Tags: Banking, Don Miller, Glass-Steagall Act, Goldman Sachs, Regulatory Reform

Goldman's Earnings Call Overshadowed by Obama's Glass-Steagall Revival

By , Contributing Writer, Money Morning •

Goldman Sachs Group Inc. (NYSE: GS) yesterday (Thursday) reported blowout fourth-quarter earnings after dramatically reducing compensation. However, that earnings call was overshadowed by U.S. President Barack Obama's announcement that he will effectively restore some provisions of the Depression-era Glass-Steagall Act.

Obama's plan would prohibit banks from running proprietary trading operations solely for their own profit and sponsoring hedge funds and private equity funds. It also proposes expanding a 10% market-share cap on deposits to include other liabilities such as non-deposit funding to restrict growth and consolidation.

"While the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near collapse," Obama said at the White House. "Never again will the American taxpayer be held hostage by a bank that is too big to fail."

However, many analysts believe the new regulations will have an adverse effect.

The announcement comes fresh on the heels of Obama's decision to levee at least $90 billion in fees on the largest financial institutions. But unlike a fee that can easily be paid, a ban on proprietary trading will fundamentally change the business models and operations of the largest U.S. financial firms - particularly Goldman Sachs, which generated about $4.5 billion from prop trading last year.

Bank of America Corp (NYSE: BAC), Citigroup Inc. (NYSE: C), and JPMorgan Chase & Co (NYSE: JPM) would all be negatively affected.

It's pretty scary what's going on," Michael Hecht, an analyst at JMP Securities, told The Wall Street Journal. A prop-trading ban "would clearly put pressure on these companies' ability to do business."

Shares of Goldman Sachs yesterday fell $6.92, or 4.12%, to close at $160.87. BofA stock fell 6.19%, Morgan Stanley dropped 4.21%, and JPMorgan fell 6.59%.

Goldman's Blowout Fourth Quarter

Goldman far exceeded Wall Street expectations by posting a profit of $4.95 billion, or $8.20 a share for the quarter.  The results trounced the $5.20 estimate of analysts surveyed by Thomson Reuters by a whopping 57%.

The fourth quarter results showed massive improvement from the year-earlier period when Goldman had a loss of $2.29 billion, or $4.97 a share, on negative revenue of $1.58 billion. 

The impressive profits for 2009 put further distance between Goldman and its rivals, many of which have posted results reflecting their struggles to emerge from the credit crisis.  The fourth quarter showed Goldman has taken on more risk and grabbed market share while its competitors are still in recovery mode.

A key factor in the turnaround was Goldman's drastic change of course on pay. The company set aside nothing for compensation in the fourth quarter, and gave $500 million to charity instead.

Goldman's compensation expense was $16.2 billion in 2009 as the firm set aside 35.8% of revenue to pay workers, the lowest proportion since the firm went public in 1999.

The strong results, "as well as recognition of the broader environment, resulted in our lowest ever compensation to net revenues ratio," said Goldman Sachs Chairman and Chief Executive Lloyd C. Blankfein.

However, the amount is still enough to pay each of the bank's 32,500 employees $498,246. By comparison, average pay a year earlier was $316,928, down from a record $661,490 in 2007.

"The low compensation ratio is in response to political pressure," Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati told Reuters. "Goldman Sachs is not a banking or financial story now, it's a political story. Obama wants to make financial companies utilities, and they're trying to install Glass Steagall-lite."

Still, others said the move is unlikely to appease politicians, labor leaders and some shareholders.

"It's still a really big number," Jon Fisher, who helps manage $18.25 billion as a portfolio manager at Fifth Third Asset Management in Minneapolis, told Bloomberg News before the earnings release. "At the end of the day that has a shock factor and gets people's ire up and really irritates politicians."

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