Goldman Sachs Plans Job Cuts as Debt Trading Misses Estimates

Goldman Sachs Group Inc. (GS), the U.S. bank that makes most of its money from trading, said it will cut about 1,000 jobs after a plunge in fixed-income revenue that was bigger than analysts estimated.

Second-quarter fees from trading debt, currencies and commodities tumbled 63 percent from the previous quarter, more than twice the drop at other major U.S. banks. Net income was $1.09 billion, or $1.85 per share, the New York-based company said today in a statement, falling short of the $2.30 per-share average estimate of 23 analysts surveyed by Bloomberg.

Led by Chairman and Chief Executive Officer Lloyd C. Blankfein, Goldman Sachs last year ceded its dominant position among fixed-income traders to larger rival JPMorgan Chase & Co. (JPM) In the second quarter of 2011, Goldman Sachs cut risk-taking to the lowest level since 2006. Debt-trading revenue of $1.6 billion dropped below JPMorgan Chase & Co.’s $4.28 billion, Citigroup Inc.’s $3.03 billion and Bank of America Corp.’s $2.7 billion.

“It’s clear that Goldman underperformed many of its peers,” said Richard Staite, an analyst at Atlantic Equities LLP in London, who has a “neutral” rating on the stock. “It seems to have prompted them into a cost-saving initiative.”

The firm identified annual cost savings of $1.2 billion that will include about 1,000 job cuts this year, Chief Financial Officer David A. Viniar told analysts during a conference call after earnings were released. Goldman Sachs employed 35,500 people at the end of June, up 100 people from the prior quarter.

‘Foreseeable Future’

“It looks like the environment’s going to be somewhat slower for the foreseeable future and so we decided it made sense at this point to cut some level of expenses to be more efficient,” said Viniar, who turned 56 years old today.

Job cuts will be “broad based” and are likely to affect both junior and senior employees, he said, adding that Goldman Sachs’s plans to grow in countries such as China, India and Brazil, where the firm has been doing the most rapid hiring, won’t be affected.

Operating expenses in the second quarter totaled $5.67 billion, down 28 percent from $7.85 billion in the first quarter and 23 percent below the $7.39 billion in the second quarter of 2010. Compensation expenses fell 39 percent from the first quarter to $3.2 billion.

Goldman Sachs fell $2.73, or 2.1 percent, to $126.61 in New York Stock Exchange composite trading at 2:04 p.m. The stock, at its lowest level since April 2009, has dropped about 25 percent this year.

Net Income

Net income climbed 77 percent from the same period a year earlier, and earnings fell 38 percent if one-time costs are excluded from the 2010 results. Last year’s second-quarter earnings were reduced by a $550 million settlement with the Securities and Exchange Commission and a $600 million expense to pay a U.K. tax on employee bonuses.

Analysts in the Bloomberg survey lowered their earnings estimates by an average of $1.09 per share in the past four weeks.

Revenue fell 39 percent to $7.28 billion from $11.9 billion in the first quarter and $8.84 billion a year earlier. The figure fell short of the average $8.2 billion estimate of 15 analysts surveyed by Bloomberg. Return on equity, a measure of how well the firm reinvests shareholder funds, decreased to 6.1 percent from 12.2 percent in the first quarter.

No Rebound

“We’ve had four relatively weak quarters in a row, and I think it’s now quite clear that the difficult environment is going to be continued throughout the remainder of this year,” Atlantic Equities’ Staite said. “I’d be pretty surprised if we see a marked rebound any time in the near term.”

Overall revenue from trading, run since February 2008 by Edward K. Eisler, David B. Heller, Pablo J. Salame and Harvey M. Schwartz, fell 47 percent to $3.52 billion from $6.65 billion in the first quarter and was down 29 percent from $4.98 billion in the second quarter of 2010.

“Certain of our businesses had disappointing results as we reduced our market risk in response to attempting to manage fluctuations in prices and market liquidity,” Blankfein, 56, said in the statement.

Value at risk, a gauge of how much the firm could lose in a single day of trading, fell for the eighth consecutive quarter, to $101 million. The figure was the lowest since the third quarter of 2006. The firm reduced the amount at risk to equity prices, currencies and interest rates, while the risk in commodity prices jumped.

‘Not as Effective’

“During the quarter we were not as effective at navigating intra-quarter swings in market prices and liquidity as we have been historically,” Viniar told analysts. “We generated lower revenues from managing client-originated market-making inventory, particularly in our largely U.S.-based mortgages business and our global commodities and credit business.”

Goldman Sachs’s equity-trading revenue declined 17 percent to $1.92 billion from $2.32 billion in the prior quarter and rose 19 percent from $1.61 billion a year earlier. That compared with $1.22 billion of second-quarter equity-trading revenue at JPMorgan and $812 million at Citigroup. Analysts including as Roger Freeman at Barclays Capital expected Goldman Sachs’s equities revenue to be about $2 billion.

Revenue from investment banking, overseen globally by Richard J. Gnodde, David M. Solomon and John S. Weinberg, advanced to $1.45 billion in the quarter from $1.27 billion in the first quarter and $941 million in the second quarter of 2010. By comparison, JPMorgan’s investment-banking fees totaled $1.92 billion in the quarter and Citigroup reaped $1.09 billion.

Investment Banking

Goldman Sachs’s investment-banking revenue exceeded estimates from analysts at Atlantic Equities, Barclays Capital and ISI Group, who expected revenue in the range of $1.2 billion to $1.3 billion.

Fees from takeover advice, a business led by Gene T. Sykes and Yoel Zaoui, increased to $637 million from $357 million in the first quarter and from $471 million a year earlier. The firm ranks first among advisers on mergers and acquisitions announced so far this year, according to Bloomberg data.

The firm also ranks first year-to-date in managing global equity sales and initial public offerings, the data show. Revenue from equity underwriting, overseen by London-based Matthew Westerman, fell to $378 million from $426 million in the first quarter, while debt underwriting revenue dropped to $433 million from $486 million in the prior three months.

Investing and Lending

Investing and lending, the segment in which Goldman Sachs books gains or losses from the firm’s own stakes in companies such as Industrial & Commercial Bank of China (1398) Ltd. and other assets, made $1.04 billion in the period, compared with $2.71 billion of gains in the first quarter and $1.79 billion in the second quarter of 2010.

Revenue from investing and lending was more than double what was expected by analysts at Atlantic Equities, Barclays Capital and ISI Group. Their estimates ranged from $210 million to $411 million.

“People regard those revenues as pretty volatile and I don’t think people will take any comfort from a better performance” in that business, said Atlantic Equities’ Staite.

Revenue from investment management, the business run by Edward C. Forst and Timothy O’Neill, was unchanged from the first quarter at $1.27 billion and up from $1.13 billion in the second quarter of last year. Assets under management increased to $844 billion at the end of June from $840 billion at the end of March.

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

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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