Why Goldman Sachs made money & UBS lost during recession?

Contributed By: Shashank Kyatanavar
IIFT MBA (IB) 2010-12 Batch, Kolkata

The belief is investment banks more than any other institutions created the culture of excessive leverage, excessive risk and excessive bonuses that led to the downfall of the financial system, hence consequently should be the first ones to go under. But big daddy of investment banking, Goldman Sachs, debunking this theory earned a handsome profit & gave bonus; a bonus which infact is the largest bonus payouts in the company’s 140 year history.
On other hand we have one the safest destination where wealthiest people park their money , the Swiss Bank and the largest among them, Union Bank of Swizerland(UBS) suffering huge loss, an amount that is more than the sum needed to rescue Greece! Let’s try to understand this which seem to turn logic on its head.
Starting with UBS, it has lost about SwFr60 billion since the start of the credit crunch, partly because it was one of those deepest into the subprime, but also because it has fallen foul in a big way of the most countries tax authorities, especially US, who discovered by various means that the bank had been encouraging its residents to bank with it and engage in schemes which would avoid tax. This eventually led to a punitive settlement the fallout of which has been too much for a lot of clients and effect that they have took their business elsewhere. As a result the net money outflow for the division known as “Wealth management and Swiss Bank” was Swfr 33 billion, the division known as Wealth Management Americas lost Swfr12 billion and the Global Asset Management division had an outflow of Swfr11 billion
Goldman Sachs on other hand has reduced its overall leverage from a year ago with its fixed-income business, a less-risky arena than the illiquid derivatives and others products it loaded up on amid the credit bubble. It not only managed risk better, but it dramatically reduced is exposure to sub-prime mortgages. It also saw an opportunity in recession where it created a financial product that allowed one hedge fund, to bet against the value of housing. Also, the company has benefited because competitors like Lehman Brothers went bankrupt.
So is Goldman Sachs merely being punished for being a better bank than its peers? The answer is probably yes. And the reason for Goldman's profits - the source of the bonuses - are not from lending but from trading, using its own capital to buy stocks and bonds, and selling stocks and bonds short. And the reason Goldman Sachs thrived is just that it learned to play better than anyone else.