Goldman Sachs Earnings Easily Surpass Expectations

By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, July 15, 2009

Goldman Sachs yesterday reported the largest quarterly profit in its history as a public company, $3.44 billion between April and June, as the decimation of its Wall Street rivals allowed the investment bank to romp across the financial landscape, buying low and selling high.

The New York firm is only months removed from a federal rescue that included emergency approval to become a bank holding company, $10 billion in direct federal aid and help to borrow billions more to finance its operations. But Goldman's earnings of $4.93 a share, up from $4.58 during the comparable period last year, made clear that the company has emerged stronger than other survivors, allowing it to seize opportunities in the aftermath of the crisis.

The results may cheer investors, offering further evidence that the strongest financial companies can once again be trusted to generate massive profit. Goldman's stock closed basically flat yesterday at $149.66, but its share price has climbed 77 percent this year.

Goldman's success also risks a political backlash, as the company is now on track to pay record bonuses in the midst of a recession that many Americans -- including President Obama -- have blamed in part on Wall Street's lavish pay practices. Goldman said yesterday that it set aside 48 percent of its total revenue, or $6.65 billion, to reward employees for the company's performance. That share is the same as Goldman set aside in 2007, before the crisis.

David Viniar, the company's chief financial officer, said the actual payments would be adjusted to reflect the company's annual results.

"If we don't perform well, we'll reduce compensation levels," Viniar said. "If we do perform well, our employees will be rewarded appropriately."

The success also may renew questions about the government's role in the company's fortunes. Goldman Sachs last month repaid its $10 billion in federal aid, but it has not disclosed to what extent it continues to rely on other federal rescue programs, such as borrowing from the Federal Reserve.

Goldman reported revenue of $13.8 billion in the second quarter, up from $9.42 billion during the comparable period last year. More than three-quarters of that revenue came from the basic business of buying and selling financial instruments such as mortgage-backed securities, corporate bonds and derivatives. Viniar said the company was making unusually large returns in what he described as "plain-vanilla transactions" because of a relative dearth of competition.

Major rivals such as Lehman Brothers and Bear Stearns have collapsed, while others, such as Citigroup and Morgan Stanley, are badly weakened.

Goldman also has the strength and appetite to take larger risks than its weakened rivals. The company said its "value at risk," the amount it estimates its trading operations could lose in a single day, averaged $245 million during the quarter, up from $182 million during the same period last year.

There were areas of weakness. Goldman recorded a large loss in its commercial real estate portfolio, an emerging problem area that is expected to hit commercial banks even harder. And Goldman's high-profile business of advising companies on merger and acquisitions had a quiet quarter.

Other major banks report earnings later this week, including J.P. Morgan Chase on Thursday and Bank of America and Citigroup on Friday.

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