Remember when high risk and reckless trading led to economic collapse?

That was so five minutes ago.

Goldman-Sachs is back to its old tricks, roaring to record profits from high-risk trading - and the federal government is aiding and abetting the whole thing.

You might have thought the feds would be discouraging Goldman from using the economy as its private casino, but that’s far from the case.

Goldman has shrewdly played all sides, first obtaining status as a bank holding company last fall so it could get more than $63 billion in bailout funds and more in a variety other subsidies, but then getting an exemption from the Federal Reserve from the tighter regulations that cover such holding companies.

Goldman’s CFO insisted that the firm was still a high-flying investment firm, not just a boring old bank. “Our model never really changed,” David Viniar recently told Bloomberg. “We’ve said very consistently that our business model remained the same.”

Goldman Sachs recently disclosed it earned $2.7 billion in profits in the most recent quarter, with 78 percent of its $13.76 billion in revenue stemming from its high-risk trading and principal investments. Goldman’s own measure of risk, known as the Value-at-Risk model, showed potential trading losses at $245 million a day, up from $184 million a day last May.

Other investment firms have their eyes on how Goldman’s dazzling manipulation of system is supposed to work: Citibank and Morgan Stanley are promising to follow in Goldman’s fancy footwork if they can.
It turns out that these financial institutions have learned important lessons from the financial crisis, just not the ones that taxpayers hoped.

Not everybody is thrilled with Goldman Sach’s performance, or the Fed’s prominent role in its success.

Some members of the House of Representatives wrote to the fed’s recently reappointed chairman, Ben Bernanke, challenging his agency’s handling of Goldman.

“The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money. This is the very definition of `heads we win, tails the taxpayers lose,’ ” the 10 members of Congress, eight Democrats and two Republicans wrote the chairman in their July 27 letter.

While they noted that there may be good reasons to grant “temporary regulatory exemptions,” the letter writers said “we are worried that the company is using its regulatory freedom to evade capital requirements and take outsized risks with taxpayers on the hook.”

Maybe Bernanke can remind us why we need to continue subsidizing and exempting Goldman, most of whose competition among the investment banking giants was swept away in the financial collapse. Maybe he can remind us exactly what taxpayers are getting in exchange for their on-going generosity to Goldman.

Bernanke has shown himself a smooth operator in settings from committee hearings to town halls. The lead signer of the letter, Rep. Allan Grayson, D-Florida, a member of the House Financial Services Committee, has done a decent job tangling with Bernanke in the past. (You can find it on Youtube.)

Bernanke is expected to try to make the case that his agency should be charged with regulating risk in the financial industry, and to argue against a new financial consumer safety commission. The Fed’s performance with Goldman would suggest otherwise. It may be helping Goldman navigate through the financial crisis, but it’s less clear that the Fed has a good handle on what it takes to protect taxpayers’ investment.