Goldman Sachs hit by criticism—for its caution

Goldman Sachs has accrued $65 billion in tangible common equity, an amount that the government is calling excessive

Brendan McDermid / Reuters / File
Traders work on the floor of the New York Stock Exchange near the Goldman Sachs stall in this July 16, 2010 file photo. Is Goldman Sachs hoarding too much capital?

By John Carney, Senior Editor,

Goldman Sachs has built up a fortress of capital. It has almost $65 billion in tangible common equity.

So what is Wall Street's reaction?

Attack Goldman for sitting on too much capital.

Just two and a half years after the government rescued our biggest financial institutions with an emergency recapitalization, the pressure is back on banking executives to reduce allegedly excessive capital holdings and to increase the return on their shareholder equity.

To be sure, Goldman's return on equity has plummeted from 38 percent at the beginning of 2009 to 12.2 percent in the first three months of this year. But this has been accompanied by a breathtaking reduction in risk. Goldman's leverage ratio once hovered at 30 to 1; now it stands at around 12 to 1. It is less susceptible to failure from unexpected market shocks than it has been any time since it went public in 1999.

So why aren't Wall Street analysts and shareholders applauding this?

Pure moral hazard. The government has demonstrated that it will not let a company like Goldman Sachs fail, which means that its precautionary capital is indeed excessive. Who needs a capital cushion if the government will be there to supply one in a crisis?

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