The Economist: Goldman Sachs is the cover story

Goldman Sachs has scored yet another magazine cover, this time the new issue of The Economist: "On top of the world - Goldman Sachs and the culture of risk"....

How many more covers before they succumb to the cover story curse?

BY ANY measure, Goldman Sachs is a formidable company. The bank knocks the spots off its competitors, whether in pure “investment banking”, the traditional craft of underwriting and mergers and acquisitions in which it made its name, or in its new focus, trading for customers and its own account. Even compared with leaders in other industries, Goldman makes spectacular returns. Among its latest record-busting yardsticks was a 40% quarterly return on equity. The average pay-packet of its 24,000 staff last year was $520,000—and that includes a lot of assistants and secretaries.

This makes the bank an easy target for populist politicians and tabloid newspapers. The real reason why Goldman should matter to outsiders is not because it is a manufacturer of millionaires (good luck to it); but because it stands at the centre of a two-decade-long transformation of the financial markets and a new approach to risk.

Business risks that were once seen as a lumpy fact of life are now routinely sliced up and packaged into combinations that generally suit issuers and investors alike. At the heart of the change has been the development of huge markets in swaps, derivatives and other complex and often opaque instruments that allow the transfer of risk from one party to another. From small beginnings in 1987, the face value of contracts in interest-rate and currency derivatives is now more than $200 trillion—16 times America's GDP. A further $17 trillion is outstanding in (even newer) credit-default swaps, which allow bond investors to lay off the risk of issuers defaulting.

Led by Goldman, investment banks have innovated at a furious pace and changed the mix of their own businesses. They have taken on more risk as they have moved from more transparent markets, in which margins are slim, to more profitable portfolios of derivatives and direct private-equity investments. The face value of Goldman's derivatives exposure is more than $1 trillion, although the bank says that its net exposure, once you offset all its positions, is $58 billion, against shareholders' funds of $28 billion. The bankers' innovations have brought huge rewards to their industry. In the past decade it has garnered revenues of more than $125 billion, more than three times the level in the previous decade....

Goldman Sachs On top of the world - The Economist