It was almost a month ago that I wrote about GS having an excellent quarter compared to most of its peers. Now it’s coming out that one of the main reasons Goldman cleaned up was due to ‘gains’ in ‘financial instruments’ (read: derivatives & the like) whose value can only be determined through Goldman’s in-house estimates. This is CNN’s take on it:
Goldman’s stock has gained 13% since its earnings came out, as investors have bought into the notion that the bank is a cut above its peers and is able to weather, and even profit from, tough market conditions.
But that view could get revised, now that it can be seen in the numbers that a large proportion of its third quarter profits were ‘unrealized’ – i.e. paper gains, and not hard cash payments from fully closed out trades – and came from financial instruments that Goldman values largely according to its own estimates.
I’m no financial genius, so I may be incorrect, but this sure sounds like a case of Goldman saying “our proprietary computer models show that we made huge money, so we did!” Paper (or in this case digital) gains mean little in this case, I think, until Goldman can actually sell their ‘instruments’ for real assets. Until then, it’s all vapor money in my opinion.
This is yet another example of how Wall Street has become detached from Main Street. Some computer model shows that a tranche of now-unsellable financial derivatives posted theoretical ( and unprovable) huge gains, so Goldman trumpets that fact, their stock jumps, and so does the broader market. This isn’t coming from some shady hedge fund based in the Caribbean, folks; this is from one of the main drivers of Wall Street. Perception is more important than reality these days…