Goldman Sachs: A Special Case

It's another banner quarter for Goldman Sachs (GS), the storied investment bank and one of the few left standing in the world. On July 14 the company reported $3.4 billion of earnings, 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? Hold off celebrating the end of the financial crisis. Goldman's results may be more indicative of its unique spot in the industry than what's to come across the rest of the banking sector. 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 backed by the Federal Deposit Insurance Corp.

Tough Act for Other Banks to Follow

"What's so intriguing about Goldman Sachs is that there are all these levers there," says David Wintergreen of the Wintergreen Fund (WGRNX), which owns Goldman shares. "There are so many ways this company can win."

Other than JPMorgan Chase (JPM), few banks will be able to match Goldman's performance. Citigroup (C) and Bank of America (BAC), 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 those banks' profits in the first quarter, has dried up.

Goldman is better analyzed in isolation, rather than viewed as a predictor of what's to come on Wall Street. And by many measures, Goldman seems to be up to its old tricks, trading with abandon. The bank's 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 putting more and more of the firm's money at risk.

It's paying off. As with 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. It was up 186% from the second quarter of 2008.

Ample Bonus Compensation

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 deal-making environment. In all, revenues increased to $13.7 billion for the quarter.

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 a nice sum: 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.

With reporting by David Henry. Carter is a department editor in the finance section for BusinessWeek in New York.

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