Goldman Sachs Reports Record Earnings, but Financial Sector Far From Out of the Woods

By Jason Simpkins
Managing Editor
Money Morning

Goldman Sachs Group Inc. (NYSE: GS) said yesterday (Tuesday) that it posted record earnings in the second quarter, but that's not necessarily an indication that better days have arrived for the U.S. banking sector.

Goldman's revenue in the three months ended June 26 was $13.8 billion, compared with $9.43 billion in the first quarter and $9.42 billion in the second quarter a year earlier. Net income rose to $3.44 billion, or $4.93 a share.

But analysts say investors should consider those results to be uniquely Goldman's and not indicative of what we'll be seeing from the greater financial sector. Traders said Goldman made several key moves during the quarter. The bank:

  • Played the whipsaw volatility in the global credit markets by trading bonds to generate part of its quarterly fortune.
  • Properly played a similar pattern in U.S. stocks this year, profiting as an early-year plunge reversed course and turned into one of the most-powerful short-term.
  • Capitalized on such commodities as oil, while also trading volatile currencies.
  • And made the most of its position as one of the few remaining heavyweight-investment-banking firms willing and able to service the deal-making market. It reaped lucrative fees from the high-margin business of underwriting stock offerings, which have surged anew this year as other more-troubled financial institutions raced to raise capital.

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

A look at a common risk-taking measure - so-called "value at risk," or VAR - shows that while other investment banks were playing it conservative, Goldman was clearly game to take risks. VAR, an estimate of what an institution could lose in a single day, zoomed by more than 20% in the first quarter and jumped 33% during the second quarter, hitting another record high.

Fixed-income trading remained strong, with second-quarter revenue rising to $6.8 billion from $6.6 billion for the first three months of the year. It was up 186% from the second quarter of 2008.

The bank also saw a massive bump in equity trading where revenue jumped 110% over the past quarter, to $2.2 billion.

However, there is a question about whether or not these profit-making opportunities will disappear in the year's second half - which looks much more challenging. Part of that challenge will be for the company to deal with the heightened group of regulations it is now subject to after having converted from an investment bank to the more-heavily regulated bank-holding company.

JPMorgan Chase & Co. (NYSE: JPM), which reports today (Wednesday), will have a similar challenge, and still tther firms - such as and Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C), which report later this week - continue to struggle under the weight of their toxic assets.

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