Goldman Profits in Stressed Economy
Wednesday, June 18, 2008
Goldman Sachs yesterday reported that it earned $2.09 billion last quarter despite the financial crisis buffeting other Wall Street firms, but the figure was down from the corresponding period a year earlier, showing that even the world's largest investment bank is not immune to the upheaval in global credit markets.
Goldman's announcement came in tandem with new data that further detailed the difficulties squeezing American businesses and consumers. Wholesale prices rose 1.4 percent in May, the Labor Department said, considerably more than analysts had expected, driven by sharp increases in prices for gasoline and other fuel.
The persistent credit crisis on Wall Street coupled with rising inflation for businesses and consumers pose a double challenge to the nation's economy, and the latest numbers sent shivers across the financial markets. Major stock indicators were down, with the Dow Jones industrial average falling 109 points, or 0.89 percent, to 12,160.30. The Standard & Poor's 500-stock index, a broader measure, dropped 9 points, or 0.68 percent, to 1350.93.
"We continue to operate in a volatile and uncertain environment," Goldman Sachs Chief Financial Officer David Viniar said during a morning conference call about the figures.
Still, Goldman has so far escaped the worst of the subprime mortgage crisis that has pounded other investment banks, such as Bear Stearns, which collapsed earlier this year, and Lehman Brothers, which reported a $2.87 billion loss a day before Goldman's announcement.
Goldman's profit fell from $2.33 billion a year ago. Earnings per common share were $4.58, down from $4.93. Revenue for the second quarter was $17.64 billion, compared with $20.35 billion.
To some analysts, the profit was a testament to Goldman's superiority.
"Since the crisis came about, they've made about $9 billion," said Peter Nerby, senior vice president of Moody's finance and securities group. "When you think about how much money others have lost during that same four quarters, I think that's a pretty powerful statement."
"I think this past four quarters demonstrates they are different," he added, crediting the firm's risk-management practices, internal controls and quick reaction time.
Others weren't so upbeat.
"They're all doing the same stuff," said Peter Schiff, president of Euro Pacific Capital, a Connecticut brokerage firm. "Goldman's not doing it so completely different from everybody else that they're just going to be immune to all of these problems."
Schiff said he suspected that many of the securities held by Goldman, as well as other Wall Street banks, continue to be overvalued and that further write-downs were coming. "I think the severity of that is going to become evident over the next few years," he said.
Warning of more storms ahead in the financial sector, Goldman's analysts predicted yesterday that banks would have to raise $65 billion of new capital to cover losses from the mortgage crisis.
Although financial companies have been hit particularly hard over the past year, the economic indicators released yesterday underscored how troubles were continuing to ripple across other sectors.
The nation's factories had another rough month, as industrial production fell 0.2 percent in May, the Federal Reserve said yesterday. Coming off of an even weaker April, the report is further confirmation of the battering that the industrial sector is enduring, as rising exports fail to make up for a weak U.S. economy.
Much of the decline, a key indicator of whether the economy is in recession, was from a steep drop in output by utilities. Production of cars and trucks rose, but output by utilities, machinery makers, and a broad range of other industrial firms were weak.
And the number of new housing units started dropped 3.3 percent in May, the Census Bureau said, to an annual rate of 975,000.
Meanwhile, businesses are being squeezed by rising prices. They are reluctant to raise prices, fearful of losing customers during a weak economy. But the cost of their raw materials has soared, as illustrated by yesterday's numbers out of the Labor Department.