Goldman’s secret sauce?

The October 5 issue of Grant’s Interest Rate Observer had this interesting tidbit about Goldman Sachs, et al.:

How is it, Jim Chanos had asked, that the big broker-dealers can show consistently high returns on equity when their own star alumni, once transplanted at hedge funds, so often struggle to earn a half or a third of what their alma maters manage to produce, “no matter how leveraged they are or what bets they have on?”

There seems to be a remarkable difference between the public and private sides of Goldman Sachs. Very bright people work in both, yet the results of the former are mediocre while the latter are stellar, bordering on statistically improbable. Is it possible that their secret sauce is friends in high places and an opacity that allows them to trade on inside information? And does the SEC enforcement of insider trading laws for the rest of us give them a further unfair advantage?

If our hypothesis is correct, Goldman’s private investment/trading strategy amounts to “don’t fight the Fed” with the advantage of knowing the Fed’s next move(s). Such a strategy worked to maximum benefit in August and September. It will become less effective as the credit drug wears off. In fact, during a bursting bubble (a likely scenario) the best strategy is “fight the Fed.” In that event, Goldman’s goose would be cooked, regardless of how many friends it has in high places. Echoes of Enron?

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