Goldman Sachs starts looking human

By Felix Salmon
July 20, 2010
Steve Eder reports on Goldman's earnings:

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Steve Eder reports on Goldman’s earnings:

Second-quarter net income was hurt by several one-time charges, including a $550 million settlement of civil fraud charges brought by the Securities and Exchange Commission and a $600 million expense related to a UK tax on bank executive bonuses.

But even stripping out those costs, Goldman’s return on equity, a measure of the bank’s ability to squeeze profits out of shareholders’ money, was just 9.5 percent. Over the prior four quarters, the average was close to 25 percent…

The bank said client activity fell in the second quarter, particularly in May and June. It blamed worry about global growth rather than client concerns about the SEC civil fraud charges.

As Paul Murphy says, it’s “kinda sad, really” that Goldman felt the need to include a line showing “Net earnings applicable to common shareholders, excluding the impact of UK bank payroll tax and SEC settlement”. It’s as though Goldman feels the need to try to spin its results, rather than simply taking its lumps as they come and quietly making obscene amounts of money.

But of course Goldman didn’t make obscene amounts of money this quarter — its earnings fell a whopping 82%, and it seems to be pulling back the reins on its cash-cow traders.

So why is Goldman, of all banks, pointing its finger at “worry about global growth”? That’s the kind of nebulous and meaningless concept that lazy journalists fall back on when they need a reason why the stock market fell today and can’t find a good one. It’s not the kind of thing which accounts for a fall of well over $2 billion in a bank’s quarterly earnings. Think about it this way: if Goldman’s earnings went up by $2 billion in one quarter, would they ever credit “optimism about global growth”?

This quarter, at least, Goldman is just another bank: it’s not special any more. A couple more quarters like this, and it’ll lose the premium it’s still trading at. And a couple of quarters after that, it’ll stop being able to hire anyone it likes. But for the time being, this is just one bad quarter. You can be sure that Lloyd Blankfein and David Viniar are going to do everything they can to avoid a second one like this.

5 comments

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“Nebulous and meaningless” is mother’s milk to public corporations’ investor relations departments, Felix, as is spin. Why should any of us be surprised?

After all, even the evil vampire quid Goldman Sachs puts on its gold-plated trousers only three legs at a time.

Posted by EpicureanDeal | Report as abusive

“quid” = “squid”

Posted by EpicureanDeal | Report as abusive

How deep shall we indulge the conspiracy nutters? Maybe the earnings report was doctored to be terribly low to buy them better PR and really get them off the radar? Don’t think they could pull that off, but I’ve certainly heard it a couple times today already…

Posted by CDNrebel | Report as abusive

“A couple more quarters like this, and it’ll lose the premium it’s still trading at.”

This has happened already. If you look at both trailing and forward p/e, Goldman no longer trades at a premium relative to its peers. In fact, Goldman now trades at a DISCOUNT to its peers. To a large extent the mystique is gone.

Posted by offpeak34 | Report as abusive

According to the Public Version of the SEC investigation of Bernie Madoff, his average return on equity was 15.5% a year.

According to the New York Times, GS had its best year in 2007 at 38% return on equity. Immediately before the economic collapse “from November 2007 to September 2009, the Wall Street bank’s tangible common equity swelled by 74 percent.”

Think about that. The already immensely powerful and wealthy bank nearly doubled its wealth during that time period.

The guys working for GS are smart, but what they were doing to generate that kind of return of equity either is illegal or it should have been illegal.

What happened to that sudden burst of wealth? In 2007, did GS start offering Certificate of Deposit at interest rates approaching 38%? Did pension funds on deposit in GS see a 74% increase increase in value from November 2007 to September 2009?

Of course not.

That incredible burst of wealth, minus about $16 Billion a year in bonuses, was never distributed even somewhat fairly.

GS is indeed a private business, yet it operates under a federal charter and under federal laws and supposedly under federal oversight. Countries need financial systems that serve the needs of its businesses and its citizens.

However, GS has demonstrated that its prime directive is self enrichment, even if it comes at the expense of the businesses and American citizens banks are supposed to be serving.

What was the Senate Committee on Banking, Housing and Urban Affairs and the House Financial Services Committee doing during that time period to make sure the public interest was protected? An equally important question: What did those committees do in the preceding years undo post-depression reforms?

Most importantly, here is the question that I will keep asking until I hear a plausible answer:

How is it that a bunch of silk-suited wheelers and dealers in New York and Washington, DC brought the largest economy on the planet to its knees…

and nobody went to jail but Bernie Madoff?

Posted by breezinthru | Report as abusive