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Goldman: The Same as It Ever Was


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Goldman Sachs CEO Lloyd Blankfein (left) and JPMorgan Chase CEO Jamie Dimon joined other executives from the financial institutions that received TARP funds to testify before the House Financial Services Committee, Feb. 11, 2009, in Washington. Chip Somodevilla/Getty Images

I'm not sure if Goldman Sachs (GS) Chief Executive Lloyd Blankfein is a big Led Zeppelin fan. But the investment firm's first-quarter earnings release got me thinking about the British band's 1973 classic, The Song Remains the Same.

Why's that? In the week since Goldman reported better-than-expected profit for the first quarter of $1.81 billion, it has becoming abundantly clear that not much has really changed at the firm. Goldman still marches to its own drummer and provides investors with the bare minimum of information about how it makes all that money.

Indeed, except for the $10 billion in bailout money Blankfein is itching to give back, the $13 billion in government money it got courtesy of American International Group (AIG), and the $30 billion in government-backed debt the firm has sold, Goldman keeps acting as if the financial crisis never happened. When it comes to the issue of disclosure, Goldman still looks a lot like a hard-to-crack black box that requires a lot of blind faith from investors.

That Dreadful December

Much has been made of the "orphan month" in Goldman's earnings release. In switching over to a more traditional quarterly reporting system that tracks the calendar year, Goldman didn't incorporate its awful December results in its first-quarter numbers. In the press release discussing its earnings, Goldman never bothered to mention why it was excluding December's $780 million loss from its results. It simply included a table titled "Results for the one month ended December 26, 2008" buried in the back of the 12-page release. To be fair, the firm did discuss the December results during its conference call.

But even more significant may be Goldman's failure to publish a "financial supplement" that provides a detailed breakdown of the performance of its various business groups. It's common for big global banks to publish lengthy supplements along with their earnings releases. Business reporters, analysts, and investors turn to those supplements to get a real insight into a bank's quarter. When JPMorgan Chase (JPM) announced earnings on Apr. 16, for instance, it not only published a traditional 15-page release but posted a 40-page financial supplement and a 23-page investor presentation on its Web site.

Not Goldman. The only other earnings-related filing posted on Goldman's Web site was a terse two-page report called "Non-GAAP Financial Measures." The brief item is a quarter-to-quarter comparison of various ratios and metrics for gauging performance. One such measure is the firm's leverage ratio—a way to see how much risk the firm is taking compared with the assets on its balance sheet. And guess what? A space for the leverage ratio for the quarter just completed was included in the table—but it's blank. In the conference call, Goldman CFO David Viniar said the leverage ratio was 14.6.

A Goldman spokesman says the firm believes in full disclosure and "will have even fuller disclosure in our upcoming 10Q."

Now sure, some will say, "Who cares if Goldman keeps playing by its own rules, as long as it keeps making money and separating itself from the pack? Goldman may take risks, but at least its risks pay off—unlike at many other Wall Street banks." After all, Blankfein's desire to pay back the government's $10 billion in bailout money is a sign of strength.

But remember this: If the federal government hadn't rushed in to bail out AIG in the days after Lehman collapsed and hadn't poured money into the nation's banks, there's a chance Goldman would have found itself a victim of the crisis, too. Blankfein may not like to admit it, but his firm owes a lot to the actions the government has taken to keep the financial crisis from spinning completely out of control.

Reason to Be Skeptical

And based on Goldman's current disclosures, savvy investors have reason enough to be skeptical. As we've already pointed out, much of the firm's profit in the most recent quarter came from its trading desk—the same group of bond and commodity traders responsible for much for Goldman's outsize profits during the credit boom. It's not clear how sustainable those results are, largely because Goldman discloses so little information about the inner workings of its trading activities.

One thing we do know is that Goldman's trading desk is still piling on risk. One important securities industry gauge for measuring the risk of a potential trading loss at the firm rose sharply over the past year. The "value at risk" measurement—which is supposed to project a firm's potential losses on any given day—rose 52% over the past year, to $240 million. Before the financial crisis, everyone on Wall Street used to joke that Goldman wasn't so much an investment firm as a giant, risk-laden hedge fund. It seems that old label still applies.

So if you were looking for Goldman to become a bit more transparent and chastened after becoming a bank holding company and falling under the Fed's umbrella, think again. The firm's earnings releases and regulatory filings are as spartan and opaque as ever.

Goldstein is a senior writer at BusinessWeek.

Goldstein is a senior writer at BusinessWeek.

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