Goldman Sachs Defends Bonus Pay

I've had this article sitting in my browser for about a week now. In the article from the U.K. newspaper The Guardian, the vice-chairman of Goldman Sachs informs the public that it should "tolerate the inequality as a way to achieve greater prosperity for all."

I have no issue with people making money. Some people will always make more money than others. But, we shouldn't pretend that monstrous bonuses being paid at Goldman Sachs (GS) are somehow for our greater good. The company, which is clearly operating with implicit government support and received billions in explicit support via TARP and other bailouts (such as AIG), is on pace to dole out record bonuses this year due, in large part, to its trading operations. GS posted phenomenal trading results in both Q2 and Q3 this year.

The GS trading operations serve a role in the financial markets to provide depth and liquidity. I did some research and attempted to do some of my own analysis to determine the role that large players like GS play in the markets. The basic framework of capitalism and the role of a stock exchange is to allow investors to fund and profit from businesses. The trading operations of most stock market players including large institutions like GS have evolved beyond the capitalist investor. You can think of investors as those who think long-term and traders as those who think short term. Traders are nothing more than gamblers.

Now GS and others will tell you that they serve a useful and important role by trading. I don't dispute this. True investors may arguably have better success in executing a trade when the market is full of players willing to buy and sell at any time. However, those who are in the market simply to buy and sell and not to hold are, by definition, not investors. If you are not investing, then I'd say you are gambling.

I do not have a problem with gambling. But, let's call it for what it is. We should not pretend that traders, from the day trader to Goldman Sachs, serve some higher purpose which is for the benefit of greater society. They are there to take advantage of market inefficiencies, gamble, and make big bucks.