Is Goldman's Run Over? Or Do Financials Surge Ever Higher?

July 9, 2025 | Premium Service | Updated | We all were a little amused to learn that the Federal Reserve Board decided to ignore the massive financial and reputation risk in private equity and private credit in the most recent bank stress tests. With cash bids for private assets plummeting, and sponsors in full flight due to prospective litigation by jilted clients, how do the Fed and other bank regulators retain any credibility?  

Our friend Nom de Plumber had an appropriate observation:

“Private Credit investors who need to liquidate can sell to Private Credit promoters.....but at deep discounts from initial purchase values. How deep and painful are the illiquidity discounts?  Enough for the promoters to buy them back. As underlying borrowers increasingly use Payment-in-Kind (PIK) elections to suspend interest and principal payments, but avoid formal default reporting, the secondary-sale discounts of Private Credit instruments essentially reflect under-reported default losses and credit degradation. That non-visibility helps explain why the Private Credit sector can seem to defy the gravity of global economic stresses.  Thank you.”

Now please tell us again why President Donald Trump and his servants are so upset with Fed Chairman Jerome Powell? Sandbagging the bank stress tests will be worth tens of billions in share repurchases. Just saying. The chart below shows net share repurchases by the seven largest US banks. 

Source: FFIEC

Even as banks look forward to higher share repurchases, the interest rate outlook is strange, to put it mildly. President Trump is mishandling the situation with the Fed and also the dollar, raising the risk of a financial market selloff later this year. The additional spending from the OBBB will make the economy run hot. In this scenario, the likelihood is for higher interest rates and inflation going forward despite the flow of happy rhetoric coming from the White House.

President Trump keeps talking about selecting a new Fed Chairman, but there is not yet an open spot on the Board. If Powell decides to remain on the Board as a governor until '28, then Trump will be forced to choose either Bowman or Waller as Chairman. But when the 12-member FOMC does not move as quickly as Trump would like, then the POTUS will boil over in public, which will be bad for markets and the dollar. 

In 1951, William McChesney Martin told President Harry Truman what he wanted to hear on the Fed reporting up to the WH, but then betrayed Truman and became the greatest ever proponent of an independent central bank. Note that Martin had been at Treasury and Export-Import Bank before going to chair the Federal Reserve Board from 1951 through 1970.

No matter who President Trump appoints to be the next Fed chairman, that person will either defend the central bank and betray the White House or fail miserably as the rest of the FOMC votes against them. Fed chairmen cannot survive being on the losing end of FOMC votes. 

The most volatile member of the universal bank group, which we lovingly refer to as the “asset gatherers,” Goldman Sachs (GS), is again one of the best performing US banks and is in the top-10 of the WGA Bank Top Index.  The question comes, however, is the outperformance by GS a signal to sell?  If you have ST gains in GS, we’d certainly recommend protecting your upside with well-positioned limit orders – and consulting your financial advisor. 

Want to read more?

Subscribe to theinstitutionalriskanalyst.com to keep reading this exclusive post.

Subscribe Now