Goldman Sachs: just good enough

April 17, 2012

Goldman Sachs reported earnings this morning and the good news was that things weren’t as bad as people thought they were going to be. That doesn’t mean Goldman had a good quarter, however:  Both revenues and earnings were down compared to the same period last year. Long-term pessimism regarding the firm’s earnings power remains.

So what’s wrong with the bank Bloomberg used to call the “most profitable  securities firm in Wall Street history”?

CFO David Viniar’s attempts to explain underscored the problems the firm faces. Viniar’s answers in short: the markets are healthier now than they were last year. That explains why Goldman beat its fourth quarter results. But it’s unclear why, if markets collectively exhaled, Goldman couldn’t beat last year’s first quarter numbers. Viniar was stuck explaining why Goldman’ revenue and earnings didn’t rise dramatically in a low volatility, bullish environment.

His answer was tougher competition. JPMorgan, after all, reported a banner year last week. Isn’t Goldman supposed to beat the competition? Viniar offered the now standard-issue comments about regulatory uncertainty, but the regulatory trajectory we’re on right now has been pretty clear for a long time. Any uncertainty relates to the rule-making process, which is indefinite but also predictable. JPMorgan, for one, has adapted nicely.

Goldman Sachs prides itself on reacting quickly to profitable opportunities. But that ability to take advantage of market movements (and other market participants) is a different skill than building new businesses in a more regulated world with a smaller risk appetite. The gap between the old Goldman and what the market currently sees could go a long way to explaining the bank’s current, chastened state. If the best investors have to look forward to is a company adapting to lower profitability and return on equity, that’s a big change.

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