July 15 (Bloomberg) -- Goldman Sachs Group Inc. ratcheted up risk-taking to an all-time high in the second quarter, increasing equity bets 58 percent to amass record trading revenue and quarterly earnings.

Value-at-risk, a measure of how much money the firm could lose in a day’s trading, rose to $245 million from $240 million in the first quarter, the New York-based firm said yesterday. The figure stood at $184 million last May (see table, below). Most of the increase during the second quarter stemmed from equity-trading risk, which surged to an average of $60 million per day from $38 million in the previous three months.

Goldman Sachs’s move to become a bank holding company in September to win the financial backing of the Federal Reserve didn’t curb the firm’s appetite for wagering its capital on trading, a formula that fueled Wall Street profit and compensation records in 2007. Second-quarter earnings and revenue also benefited from reduced competition, following the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc.

“Our model really never changed,” Goldman Sachs Chief Financial Officer David Viniar said yesterday in an interview. “We’ve said very consistently that our business model remained the same.”

Goldman Sachs, which was the biggest U.S. securities firm before converting to a bank, is the only one of its major Wall Street rivals that hasn’t been transformed by the financial crisis. Lehman Brothers filed for bankruptcy in September, while Bear Stearns Cos. was taken over by JPMorgan Chase & Co. and Merrill Lynch & Co. was sold to Bank of America Corp.

Capital Buffer

Morgan Stanley, which ranked second to Goldman, has said it is scaling back trading risk and principal investments. The firm acquired control of Citigroup Inc.’s Smith Barney brokerage in May to focus on selling financial advice to clients. Analysts predict Morgan Stanley will report a third consecutive quarterly loss next week, after disappointing them with weaker-than- expected trading revenue last quarter.

Goldman Sachs’s value-at-risk, or VaR, has climbed in tandem with the buffer of capital the firm has at its disposal. The bank’s total shareholder equity was $62.8 billion at the end of the second quarter, up from $44.8 billion at the end of the second quarter of 2008, boosted by stock sales in September and again in April.

While the risk-taking has paid off for Goldman Sachs so far, some question whether it could be a perilous example for others to follow.

“Do we want other people trying to emulate what they’re doing, perhaps not with the same skill or resources?” asked Arthur Wilmarth, a professor at George Washington University law school who specializes in issues related to banking. “Regulators ought to be concerned and say ‘Is Goldman making this money with any kind of reasonable prudence?’”

‘Disciplined Fashion’

Equities trading generated a record $3.18 billion of revenue, up 59 percent from the first quarter and 28 percent from a year earlier. Trading in fixed-income, currencies and commodities brought in $6.8 billion, topping last quarter’s record by 4 percent.

“Goldman saw that they were being paid to take risk and they did the appropriate thing,” said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $13.8 billion including Goldman Sachs shares. “If you can generate commensurate return to the risk you’re taking, you do it and you do it in a disciplined fashion.”

Equities trading revenue benefited from a gain in many of the major world markets, with the Standard & Poor’s 500 Index rising 12.6 percent between March 27, the end of Goldman’s fiscal first-quarter, and June 26, the end of its second quarter. The U.K.’s FTSE-100 climbed 8.8 percent during the same period and the Hang Seng index jumped 31.7 percent.

Rates, Currencies

“The interesting thing about the equity market is it probably has the most correlation of any market between the direction of prices and how we do,” Viniar said yesterday in a conference call with analysts. “It is the one market where you tend to see more activity when the market’s going up because people are more confident. They feel better. They do more.”

Goldman Sachs trimmed its average daily risk on interest rates to $205 million from $218 million in the first quarter. The figure was still up from $144 million in the second quarter of last year.

Viniar, who turns 54 next week, told analysts that interest-rate revenue in the second quarter was “strong but down from a record first quarter as client activity declined and spreads narrowed modestly.”

Revenue from trading currencies rose in the quarter from the previous period on higher trading volumes, Viniar said. The firm’s average daily risk in currencies rose to $39 million from $38 million in the first quarter, the company reported.

Level 3

Value-at-risk to commodity prices was unchanged from the first quarter at $40 million and Viniar said revenue in that segment was down from the first quarter because customer activity diminished.

Goldman Sachs reduced the assets on its balance sheet to $890 billion on June 26 from $925 billion at the end of March. The company’s leverage, the ratio of the bank’s assets to shareholder equity, dropped in the quarter to 14.2 from 14.6 at the end of March.

“I do not expect our balance sheet to stay this low,” Viniar said. “We’re in an environment where all of the opportunities are in very, very liquid items, so things move off our balance sheet very quickly.”

So-called Level 3 assets, those that are hardest to value and trade, fell to about $54 billion, or 6 percent of total assets, from $59 billion in the first quarter, or 6.4 percent.

The table below shows Goldman Sachs’s average daily value- at-risk and shareholder equity, from 2007 to present, according to company reports.

Quarter End         Value-at-Risk       Shareholder Equity
                    (Daily Average)     (at Quarter End)

June 26, 2009:      $245 million        $62.81 billion
March 27, 2009:     $240 million        $63.55 billion
Nov. 28, 2008:      $197 million        $64.37 billion
Aug. 29, 2008:      $181 million        $45.60 billion
May 30, 2008:       $184 million        $44.82 billion
Feb. 29, 2008:      $157 million        $42.63 billion
Nov. 30, 2007:      $151 million        $42.80 billion
Aug. 31, 2007:      $139 million        $39.12 billion
May 25, 2007:       $133 million        $38.46 billion
Feb. 23, 2007:      $127 million        $36.90 billion

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: July 14, 2009 20:01 EDT