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What's Good for Goldman Is Good for the Government

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Doesn't Washington remember that more Wall Street wealth brings in more tax revenue?

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Goldman Sachs (GS) made buckets of money in the second quarter and the politicians should be up on their hind legs cheering.

They're not. Earlier this week, Goldman disclosed two new investigations by the government into its compensation practices and credit derivatives trading.

"We've got millions of people with no jobs," Rep. Elijah E. Cummings, D-Maryland, told the Los Angeles Times after Goldman's earnings announcement last month. "It just doesn't make you feel too good and it doesn't make my constituents feel too good."

Today's study question for politicians: where does tax revenue come from?

Maybe some members of Congress think tax money drops from the sky, and lately they've been spending it as if it's free. But as any sane person knows, someone has to create the wealth before it can be taxed and then spent by wise members of Congress on programs that often fail to goose the economy as promised.

Goldman Sachs took $10 billion from Uncle Sam in the Troubled Asset Relief Program, but repaid the money earlier this summer. So on what theory do members of Congress think they have any say in the brokerage firm's earnings, how it pays executives or rewards top performers with bonuses?

Goldman Sachs says it accepted federal bucks only at the behest of former US Treasury Secretary Henry M. Paulson. Nevertheless, Goldman reorganized as a bank holding company and many now question its ability to have survived the credit crisis without federal intervention.

But let's get this straight: Goldman takes on risk, makes money for its clients and shareholders in a dicey market – and gets hammered by some in Congress for being bold and savvy? At times, it seems that some members of Congress believe Wall Street should be run like the National Endowment for the Arts.

Follow-up study question: would Rep. Cummings' constituents, or anyone, be better off if Goldman Sachs were in the dumper, maybe something along the lines of Bank of America's (BAC) Merrill Lynch or American International Group (AIG)? Maybe the late, unlamented Lehman Brothers is Washington's model of a socially responsible brokerage house.

Goldman Sachs last month reported net revenue of $13.76 billion and net earnings of $3.44 billion for the second quarter ended June 26 – the heftiest quarterly profit in the company's 140-year history. It earned $4.93 a share, compared with $4.58 for the second quarter in 2008 and $3.39 for the first quarter of 2009.

The bank earmarked $11.4 billion for employee compensation, or about $324,600 per employee. Deep down, or maybe not so deep down, this probably rankles members of Congress who are paid $174,000 a year. If the routine nonsense out of Washington about Wall Street pay is just a case of class envy, the solution is simple: suffering souls should resign from Congress and get a job on Wall Street.

Last week, New York Attorney General Andrew Cuomo fretted that Goldman Sachs handed out 953 bonuses of $1 million or more, including 212 stars who pocketed $3 million or more.

Horrors! That's a bit more than most have in their checking account at the moment, but why is this any of the government's business? Where is the Constitutional authority for the government to regulate the pay of Wall Street's top performers – or anyone else?

If the tax code is steeply progressive, wouldn't it be smart for the top 5% to make big bucks so they can be taxed cross-eyed?

Flapdoodle about Wall Street pay may just be part of the continuing spat between New York and Washington. If the purpose of Wall Street is to raise and allocate capital for US industry, it's a good bet Washington wants a piece of the action. And why not? After all, the $787 billion stimulus bill was such a hit and naming public buildings or bridges after yourself must get old.

Goldman Sachs recently bounced back to report impressive profits. Join Hoofy and Boo as they take a look at how Goldman's risks paid off big:

No positions in stocks mentioned.
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