors are merely licking their wounds after the drubbing the stock took last Friday on the heels of the announcement that the SEC was leveling charges against the firm for pumping CDOs while betting against the same CDOs in house. The company's shares can't seem to resume their peppy march higher with such sinister enforcement action, not to mention a potential major regulatory overhaul, on the horizon.

If the SEC's charges sound familiar to you it may be because they sound exactly like the charges that seem to be leveled against Wall Street firms every few years. Don't believe me? Try replacing the word "CDO" with "IPO" and see if you're taken back in time to the turn of the century. You see, herein lies the problem. Peddling crap to investors, while secretly knowing it is crap is what Wall Street does for a living. It's why Wall Street is referred to as the "sell side." There is this pool of natural buyers called the buy side. The buy side has money and needs to buy stuff. Investment banks create products for them to buy and then "market" those products in order to sell them out of their inventory for more than where they have those items marked, regardless of whether those items have any value. Investment banks hire a bunch of young, smart, kids out of great colleges to put together 500 page pitch books, which nobody reads, to peddle their latest creations. Then every couple of years everyone is ABSOLUTELY SHOCKED that Wall Street was selling stuff that they knew was garbage. How did that pets.com stock perform? Miserably? Really? We really thought that a $500 billion market cap made sense. I mean the company had almost $2 million in revenue. How about those Enron bonds? Worthless? I can't believe it, because, you know, when we were busy helping them create off- balance-sheet partnerships to sell their own assets to themselves at inflated prices, we really thought the company was just brimming with value. Worldcom bonds? I can't believe those didn't work out for you. I mean, our analyst, who was just trying to get his kids into a fancy upper east side preschool by kissing the CEO's ass and upgrading the stock to a "strong buy," really thought that was a good one. Wow, did we really just bankrupt Orange County? Oh sorry, I shouldn't be dating myself, why don't we just stick to the more recent Jefferson County.

I could go on, but I'll stop here. Does the SEC have a good case against Goldman and other banks that I'm certain did the same thing? Probably. Is it going to get us anywhere? Probably not. Banks will pay the fine, a few heads might roll, but we'll move on. Nothing will change. Why? Because Wall Street's motto is to make as much money now as you possibly can now, get paid, pay the fine and retire with a boatload of money when you're forced out. If we wanted the cycle to stop, we shouldn't have bailed them out.