Goldman's earnings plummeted 82% in the second quarter, hammered by the investment bank's settlement of Securities and Exchange Commission (SEC) fraud allegations and the U.K. tax on bank executive bonuses.
Strong trading and bond underwriting had bolstered the company's first-quarter results. But markets began to gyrate in April, and investor nervousness increased after the "flash crash" in May. Volatility has continued to rock the markets throughout the summer with investors' ongoing concerns about economies in Europe and fears that the U.S. recovery might be stalling.
Shares of some of Goldman Sachs's biggest rivals fell last week after they reported revenue that was lower than investors predicted as their investment-banking results declined sharply from year-earlier levels.
JPMorgan Chase & Co.'s (NYSE: JPM) second-quarter net revenue dropped 9% from the first quarter as sales at the investment-bank unit slid 24%. Bank of America Corp. (NYSE: BAC) turned in unexpectedly poor results as revenue fell 9% after global banking and trading results tumbled 38%. Citigroup Inc. (NYSE: C) chimed in last week by posting an earnings drop of 37% from the same quarter last year, hurt by lower revenue in its investment banking business.
"It was a pretty slow quarter," Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $800 million including shares of JPMorgan and BofA told Bloomberg News. "In the first quarter they made a lot of money on the trading side of things and this quarter they did not."
Last week, Goldman settled a civil-fraud complaint with the SEC by agreeing to pay $550 million. The prestigious bank settled the complaint without admitting or denying charges that it duped clients by selling mortgage securities that were secretly designed by a hedge-fund firm to cash in on the housing market's collapse.
Goldman also laid out $600 million during the second quarter to comply with Britain's recently passed bonus-tax law on bankers.
Goldman set aside $9.3 billion to pay each of its 34,100 employees in the first half of the year an average of $272,580 per person. That compares with $11.4 billion in the first half of 2009, or $364,134 for each of the firm's employees at the time. That dropped the ratio of compensation to net revenue to 43% in the first half of 2010 from 49% in the first half of 2009.
Goldman said "substantially all" of the two charges are non-deductible for tax purposes
The bank's profits plunged to $613 million, or 78 cents per share, while revenue slid 36% to $8.84 billion. Both figures were the lowest since the fourth quarter of 2008. The average estimate of 21 analysts surveyed by Bloomberg was for earnings of $1.99 per share.
Even after discounting the $1.15 billion in special charges related to the fraud settlement and bonus tax, the bank would have posted a profit of $2.75 per share, down from $4.93 a year earlier.
Investors are concerned about the impact that new federal regulations will have on banks' ability to generate profits from trading.
Chief Financial Officer David Viniar said during a conference call with reporters that there is no way to estimate the impact of the new regulations on revenue or profits. It could take more than a year before Goldman can assess their potential impact, he added.
But the impact of the regulations won't really matter, Viniar said.
"Our pay at the end of the year will be based on our performance," Viniar said, The Wall Street Journal reported.
Analysts say weakness in the broader economy is still casting a cloud over the market. Economic indicators point toward a continued slowdown, which could keep customers and institutions from trading.
"Where are they [banks] going to grow with the economy we have?" Alan Villalon, a senior research analyst at First American Funds, asked the Associated Press.
Still, Goldman's stock rallied yesterday (Tuesday) in trading on the New York Stock Exchange.
Goldman shares closed at $148.91 a share, up $3.23, or 2.22%, after retreating earlier in the session.
"People have gotten overly pessimistic on Goldman," Charles Peabody, an analyst at Portales Partners LLC, told Bloomberg before the earnings were released. "We don't believe they've lost big chunks of their client base, and we do believe in their risk-management capabilities."
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