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Goldman Sachs headquarters in New York

Goldman Sachs Group Inc. isn't just surviving the worst recession in decades. It's apparently profiting handsomely from it.

The legendary Wall Street bank is widely expected to report Tuesday that it made a profit of more than $2-billion (U.S.) in the March to June period - possibly its best quarter in two years.

And while that should be all good, Goldman Sachs's rapid climb back from the abyss of last fall's global financial implosion is raising eyebrows because taxpayers have played no small part in its miraculous recovery.

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"I, for one, would like to know why Goldman Sachs and other Wall Street firms were allowed to abscond with so much of the rescue money that AIG received from the government," said economist Ed Yardeni of Yardeni Research Inc.

Goldman, the most politically connected of Wall Street banks, recently repaid the $10-billion it received from the U.S. government last year that enabled it to weather the worst of the crisis.

But that isn't the only way the company has managed to thrive amid the carnage. Two fortuitous things happened last fall.

Goldman got back its full $13-billion exposure to American International Group thanks to Washington's bailout of the faltering insurer. The rescue enabled Goldman, along with other financial institutions, to receive 100 cents on the dollar as a counterparty to the risky bets made in the subprime mortgage market and elsewhere - a considerably better outcome than most other investors caught in the financial meltdown.

Secondly, at the height of the crisis, chief executive officer Lloyd Blankfein converted Goldman into a bank holding company that is regulated by the U.S. Federal Reserve from the investment bank it had been for much of its storied 140-year history. (Morgan Stanley also made that move.) As a commercial bank, Goldman has since been able to leverage the backing of the Federal Deposit Insurance Corp. to secure billions in debt at cheap - some would argue subsidized - rates.

Goldman has also benefited from the endorsement of legendary investor Warren Buffett, whose holding company invested $5-billion in the bank last September to help it fix its balance sheet.

The storyline Goldman executives will tell investors as they unveil their results Tuesday will no doubt focus on how they are once again making money trading, including the risky business of high-frequency computer trading in which they are the dominant player.

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More than most banks, Goldman anticipated the mortgage meltdown, even betting on its unwinding. And now, with several of its competitors hobbled (Merrill Lynch) or gone (Lehman Brothers), the recapitalized bank is doing very well as a dealer in bonds, including the bonds issued by the federal government to finance all the bailouts and fiscal stimulus.

But it's unclear where Goldman would be without the steady hand of government on its shoulder.

And that's what irks critics and admirers alike. In a widely cited and provocative feature in the current issue of Rolling Stone magazine, writer Matt Taibbi describes the investment bank as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

Not surprisingly, Goldman dismissed the story about its role in the financial crisis as a "hysterical compilation of conspiracy theories." Contrastingly, the company sees itself as a "force for good" in the global economy.

Mr. Taibbi isn't alone in raising questions about Goldman's string of good fortune.

New York Attorney-General Andrew Cuomo is considering a possible investigation into why and how Goldman and others escaped the AIG mess, seemingly without consequence.

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Other critics are still upset about Goldman's role in the risky financial market behaviour that was at the root of the crisis. Barry Ritholtz, a market strategist with Fusion IQ, points out that the bank led the charge to get the Securities and Exchange Commission to loosen the capital requirement rules for investment banks. This allowed Goldman and other major investment banks to boost their leverage to as high as 40-to-1 from 12-to-1 in the years before the crisis.

"As a nation, we need to stop pretending this is too complicated and start holding the responsible parties accountable," said Mr. Ritholtz, author of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy .

The other thing that could put Goldman in an awkward political spot is the issue of bonuses.

Analysts estimate the return of big profits means the bank will pay out a record $18-billion in salary and bonuses this year to its 28,000 employees.

That's more than $600,000 per employee - putting the Goldman average well ahead of even President Barack Obama, who makes $400,000 a year.

In the past, Mr. Obama has decried big Wall Street bonuses as "shameful."

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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