Goldman Posts Profit, Moves to Repay Rescue Money
Tuesday, April 14, 2009
NEW YORK, April 13 -- Goldman Sachs announced Monday that it made $1.81 billion in profit during the first quarter, far more than analysts had expected, and planned to raise $5 billion to repay taxpayer bailout funds.
Goldman, which received $10 billion in federal rescue funds last fall, said it would use money from the stock sale to help repay the full amount of the government investment "if permitted by our supervisors and if supported by the results of the stress assessment." The stress testing of 19 large banks by the government is scheduled to be completed later this month, and Goldman is expected to pass.
While six smaller banks have already returned federal funds, Goldman's move to exit from the Troubled Assets Relief Program would put pressure on other large banks to follow suit, threatening to diminish the government's efforts to stabilize the financial system and support new lending to consumers and businesses.
"What is the rational move of every other CEO? They're going to say, 'I have to pay back my TARP money, too,' " said Brad Hintz, an analyst at Bernstein Research. "What is in the interest of Goldman and its shareholders and the best interest of the broader financial services world may not be the same thing."
Federal officials are concerned that healthy banks, by returning government money, could put pressure on less healthy firms to do the same instead of focusing on conserving resources. Officials, including banking regulators, also worry that the market may lose confidence in banks that are unable to repay the money, further damaging their prospects.
"The market's going to finally know who needed [the government funds] and who didn't," said Gerard Cassidy, a banking analyst at RBC Capital Markets.
At a White House meeting two weeks ago, President Obama urged the chief executives of large banks to stay in the program, according to a source who spoke on condition of anonymity because of the sensitivity of the matter.
In an attempt at levity at the meeting, J.P. Morgan Chase chief executive Jamie Dimon presented Treasury Secretary Timothy F. Geithner with a fake check, according to a person who was briefed on the gathering. Geithner looked at it and, without smiling, handed it back to Dimon.
In reporting earnings after the stock market closed on Monday, Goldman said its first-quarter profit was $1.81 billion, or a net figure of $1.66 billion after accounting for $155 million in preferred stock dividends. The earnings come to $3.39 a share, compared with $3.23 a share, or $1.5 billion, in the first quarter of last year. The latest profit figure was more than double the roughly $1.60 a share that analysts had been expecting. The earnings reverse a net loss of $2.12 billion in the final quarter of last year, the first quarter that the firm had been in the red since going public a decade ago.
Despite cutting its workforce by 7 percent since the end of November, compensation and benefits expenses for the quarter rose 18 percent to $4.7 billion from a year ago. Chairman and chief executive Lloyd Blankfein's pay for 2008 dropped to $1.1 million from $70 million, a Wall Street record, in 2007.
The strong performance was driven by a surge in trading revenue, particularly in fixed income, currencies and commodities operations, where revenue doubled from a year earlier to make up for write-downs that continued in hard-to-value assets such as mortgage securities. Goldman posted declining revenue in every other major part of its business including asset-management, financial advisory and investment banking.
Goldman's results come on the heels of a Wells Fargo announcement last week that it would post better-than-expected first-quarter results, which gave a lift to shares of financial-services companies.
But on Monday, some analysts warned against reading too much into those results, noting that both banks were boosted, at least in part, by divisions and circumstances that do not apply to many traditional banks.
Several analysts said Monday that Goldman should not have problems raising capital and would be able to come up with the rest of the funds in a variety of ways, such as shrinking its balance sheet or raising long-term debt.