Thursday, July 30, 2009

How does Goldman Sachs make so much money so reliably?

Everybody wants to know how Goldman does it. How Goldman Sachs make so much money and do it year after year with such great success. Actually, the answer is really simple: They understand greed and focus obsessively on exploiting it, all the while refraining from succumbing to it themselves. Oh, and they do some trading on the side. That's it, the whole secret of their mind-boggling success.

Everybody and his brother thinks they have a geat idea for how to make money, but they just need help funding their efforts.

And, every organization is looking to reach for yield on their investments and save a nickel on their debt.

They are all looking or a gimmick, some form of free lunch.

That is called: greed.

Goldman is right their by their phones ever-ready with a collection of exquisite financial gimmicks designed to exploit your own very personalized form of greed. Goldman makes it their mission to completely satisfy your insatiable greed... well, at least up front when they collect the fees.

Most importantly, clients are willing to pay very rich fees for Goldman's willingness to share their elaborate and exquisite financial gimmicks. All of those fees really add up quite quickly.

In-house proprietary trading at Goldman also make a lot of money, but it is not the trading itself, but trading off the gimmicks utilized by clients that really juices up their revenues. Sell the client on an investment "strategy" and then trade off the weaknesses of the "strategy." Convertible bonds come to mind as an example.

Others on Wall Stre6et know how to play this game as well, but sometimes they drink their own KoolAid and their own greed takes them down. Don't they watch the movies? Drug lords are not supposed to "use" their own "products."

Meanwhile, Goldman plays this greed game to the hilt, obsessively focused on exploiting the customers' greed and very studiously avoiding the temptation to fall into the greed trap themselves.

So, Goldman's formula is quite simple:

  1. Identify greedy "clients".
  2. Satisfy their greed with exquisite financial gimmicks tagged with exorbitant fees.
  3. Trade against their client's gimmicked-up "investments".
  4. Avoid getting greedy themselves and refrain from using their own financial gimmicks.

-- Jack Krupansky

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