The world of banking received its first piece of good news in many months when Goldman Sachs announced a net quarterly profit of $1.8 billion for the first quarter of the calendar year 2009. What made the news even sweeter for Wall Street was the fact that Goldman?s turnaround has been remarkably swift. The investment bank-turned commercial bank has reported a loss for the last quarter of 2008?the quarter which immediately preceded this one?for the first time since the firm went public in 1999.
The good news had a positive effect on banking stocks. In London, shares of Lloyds and Barclays rose by more than 10%. Banks in France and Germany also recorded increase in their share price by 5-10%. So, is the worst of the economic crisis over? After all, if the worst affected financial sector is showing signs of recovery, the green shoots must be for real.
But there are reasons to be cautious about an imminent recovery. Goldman Sachs has always been a bit of an outlier. Despite paying the highest bonuses over 2007-08, it had taken on the least bad assets out of major investment banks. Goldman wasn?t the best example to use to make the case for curbs on executive pay.
It?s fair to say that one always got the feeling that Goldman was better run than the average investment bank. By that logic, its recovery will be much faster than most of other badly stricken banks. Citicorp?s results later in the week will be a better indicator of the general situation in banking.
Results aside, Goldman?s decision to repay what it took from the US government under Tarp is a very welcome sign. And it?s a sign that other bankers should heed. It?s in their best interests to wean away from government financing and government control at the soonest. But again, Goldman had a minimal (compared with other banks) cash injection from the government?just over $10 billion.
Still, to the extent that the severity of this crisis has been a function of a complete loss of confidence, even the slightest bit of good news can play an important role on the slow road to recovery.
saikat.neogi@expressindia.com