The Same Old Tricks at Goldman Sachs

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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.

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