Bankers aren't to blame for making all that money

During the nadir of the Iraq war, Blackwater and its guns-for-hire symbolised everything that was so detestable about the conflict.

During the nadir of the Iraq war, Blackwater, the North Carolina-based security company, and its guns-for-hire symbolised everything that was so detestable about the conflict, so much so that it became in the minds of its critics the root cause of the violence rather than a consequence of it. In much the same way, investment banks such as Goldman Sachs have become targets for those who see corporate greed as the source of last year's financial crisis rather than Washington's failure to properly regulate it.

Certainly Goldman, that blue-chip finishing school for aspiring regulators, and its friendly Wall Street rivals are easy to loathe these days. Nearly a year after they were rescued by the US$700 billion (Dh2.57 trillion) lifeboat fund organised by the then-US Treasury secretary, Henry Paulson, it has been reported that Goldman was allowed to recover $13bn in credit defaults swaps written by the failed insurance giant AIG. (Mr Paulson is a former Goldman chief executive.) Bank directors, as if deaf to the silence of vacant factory lines and abandoned foreclosed homes, are back to rewarding themselves with multimillion-dollar bonuses and glamorous corporate retreats.

Over the past few weeks, the press has lobbed one mortar round after another about investment banking in general and about Goldman in particular. Rolling Stone last month described Goldman as a "great vampire squid wrapped around the face of humanity". The cover of New York magazine led with the headline: "Is Goldman Sachs evil?" Politicians have lined up in Congress to blame Goldman for exploiting the crisis, if not starting it altogether.

High finance has long occupied the American imagination. From the Depression-era screwball comedy My Man Godfrey to the 1987 morality play Wall Street, which introduced the iconic greenmailer Gordon Gekko, Americans have been simultaneously intrigued and appalled by pin-striped predators. Beginning in the 1980s, when Reagan-era deregulation allowed investment bankers to raise their own funds to finance huge deals, they were the high priests of finance - the "Masters of the Universe", as the writer Tom Wolfe put it. They were the fuel behind the dotcom bubble and they were the sausage factories that packaged home loans into exotic, thinly traded and ultimately worthless securities that, last autumn, brought the global financial system to within a whisper of a meltdown.

Now, the banks are back. This week, the top dozen firms reported combined revenue of $136bn in the first half of the year. And for the second time in 12 months, they owe the federal government for their deliverance. Having been deprived of their proprietary pools of investment capital under the terms of the Paulson bailout, they have found a liquid market buying debt from the US Treasury and selling it to the Federal Reserve in its bid to stabilise financial markets at a time of record low interest rates.

The timing could not be better for the banks, given how the merger and acquisition trade, among the most lucrative in finance, has yet to revive itself. The number of the Fed's primary dealers has declined in number, down to 18 from 31 a decade ago, which means they can charge higher fees. What is more, because the Fed, for the sake of transparency, gives advance notice of the kind and quantity of the securities it needs to buy, dealers load up on them ahead of the scheduled purchase date and then hold out for top prices.

Thanks to the Fed, the normally dull fixed-income market has become a growth industry for Wall Street. Last week, the Financial Times reported that Goldman alone earned $6.8bn in fees from debt trading and related activity in the second quarter because of "historically wide margins and a fragmented credit environment". Having plucked the banks from the abyss with public funds, Washington is now showering them with thick commissions and a steady revenue stream. "The government is a huge buyer and seller and Wall Street has all the pricing power," an unnamed investment manager told the FT. "You can make big money trading with the government."

The banks, led by Goldman, are unapologetic. Why should they not be? It is not their fault they were allowed to tear through the world's credit markets, under-regulated, for a generation until the Big One finally lowered the boom. That responsibility lies with freely elected members of the US Congress, who happily complied with Wall Street's demands for the razing of laws that prevented bank holding companies from owning investment houses.

When the US's popular invasion of Iraq in 2003 span out of control, Washington turned to security companies such as Blackwater for help. Now it relies on banks such as Goldman and its rivals in New York, London, and Tokyo to ease it out of a crisis inseminated by the deregulation craze of the past 30 years. To misquote William Shakespeare, the fault lies not in the mercenaries nor in the money-lenders, but in ourselves.