Goldman Sachs

It has been reported that Goldman Sachs will make a record profit in 2009 and will consequently pay record staff bonuses, setting aside as much as $18 billion. Personally I find this obscene, as do many others, and was really hoping that the banking industry would show some restraint and try to illustrate that they recognise the damage that has been done to the world economy by their risk taking.

On the other hand, some argue that this is simply capitalism working and if they choose to distribute some of their profits amongst their staff, that is entirely up to them. In principle this is fine, but I thought I would try to see if their was some reason why this argument wasn’t quite correct. In the past few years Goldman Sachs has had revenues of about $50 billion. It may be slightly higher in 2009 since there are fewer banks operating, but it probably isn’t more than $100 billion. The bonus pot is about half of their total profit, suggesting a total profit of $35 billion. This means that their profit is something like 35 % – 70 % of their revenue (depending what their actual revenue is). How does this compare with other large companies. Well, I quickly looked up Toyota and in the last few years they’ve had revenues of about $220 billion and profits of about $15 billion, about 5 % of their revenue.

The above isn’t particularly statistically significant. I thought I would try to have a slightly deeper look at this. I downloaded data for the top 100 companies (by revenue) in the world and worked out the average percentage profit. It is about 6.5 %. When I do the same for the Banking sector only, it turns out to be 9.5 % (it is the same whether I take the top 20, top 25 or top 50 banks in the world). This may not seem like a lot, but it does suggest that the banking sector operates in a way that allows it to make a larger percentage profit – in general – than most, if not all, other industries.

Maybe the above is fine, I don’t really know. Personally I have a problem with it. Although banks compete amongst themselves, unlike many other industries, there isn’t really an alternative to banking. We don’t have to buy a car, we could use public transport or ride a bike. If, however, we want to buy a house or invest some money, we need to use a bank (there may be some exceptions, but this is generally true). Is the reason that banks can attain larger percentage profits than comparable industries in other sectors because they have the brightest most capable staff, or simply because the type of competition they face is different to what other industries face. Personally I favour the latter interpretation. I don’t know how to change this, and even if there is a way to do so, but it is my opinion that our economy would be better off if more of the money remained in industries that actually build things and develop new technologies than being swallowed up by banks and divided up amongst their staff and investors.

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