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Goldman Sachs ends difficult year with 52 percent earnings decline in 4th quarter

By David S. Hilzenrath
Washington Post Staff Writer
Friday, January 21, 2011; 10:41 PM

For Wall Street powerhouse Goldman Sachs, a year that included a $550 million settlement with federal regulators over fraud charges and a public shaming before a Senate committee ended on a financially humbling note.

The firm reported Wednesday that its fourth-quarter earnings declined by 52 percent to $2.4 billion, from $4.9 billion in the comparable period a year earlier. Investors punished Goldman's stock, which fell 4.7 percent.

The decline in Goldman's bottom line was all the more striking because it contrasted with results at some other big financial firms, such as Wells Fargo, which on Wednesday reported a 21 percent increase in profits during the fourth quarter, and U.S. Bancorp, which reported a 59 percent increase.

In recent days, J.P. Morgan Chase reported a 47 percent increase, and Citigroup, formerly a major money loser that required a dramatic federal rescue, reported it had swung sharply to a profit.

As the financial sector continued to climb out of a historic hole, the numbers reflected a divide between Wall Street and Main Street.

Goldman, an investment bank that has little involvement in retail banking, fell behind as improvements in the broader economy lifted financial firms with more of a Main Street focus.

The fourth quarter was tough on Goldman's Wall Street business, from trading bonds, currencies and commodities to underwriting securities.

But 2010 ended on an upbeat note for conventional banks as the dead weight of bad loans became less of a burden. That meant they had to set aside less additional money to cover expected losses or could draw down funds previously put in reserve.

"The traditional banks were able to put up numbers that were in line with expectations and were favorably impacted by the economy," said analyst Gerard S. Cassidy of RBC Capital Markets. In contrast, "Goldman's not a bank," Cassidy said.

Christopher Whalen of Institutional Risk Analytics agreed, saying that commercial banks "live and die" based on their lending business. "Goldman's all about trading and investment banking," he said.

Goldman's setbacks involved areas that had been its strong suits.

Investment banking revenue for the quarter was down by 10 percent from a year earlier. In its underwriting business, the firm cited "a decline in client activity." Revenue from "institutional client services," which include helping clients trade stocks, bonds, currencies, and commodities, was down by 31 percent.

J.P. Morgan Chase last week reported that net income from its investment banking business was down by 21 percent.

But J.P. Morgan Chase scored strongly in other areas. Its retail financial services business swung to a profit of $708 million from a loss of $399 million during the same period a year earlier, largely because the bank reduced its provision for credit losses by 42 percent, to less than $2.5 billion from more than $4.2 billion. Similarly, J.P. Morgan's credit card business swung to a profit of $1.3 billion from a loss of $306 million, mainly because it cut its provision for credit losses to $671 million from $4.2 billion.

Wells Fargo reported a $3 billion provision for credit losses, down 49 percent from $5.9 billion a year earlier.

U.S. Bancorp reported that, for the fifth consecutive quarter, it reduced the amount set aside for credit losses.

Addressing the bad publicity Goldman received last year, spokesman Michael Duvally pointed to a ranking from Thomson Reuters showing that his firm was the top mergers-and-acquisitions adviser in 2010. He said the ranking shows that "our clients still view us as a trusted adviser."

Goldman faced a challenging period after the Securities and Exchange Commission filed fraud charges against the firm in April alleging it sold investors a subprime-mortgage investment that was secretly designed to lose value. In July, Goldman agreed to pay $550 million to settle the charges without admitting any wrongdoing. The firm agreed to express "regret" for including "incomplete information" in marketing materials touting the investment to clients.

In the spring, the company's executives also endured an 11-hour excoriation by a Senate panel examining the roots of the financial crisis.

Analyst Shannon Stemm of the brokerage Edward Jones said Wednesday she didn't think Goldman's results were affected by the embarrassments of the past year.

"They're good at what they do and their clients will continue to use them," she said.

The last word on the fourth quarter is not in. Morgan Stanley is scheduled to issue its results Thursday, and Bank of America will follow Friday.

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