Goldman Sachs (GS ) Group Inc. has been dazzling Wall Street with its take-no-prisoners advance lately. Its investment-banking, trading, and asset-management businesses are all white-hot. Their combined efforts led to a 24% gain in net income, to $5.6 billion in 2005, on a 45% rise in revenues, to $43.4 billion. As the 137-year-old firm blasts past peers, it seems nearly unstoppable.

Firing on all cylinders propelled Goldman to the No. 15 spot on the BusinessWeek 50, a huge leap from its 116th-place perch in our larger Standard & Poor's 500-stock index tally a year ago. Its stock jumped 23% in 2005, to about $128, and has since topped $150. Most analysts remain effusive. "The growth will accelerate this year," says CIBC World Markets' (BCM ) Meredith Whitney, who expects shares to reach $190. "You have a tremendous environment for [making] and for harvesting investments."

Not So Transparent

The most powerful engine at Goldman is one that roars mostly behind the scenes. Its trading and principal investments business, where commodities, fixed-income, and equities traders use proprietary strategies to play the markets, churned out $16.3 billion, or 66% of its revenues net of such expenses as interest. The business has made some savvy investments, taking stakes in U.S. power plants and other energy concerns while demand is hot. Globally, too, Goldman made smart bets: A $1.3 billion stake in Sumitomo Mitsui Financial Group Inc. bought in 2003 is worth more than $4 billion.

Having such a fat slice of its profits come from a business that stays largely mum about how it achieves its gains makes some analysts nervous. Goldman, according to CreditSights Ltd. analyst David H. Hendler, "is a high-performance race car, but we don't know exactly how the engine works." One oft-repeated line on Wall Street: The best way to invest in a hedge fund is to buy Goldman stock.

Goldman's risk profile is going up in part because it's investing more alongside its clients. This year, for example, it paired with clients Allianz (AZ ) and American Express (AXP ) Co. to provide the lion's share of $3.8 billion plowed into the Industrial & Commercial Bank of China. The firm will help the giant Chinese bank upgrade technology and processes and then expects to gain after it goes public in a mammoth initial public offering.

Just how much riskier is Goldman? Its "value at risk," (VAR), a measure of how much money it could lose on any particular trading day, jumped 15%, to $92 million, in the first quarter. Standard & Poor's (MHP ) analyst Robert Hansen argues that as a share of revenues, the amount at risk has declined as the revenues have grown. He's not worried, since net revenue this year should hit $29 billion, up 14%. CreditSights analyst Hendler frets, however, that "what goes up can come down." If market losses add up, he warns, revenues will fall as well. Says Goldman Chief Financial Officer David A. Viniar: "We take risks commensurate with opportunities that we see." The VAR number is the highest it has been, but not the highest it will be, he adds. "As the business grows, we see more opportunities in more places."

If market bets do turn against it, Goldman has other, albeit smaller, profit engines. It ranked No. 1 last year in mergers, playing advisory roles in 6 of the 10 biggest deals in the world. It helped Procter & Gamble Co. (PG ) swallow Gillette in a $57.2 billion move; abroad, it midwifed acquisitions such as Gas Natural SDG's $51.2 billion takeover of another Spanish utility, Endesa (ELE ). In a controversial move, it also advised both sides in the merger between the New York Stock Exchange and Archipelago Holdings. Investment banking revenues hit their highest level in four years, at $3.7 billion. And its asset-management arm weighed in with $4.8 billion in gains.

As Goldman expands, its risks will expand as well. And one of its major areas of expertise is, of course, managing risk. Now, Goldman's greatest challenge may simply be topping its own performance.

By Joseph Weber

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