Goldman knows the ECB flood can’t last forever

BOTH Goldman and Citi have seen a strong recovery this quarter, as markets, flooded with shiny new euros from the ECB, have had to do something with the cash.

They have also both benefited from a backlog of debt-hungry banks and corporates that were holding off on issuance for the latter half of 2011.

In the current climate, Goldman has wisely taken the opportunity to bump up its dividend by over 30 per cent for its battered investors.

But, Citi’s attempt to hike its pay-out was blocked by the Federal Reserve, with disastrous consequences for its management yesterday as angry investors voted down their bumper pay packets.

The contrast is curious, not least because of the comparable capital ratios of the two banks: Goldman revealed a tier one common equity ratio of 12.9 per cent using Basel I definitions versus Citi’s 12.4 per cent – lower, but not drastically so. The issue underscores that when it comes to capital, confusion still reigns. The Fed’s stress tests use one definition, Basel I another and Basel III yet another.

The key is which bank is more adequately prepared for a resumption of crisis mode once the intoxicating effect of all those euros runs out – and run out it will.

Asked why M&A activity has yet to recover despite strong corporate cash balances, Goldman CFO David Viniar was clear: “Europe is the number one thing. [CEOs] want to see growth for a longer period and resolution in the Eurozone.” Don’t we all?