Goldman’s power is now so pervasive that European leaders expressed concern about it at this month’s G20 talks in Pittsburgh, according to French newspaper Le Monde. EU heads are worried that Goldman will exert influence on senior US politicians to water down G20 initiatives to curb the type of reckless behaviour by banks that helped precipitate the recent financial crisis.

Goldman has a long history of political involvement. The bank has helped finance the political campaigns of a number of US politicians over the years including Barack Obama’s succesful bid for the presidency. Mark Patterson, a former Goldman executive, is Treasury Secretary Tim Geithner’s chief of staff.

Stephen Friedman, who spent 28 years at Goldman, served as a top economic adviser to President George Bush, and Robert Rubin, who spent 26 years at Goldman, was President Bill Clinton’s Treasury Secretary. Hank Paulson, who masterminded the bailout of the US banking system during the height of the financial chaos last year, was chief executive at the investment bank before becoming Bush’s Tresaury Secretary in 2006.

Goldman, which has a substantial presence in the UK, emerged from last year’s chaos on Wall Street stronger than ever. Its main competitors – Bear Stearns and Lehman Brothers – toppled over and troubled Merrill Lynch was gobbled up by Bank of America.

In July, the Wall Street-based financial services and banking company posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10bn in US rescue funds.

The bank reported second-quarter net income of $3.44bn, or $4.93 a share. That surpassed the $3.65 per-share average estimate of 22 analysts and was 65% higher than last year’s second quarter.

Chief executive Lloyd Blankfein, after repaying the government’s bailout money along with $426m in dividends to taxpayers, is taking steps to make Goldman Wall Street’s top investment bank. Goldman is pulling in record revenues thanks to the revival in world financial markets. It is making most of its money from trading in stocks, bonds, currencies and commodities, correctly calculating which way prices were going to go. It is a high-risk but high-reward approach.

“The wind is at their back, so their earnings numbers are going to be very strong,” said Jon Fisher, a portfolio manager at Fifth Third Asset Management, a US investment company that oversees about $18bn. “I think numbers are going up. I think they repeat this quarter next quarter and the quarter after that.”

Last year’s credit freeze led Blankfein to convert the firm to a Federal Reserve-regulated bank, accept government funds and report the first quarterly loss as a public company. This year Goldman Sachs has issued new shares, repaid the US Treasury and reaped higher fees from selling stocks and bonds.

It’s also paying its employees more money. The company set aside $6.65bn for compensation and benefits in the period, or 48% of revenue, compared with $4.71bn in the first quarter. The company has about 29,000 employees and said in late September that it plans to hire more.

It has undertaken an aggressive recruiting drive to build its asset management business just as its rivals pull back from fund management. Goldman will hire up to 200 staff across all regions in efforts to establish a dominant position. In 2007, Goldman was ranked 17th in the world in terms of assets under management.

“We are moving back on the offensive,” Marc Spilker said in his first interview since being appointed co-head of the bank’s investment management business in June 2008.

Goldman plans to expand its investment management business organically instead of through acquisitions.

“We wouldn’t rule out acquisitions, but we won’t put growth ahead of everything. Growth must be in the context of long-term performance. We do not want to disturb what we have got,” Spilker stated.

Wall Street analysts say Goldman has good long-term prospects as it weathers the recession and is unlikely to see serious impact from proposed government regulations.

Citi Investment Research analyst Keith Horowitz said in an investor note that he is more optimistic on Goldman Sachs. He maintained a “Buy” rating on the company and a price target of $215.

Horowitz increased his earnings estimate for the third quarter to $4.20 per share from $4 and for the fourth quarter to $5 from $4.75. Analysts surveyed by Thomson Reuters expect $3.86 in the third quarter and $4.57 for the fourth.

Horowitz increased his fiscal 2009 estimate to $17.70 per share from $17.20. Analysts surveyed by Thomson Reuters expect $16.78 per share.

He said the company’s management team expects the next big trend to be driven by capital growth as interest rates rise and pension funds, wealth funds, governments and large institutional investors reallocate portfolios, driving major volume flows.

Derivative trading will also rise as mortgage servicers, hedge funds and corporations get back into the market.

Goldman has gained market share in the first half of this year, placing it in a “significantly better competitive position coming out of this cycle,” Horowitz said.

He expects Goldman and JP Morgan Chase to benefit from fewer players in the same business.

The company also appears to be well positioned given its strong capital position versus peers and it should hold up well against new government-imposed capital rules.

Mergers and acquisitions are expected to increase as chief executives begin to contemplate deals. More CEOs are beginning to look at outside opportunities.

“Chief executives are recognising domestic growth outlook will be challenged for the next three to five years and clients will look to strategic mergers and acquisitions as well as transactions to build presence in markets like China or Europe to increase growth to offset weaker economic landscape at home,” Horowitz wrote.

Goldman has opportunities in the stressed loans market because of its strong capital position. Its recent purchase of Litton Loan Servicing, a subprime loan servicer, should allow it to effectively manage a portfolio of distressed loans as well as give detailed intelligence on underlying fundamentals, Horowitz said.

Goldman’s record earnings and growing power on Wall Street have been criticised by some politicans in Washington and political journalists.

Senator Sherrod Brown, an Ohio Democrat, said Goldman should “show some restraint” on compensation after criticism that outsized pay packages contributed to the financial crisis by encouraging excessive risk-taking.

Matt Taibbi, a journalist at Rolling Stone magazine, recently wrote a stinging article on the bank’s Wall Street activities.

However, Goldman has its defenders. James Reynolds, chief executive officer of Loop Capital Markets in Chicago, said: “I just don’t understand why the country, or a working person in Michigan, Ohio or Kansas, would cheer against Goldman doing well just because the government invested in Goldman at a time when the financial markets were in chaos.”