Issue of the week: Was Goldman’s quarter too good?

The rest of America is waiting for the recovery to arrive, but at Goldman Sachs the good times are already back, said Graham Bowley and Jenny Anderson in The New York Times. The Wall Street investment bank this week reported record second-quarter earnings—an eye-popping $3.44 billion, or $4.93 a share, blowing past analysts’ consensus forecast of $3.54 a share. What may be even more startling is where those earnings came from: The best-performing units were Goldman’s fixed-income desk, which trades mortgages and other credit instruments, and its investment banking department, which underwrites issues of stocks and bonds. How did they do it? “Several of its rivals have gone out of business following the credit crisis,” making for less competition. The profit puts Goldman on track to pay out $18 billion in bonuses to its traders and bankers, which is sure to revive the controversy over Wall Street compensation practices.

That’s not the only cloud hanging over Goldman’s sparkling quarter, said Greg Farrell in the Financial Times. Along with news of the financial results came reports that firm executives sold $700 million of company stock “during the period in which the investment bank enjoyed the support of $10 billion from the federal Troubled Asset Relief Program.” That selling spree “is likely to draw criticism from lawmakers on Capitol Hill” who object to insiders profiting at the same time the firm was receiving government assistance. A Goldman spokesman would say only that many of the firm’s executives routinely sell shares in “an effort to diversify their holdings.”

In any case, the earnings numbers were less a gauge of Goldman’s trading proficiency, said Albert Bozzo in CNBC.com, than “a barometer of the government’s bailout of the financial system.” Goldman racked up those big profits because it was “borrowing money from Uncle Sam for virtually nothing” and then lending it out at a 3- to 4-percentage point markup. Even an idiot can make money with that kind of government subsidy. If, “after all of the support—direct and indirect,” Goldman was not doing well, then “we should be worried.”

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What should really worry us, said Glenn Greenwald in Salon.com, is Goldman’s influence among Washington’s policymakers. Its former executives have flooded the upper reaches of the Federal Reserve and the Treasury Department, as well as President Obama’s economic brain trust. Its executives have showered millions of dollars in campaign contributions on congressional leaders of both parties. And of the $170 billion that the U.S. spent to rescue AIG, $13 billion actually flowed to Goldman, AIG’s biggest trading partner. “Is there anyone who would be willing to claim with a straight face” that Goldman’s second-quarter profits are unrelated to its access to power?

Goldman’s blowout quarter was “bound to fuel more conspiracy talk,” said Janet Whitman in Canada’s Financial Post. But there’s no need to reach for sinister theories to explain the firm’s performance. Goldman navigated the credit crisis more nimbly than its rivals did, leaving it poised to profit when markets regained their equilibrium. “This may just be an example of a firm that has followed a good business model all along,” says former Goldman executive Roy Smith, now a New York University finance professor. “Goldman has benefited from being a simpler, less complicated business than its competitors.”