The Same Old Tricks at Goldman Sachs

Posted by: Adrienne Carter on July 14

It’s another banner quarter for Goldman Sachs, the storied investment bank and one of the few left standing. On July 14, the company reported earnings of $3.4 billion, up 65% from 2008 and 89% from the first quarter of the year.

“While markets remain fragile and we recognize the challenges the broader economy faces, our second-quarter results reflected the combination of improving financial-market conditions,” CEO Lloyd Blankfein said in the earnings announcement.

But are Goldman’s boffo profits a sign that Wall Street is back?

Don’t start popping the champagne and celebrating the end of the financial crisis just yet. Goldman’s results may not be indicative of what’s to come across the rest of the banking sector. As BW’s David Henry reported a few weeks ago, Goldman is a unique spot. The investment bank, which shrewdly navigated through the mess and even profited from it, has emerged as one of the strongest financial institutions around. With that position of power—and fewer rivals since the demise of Bear Stearns and Lehman Brothers—Goldman is reaping the rewards from the market rebound, the low interest rate environment, and government perks such as cheap bonds back by the Federal Deposit Insurance Corp.

“What’s so intriguing about Goldman Sachs is that there are all these levers there,” says David Wintergreen of the Wintergreen fund, which owns a stake in Goldman. “There are so many ways this company can win.”

Other than JPMorgan Chase, few banks will be able to match Goldman’s performance. Citigroup and Bank of America, which are set to report in the coming week, are still struggling under the weight of their toxic assets. The mortgage refinancing boom, a big source of banks’ profits in the first quarter, has dried up.

Goldman is better analyzed in isolation, rather than viewed a predictor as what’s to come on Wall Street. And by many measures, Goldman seems to be up to its old tricks: trading with abandon. The banks so-called value-at-risk, a measure of how much money the firm could lose in a day, jumped 33% during the second quarter—hitting another record high. In essence, that means Goldman continues to put more and more of the firm’s money at risk.

It’s paying off for Goldman. As in the first quarter, fixed income trading remained strong, with revenues jumping to $6.8 billion compared with $6.6 billion for the first three months of the year. They were up 186% from the second quarter of 2008.

The bank also saw a massive bump in equity trading. Revenues in the group jumped 110% over the past quarter to $2.2 billion. Although equity underwriting bounced backed modestly, advisory work remains weak amid the anemic dealmaking environment. In all, revenues increased to $13.7 billion for the quarter. No wonder people want to steal the company's secret trading formula.

What does that mean? The record revenues may ultimately lead to record bonuses at Goldman—just months after the uproar over Wall Street pay. Bankers already seem to be collecting nice sums. Compensation costs at the investment bank jumped to $6.6 billion. That’s up from $4.7 billion in the first quarter and $4.5 billion last year. If the revenues continue to surge, 2009 may be the year of the golden bonuses at Goldman.

Reader Comments

Kurt

July 14, 2009 06:07 PM

"'What’s so intriguing about Goldman Sachs is that there are all these levers there,' says David Wintergreen of the Wintergreen fund, which owns Goldman."

I'm relatively certain the Wintergreen fund does not own Goldman Sachs. Perhaps you meant to say, "...which owns shares of Goldman."

Earthling

July 14, 2009 06:57 PM

So Goldman can rake in billions in bailout funds, both directly (now repaid) and laundered through AIG, and then pay out billions in bonuses. No need to throttle back on the risk taking, full speed ahead, let the taxpayer assume any risks while Goldman borrows money interest-free. America couldn't be more generous to the robber barons of Wall Street, what a racket. No place plusher than the Goldman executive suite for sitting out the Wall Street collapse.

Strategery

July 14, 2009 07:05 PM

Anyone else smell a rat? Goldman Sachs manipulates the markets for their advantage, the most obvious being oil and other commodities--things the world cannot live without and must pay whatever price is asked. In addition, they have a lot of clout over the Federal Reserve; which is the entity that really controls things including Democrats and Republicans. If their fortunes were made by producing TANGIBLE goods and services, I might be impressed. They are nothing more than a glorified casino with a house advantage, and what is a profit to them is a loss to the other party involved in the bet.

amazed at the sun's power

July 15, 2009 01:49 AM

If we could somehow control these guys down and Nationalize the Federal Reserve, the playing field would be a lot more level.

amazed at the sun's power

July 15, 2009 01:49 AM

If we could somehow control these guys and Nationalize the Federal Reserve, the playing field would be a lot more level.

goldmanreveal

July 15, 2009 04:58 AM

Goldman need to account and explain:
1. Why its hedge funds for clients lost so much money and at the same time its proprietary desk made huge profits in 2008?
2. What were its positions prior, during and after to Bear, Lehman & AIG demise on these firms? This should be investigated by the FED & SEC.
3. Its executives emails & correspondence with the FED & Paulson should be audited for insider compromise given the ex-Goldman "relationship" problem.
4. AIG full payment/transfer of about $17bln without discount should be fully explained. FED should also account for this fiasco. How can a bankrupt firm debt be paid in full at that point?
5. All FED guaranteed programs for Goldman debts and funding should be accounted, lifted and compensated before bonuses paid.
6. Investigation on Goldman commodities positions/research releases to ensure no manipulation of markets.

If you are clean, there is nothing to hide.

kuei

July 15, 2009 07:47 AM

I told everyone before the fist bailout was approved this whole financial crisis was nothing more than a scam. I could see it coming a mile away. One bank gets a huge bailout and everyone else rewrites their books to hide profits and show huge losses. What did Chace call it? "Good Will Writeoffs"? In other words, money that could have been collected was just wriiten down as a loss. So nice of them...er...I mean, american taxpayers.

sanak

July 15, 2009 07:57 AM

Are these guys pushing the petrol prices up???

manson

July 15, 2009 08:30 AM

How seriously can one take an article so full of grammatical mistakes? What is with BW that it lets stuff like this go out unedited? The old adage applies: "If you can't say it clearly and correctly, how can we believe your analysis?"

Piet Strydom

July 15, 2009 08:41 AM

Isn't the current "minister of finance" in the US an Ex-Goldman Sachs boy? Geithner.

citracyde

July 15, 2009 04:29 PM

Goldman knew the economy was a "house of cards" in 2007 and was the first company to realize if they pull a card(s) out from the middle that the whole house will fall, but fall also in their favor. Having a clear roadmap of how you would like the collapse & recovery to commence requires knowing how to guide the market (rumours, comments from their expert economists, moving the market with a volume of smalled distributed buy/sell orders to benefit several positions). Tell me you don't think they know how to manipulate a market or a stock - then ask yourself with that power, what could I do if I organized it a massive way.

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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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