To imply that Ryan Seacrest's $45 million three year American Idol deal announced last Monday is as obscene as Goldman's $3.4 billion second quarter profit is ignorant and unworthy of the New York Times. By my calculation, Seacrest is getting 40 cents per viewer per season, perhaps half this amount if viewership outside America is included. I think that 40 cents is well worth paying for the entertainment he provides. This is what is known as value-for-money.
Goldman's profits, on the other hand, should be considered scandalous, unless they accrue to taxpayers rather than Goldman employees by imposing a high tax rate on bonuses.
To understand why Goldman's profits are obscene, you have to understand where they came from. If Goldman had made the world a better place to the tune of $3.4 billion I would have no problem with them keeping it, or a large chunk of it, but in fact the opposite is the case. They came out of your pocket.
How much profit would the firm have made if hundreds of billions of dollars of your money had not been spent to stabilise the financial system and stimulate the economy? This is of course impossible to answer, but the write offs that Goldmans and other financials would have had to continue making in the absence of government intervention would have been considerable. As one commentator put it, it is the equivalent of the government reducing the production cost of the car industry to zero, then buying all the cars! Thanks to the government propping up the financial system, a company like Goldmans was able to take advantage of the extraordinary opportunities on offer.
Goldmans is so far up its own backside that it genuinely believes that its second quarter profits were the result of its talents. I might concede that Goldman workers are smarter than those elsewhere, but they do not deserve the 49% of the profit that the company commits to paying in bonuses. "It seems perverse to criticise firms that have done what they're asked to do for doing what they've been asked to do," said the Goldman spokesman.
It is this lack of honesty I abhor. Had Goldmans conceded the very special conditions in which their profits were made I would have had more respect for the firm. It would also have been the intelligent thing to do, as the huge profit has understandably sparked widespread anger, anger which is hurting the company. Perhaps, on second thoughts, those Goldman smarts aren't so smart.
Published on The Centilliard
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.