Did Goldman make too much money?

Goldman Sachs posted a huge profit last week, in the wake of unprecedented problems in the financial sector. An interesting article in the Washington Post today, "Resist the Urge to Punish Success", says:

"Conventional wisdom says that Goldman's profit must be the result of a formula that involves excessive risk. Former labor secretary Robert Reich points to Goldman's "value at risk" calculations to conclude that the government should limit Goldman's risk-taking.

How quickly we forget that just a few months ago, nearly all the formulas that were intended to explain the behavior of the bond markets and provide banks with the tools to manage their risk turned out to be useless -- or worse. A regulatory regime whose goal is to limit profit, in the hope of thereby limiting risk, is one that merely codifies the same bogus and incompetent thinking about risk that held sway in the financial industry during the mortgage bubble."

What risk systems will our government come up with, when the previous regulators and most of Wall Street failed? What White Swans will they monitor in their attempt to uncover and prevent the next Black Swan? And, what doors will the new system open to enable the next crisis?

How much money has the government made on their investments during this crisis? My guess is that Goldman has a better handle on risk than the regulators.

Whenever I see these articles about a company being "too profitable", it reminds me of this story from the Wall Street Journal in August 2008: "What is a 'windfall' profit?" It explains how difficult it is to identify one, and that "what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation. It's what politicians do in Venezuela, not in a free country."

Do some people make too much money? Sure. Is it possible to "correct" that without creating bigger problems? Probably not. I'd rather have the companies that make profits be in the U.S., hiring Americans, than moving to other countries if the U.S. becomes a horrible place to do business because too much success has become a crime.