Bailout

Goldman Sachs starts looking human

By Felix Salmon

Steve Eder reports on Goldman’s earnings:

Second-quarter net income was hurt by several one-time charges, including a $550 million settlement of civil fraud charges brought by the Securities and Exchange Commission and a $600 million expense related to a UK tax on bank executive bonuses.

But even stripping out those costs, Goldman’s return on equity, a measure of the bank’s ability to squeeze profits out of shareholders’ money, was just 9.5 percent. Over the prior four quarters, the average was close to 25 percent…

The bank said client activity fell in the second quarter, particularly in May and June. It blamed worry about global growth rather than client concerns about the SEC civil fraud charges.

As Paul Murphy says, it’s “kinda sad, really” that Goldman felt the need to include a line showing “Net earnings applicable to common shareholders, excluding the impact of UK bank payroll tax and SEC settlement”. It’s as though Goldman feels the need to try to spin its results, rather than simply taking its lumps as they come and quietly making obscene amounts of money.

But of course Goldman didn’t make obscene amounts of money this quarter — its earnings fell a whopping 82%, and it seems to be pulling back the reins on its cash-cow traders.

So why is Goldman, of all banks, pointing its finger at “worry about global growth”? That’s the kind of nebulous and meaningless concept that lazy journalists fall back on when they need a reason why the stock market fell today and can’t find a good one. It’s not the kind of thing which accounts for a fall of well over $2 billion in a bank’s quarterly earnings. Think about it this way: if Goldman’s earnings went up by $2 billion in one quarter, would they ever credit “optimism about global growth”?

This quarter, at least, Goldman is just another bank: it’s not special any more. A couple more quarters like this, and it’ll lose the premium it’s still trading at. And a couple of quarters after that, it’ll stop being able to hire anyone it likes. But for the time being, this is just one bad quarter. You can be sure that Lloyd Blankfein and David Viniar are going to do everything they can to avoid a second one like this.

Full post as published by Macroprudential on July 20, 2010 (boomark / email).