Blankfein's Led Zep Moment

Posted by: Matthew Goldstein on April 21

We’re not sure if Goldman Sachs (GS) CEO Lloyd Blankfein is a big Led Zeppelin fan. But the investment firm’s first quarter earnings release got us thinking about the British band’s 1973 classic, “The Song Remains the Same.’’

Why’s that? Well in the week since Goldman reported better-than-expected profit for the first quarter of $1.81 billion it’s becoming abundantly clear that not much has really changed at the firm. The firm continues to march to its own drummer and provide investors with scant 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 courtesy of AIG and $30 billion in government-backed debt it’s 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 blackbox.

As we’ve already pointed out, much of the firm’s profit came from its proprietary trading desk—the same group of bond and commodity traders responsible for much for Goldman’s outsized profits during the credit boom. It’s not clear how sustainable those results are, largely because Goldman discloses so little information about its trading activities.

One thing we do know is that Goldman’s trading desk is still piling on risk. One important gauge for measuring the daily risk of a potential trading loss to the firm rose 52% from a year ago to $240 million. Before the financial crisis everyone on Wall Street used to joke that Goldman wasn’t so much an investment firm, as it was a giant risk-laden hedge fund. Even though leverage ratios may be coming down on Wall Street, Goldman still looks a lot like a hedge fund.

Finally, if one was looking for Goldman to become a bit more transparent 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.

Much has been made of the so-called “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 entitled “Results for the one month ended December 26, 2008,’’ buried in the back of the 12-page release.

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. JPMorganChase(JPM), for instance, when it announced earnings on April 16, not only published a traditional 15-page release, but posted a 40-page financial supplement and a 23-page investor presentation on its website.

Not Goldman. The only other earnings related filing posted on Goldman’s website was a terse two-page report called “Non-GAAP Financial Measures.’’ The brief report is a quarter-to-quarter comparison of various ratios and metrics for gauging performance at the firm. One such measure is the firm’s leverage ratio—a way to see how much risk the firm is taking on compared to the assets on its balance sheet. But guess what? A space for the leverage ratio for the quarter just completed was included in the table, but it’s blank. It appears investors wanting some concrete evidence that Goldman is reducing its leverage will have to wait until the firm files its first-quarter 10Q with the Securities and Exchange Commission.

We called Goldman to ask them about the firm’s disclosures and why it still seems wanting—especially compared to other big banks. We haven’t heard back yet. If we do we’ll update you on Goldman’s response.

Reader Comments

wiseguy

April 23, 2009 12:21 PM

What else you expect from GS? They are hypocritical and trying to have it both ways. They want to be a bank holding company to get the cheap taxpayer loan, but don't want the scrutiny and transparency. They want to return the TARP so that they can pay bonus to themselves, but they want to keep the 12b AIG payout because it is backdoor TARP money with no restrictions. They want to be "too big to fail" but don't want the associated regulations.

They are a bunch of shortsighted greedy managers who don't even have a clue of the sweeping change in political and public sentiments. They still want to cream off the last remaining crumb and will eventually turn out to be killing the golden goose that feed them for so long.

whs806

April 26, 2009 07:51 AM

The AIG bailout would have been much different if they had not greased Barney Frank, Chris Dodd, Schumer, and Obama's hands.

Oh, I forgot, they also insure the Government Pension Plan!

Wonder if that had something to do with it!

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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