Goldman's $3.46-billion profit does not dispel heat

Share

Even dogged by allegations of fraud, Goldman Sachs Group Inc. is still the powerhouse of Wall Street when it comes to profits.

The firm earned $3.46-billion (U.S.) in the first three months of this year, nearly double what it earned in the same period in 2009.

That's even better than analysts expected, thanks largely to surging revenue from its trading business.

Almost any other time, such stellar earnings would have buoyed Goldman's shares and allowed top executives to take a victory lap. Instead, they were grilled on a morning conference call over the civil fraud charges unveiled last week by the U.S. Securities and Exchange Commission, which accused the firm of hiding key information from clients on a complex mortgage-related investment.

Investors remained rattled by the allegations. On a day when the broader stock market edged higher, Goldman's shares finished the day down 2 per cent.

Since the SEC filed its charges, Goldman's stock price has dropped 13 per cent.

Britain's financial regulator said on Tuesday that it is launching a formal probe of Goldman in response to the SEC accusations. Germany has already sought further information on the charges. Banks in Germany and Britain ended up losing nearly $1-billion on the doomed transaction at the centre of the allegations, dubbed "Abacus 2007-AC1."

U.S. regulators say Goldman failed to tell investors that another client, the hedge fund Paulson & Co., helped shape the transaction because it wanted to place a bet on the deal's demise. Goldman has vigorously denied misleading investors.

Goldman faces an "uphill battle" in fighting the SEC charges and potentially other related lawsuits, Douglas Sipkin, an analyst at Ticonderoga Securities, wrote in a note to clients. However, its business is in great shape, he said, and "we believe fundamentals should prevail over time."

Goldman's strong showing in the first quarter was the product of an improving economy and robust customer activity, Lloyd Blankfein, the firm's CEO, said in a statement. He mentioned the SEC firestorm only indirectly, noting that "in light of recent events involving the firm, we appreciate the support of clients and shareholders." In keeping with company tradition, he did not participate in the call.

Mindful of the highly charged environment surrounding Wall Street bonuses, Goldman set aside a smaller portion of its revenue for employee compensation compared with a year earlier. While the firm will pay out a whopping $5.5-billion in compensation, that represents 43 per cent of its revenue, the lowest ratio ever for the first three months of a year.

While the Goldman of the public imagination tends to be known for its investment bankers who offer discreet advice to companies mulling an acquisition or stock offering, its fortune is increasingly tied to its role as a middleman in financial markets.

Goldman executes trades for its clients in exchange for a small fee, or "spread," but also places wagers on its own account, known as "proprietary trading." Its legions of traders oversee the buying and selling of everything from oil futures to bonds to stock options to the British pound.

In the first quarter of this year, trading in currencies, commodities, and fixed-income products produced revenue of $7.39-billion, or 60 per cent of the total. Such revenue increased 43 per cent from a year earlier, and up 60 per cent from the last three months of 2009. Other banks have also seen healthy proceeds from trading this year.

On a conference call yesterday morning, Goldman's chief financial officer was joined by one of its top in-house lawyers. For over an hour, analysts peppered both executives with questions that focused more on the SEC charges than the quarterly results.

The timeline for resolving the case is "totally unknown," Greg Palm, Goldman's counsel, said on the call. "It will just either take a lot of time, a little time, but we just don't know."