Goldman Net Beats Estimates on Trading, Investments (Update1)

By Christine Harper
Oct. 15 (Bloomberg) -- Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, reported third-quarter earnings that exceeded analysts’ estimates on trading gains and investments with the company’s own money.
Net income more than doubled to $3.19 billion, or $5.25 a share, in the three months ended Sept. 25, from $845 million, or
$1.81 a share, in last year’s third quarter, the New York-based company said today in a statement. The average estimate of 22 analysts surveyed by Bloomberg was for $4.18 a share, with forecasts ranging from $3.48 to $4.75.
Lloyd Blankfein, Goldman Sachs’s chairman and chief executive officer, stuck with the firm’s focus on advising, trading and investing after converting to a bank last year to win the Federal Reserve’s backing. Increased risk-taking paid off, and the company’s stock climbed 128 percent this year, the best performance among the 15 biggest U.S. banks.
"Fundamentally everything’s fine and is probably going to remain strong into next spring," Jon Fisher, a fund manager at Fifth Third Asset Management in Minneapolis, which has more than
$19 billion under management including Goldman Sachs stock, said before the results. "The risk really is just on the sentiment
side: political fallout or just expectations getting too bullish in the short term."
Earnings declined 7.2 percent from the second quarter’s record $3.44 billion. Shares of the company fell to $188.49 in New York at 7:28 a.m., from $192.28 at the close yesterday.

Compensation Costs

Compensation, the company’s biggest single expense, accounted for 43 percent of revenue to total $5.35 billion in the quarter. So far this year, Goldman Sachs has set aside $16.7 billion to pay employees, compared with $11.4 billion after the first three quarters of last year.
The prospect of record year-end bonus payments at Goldman Sachs this year has sparked criticism from lawmakers even after the firm repaid $10 billion it received from the U.S. Treasury last year plus dividends. The company has also benefited from Federal Reserve support, government backing on about $30 billion of debt, and was one of the largest recipients of funds from the U.S. bailout of American International Group Inc.
Goldman Sachs’s "biggest challenge and the thing that seems to get the most press is how much they put aside for comp expense," said Michael Hecht, an analyst at JMP Securities LLC in New York, who rates the stock "market outperform." "A year ago we were talking about whether they would survive and now they just have too much damn money."

JPMorgan, Citigroup

Goldman Sachs’s results come a day after JPMorgan Chase & Co., the second-biggest U.S. bank by assets, said its profit surged sevenfold, to $3.59 billion, on higher investment-banking revenue. Citigroup Inc. will report earnings later this morning.
Eighteen analysts surveyed by Bloomberg News estimated a loss of
29 cents a share.
"Although the world continues to face serious economic challenges, we are seeing improving conditions and evidence of stabilization, even growth, across a number of sectors,"
Blankfein, 55, said in the statement.
Third-quarter revenue at Goldman Sachs doubled to $12.4 billion from $6.04 billion last year. Value-at-risk, a measure of how much the firm estimates it could lose in a single day of trading, fell to $208 million from a record $245 million in the second quarter.
Revenue from fixed-income, currency and commodity trading, or FICC, surged to $5.99 billion from $1.60 billion in last year’s third quarter. Equities revenue rose to $2.78 billion from $1.56 billion.

Making Money

"A lot of us struggle with just the size of the FICC line and understanding exactly how they make as much money as they do," said JMP Securities’ Hecht.
Principal investments, which includes the firm’s stakes in companies such as Industrial & Commercial Bank of China Ltd., recorded a gain of $1.26 billion, compared with a $453 million net loss a year earlier.
Goldman Sachs advised on $33.8 billion of takeovers completed during the quarter, compared with $232.9 billion in last year’s third quarter, Bloomberg data show. The firm managed
$11.7 billion of equity and equity-linked offerings in the period, compared with $10.2 billion last year, the data show.
Investment-banking revenue, which includes fees from advising on takeovers and underwriting stocks and bonds, fell to
$899 million from $1.29 billion in the third quarter of last year. The company, which has held the top spot among advisers on announced mergers and acquisitions for each of the last eight years, ranks second this year after Morgan Stanley, according to data compiled by Bloomberg.

IPOs, M&A

Revenue from initial public offerings and from mergers and acquisitions will probably continue to climb in coming months after stock market gains this year, said Fifth Third’s Fisher.
"The market’s going to finish the year pretty high so the IPO pace of things should pick up gradually into next year and M&A activity I think is going to pick up into next year,"
Fisher said.
Goldman Sachs’s annualized return on common equity, a measure of how well the firm reinvests earnings, was 21.4 percent in the quarter compared with 7.7 percent in the third quarter of 2008. Book value per share grew to $110.75 from
$106.41 at the end of June.
"What seems to drive the stock is growth of book value,"
said JMP Securities’ Hecht. "The stock’s going to continue to drift higher especially because I think their results are going to look pretty good, relative to others."
Goldman Sachs’s third quarter ended on Aug. 29 last year because the company’s fiscal year finished in November. The company changed its fiscal year-end to December after becoming a bank holding company.

Scalpuman wrote:

By Christine Harper
Oct. 15 (Bloomberg) -- Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, reported third-quarter earnings that exceeded analysts’ estimates on trading gains and investments with the company’s own money.
Net income more than doubled to $3.19 billion, or $5.25 a share, in the three months ended Sept. 25, from $845 million, or
$1.81 a share, in last year’s third quarter, the New York-based company said today in a statement. The average estimate of 22 analysts surveyed by Bloomberg was for $4.18 a share, with forecasts ranging from $3.48 to $4.75.
Lloyd Blankfein, Goldman Sachs’s chairman and chief executive officer, stuck with the firm’s focus on advising, trading and investing after converting to a bank last year to win the Federal Reserve’s backing. Increased risk-taking paid off, and the company’s stock climbed 128 percent this year, the best performance among the 15 biggest U.S. banks.
"Fundamentally everything’s fine and is probably going to remain strong into next spring," Jon Fisher, a fund manager at Fifth Third Asset Management in Minneapolis, which has more than
$19 billion under management including Goldman Sachs stock, said before the results. "The risk really is just on the sentiment
side: political fallout or just expectations getting too bullish in the short term."
Earnings declined 7.2 percent from the second quarter’s record $3.44 billion. Shares of the company fell to $188.49 in New York at 7:28 a.m., from $192.28 at the close yesterday.

Compensation Costs

Compensation, the company’s biggest single expense, accounted for 43 percent of revenue to total $5.35 billion in the quarter. So far this year, Goldman Sachs has set aside $16.7 billion to pay employees, compared with $11.4 billion after the first three quarters of last year.
The prospect of record year-end bonus payments at Goldman Sachs this year has sparked criticism from lawmakers even after the firm repaid $10 billion it received from the U.S. Treasury last year plus dividends. The company has also benefited from Federal Reserve support, government backing on about $30 billion of debt, and was one of the largest recipients of funds from the U.S. bailout of American International Group Inc.
Goldman Sachs’s "biggest challenge and the thing that seems to get the most press is how much they put aside for comp expense," said Michael Hecht, an analyst at JMP Securities LLC in New York, who rates the stock "market outperform." "A year ago we were talking about whether they would survive and now they just have too much damn money."

JPMorgan, Citigroup

Goldman Sachs’s results come a day after JPMorgan Chase & Co., the second-biggest U.S. bank by assets, said its profit surged sevenfold, to $3.59 billion, on higher investment-banking revenue. Citigroup Inc. will report earnings later this morning.
Eighteen analysts surveyed by Bloomberg News estimated a loss of
29 cents a share.
"Although the world continues to face serious economic challenges, we are seeing improving conditions and evidence of stabilization, even growth, across a number of sectors,"
Blankfein, 55, said in the statement.
Third-quarter revenue at Goldman Sachs doubled to $12.4 billion from $6.04 billion last year. Value-at-risk, a measure of how much the firm estimates it could lose in a single day of trading, fell to $208 million from a record $245 million in the second quarter.
Revenue from fixed-income, currency and commodity trading, or FICC, surged to $5.99 billion from $1.60 billion in last year’s third quarter. Equities revenue rose to $2.78 billion from $1.56 billion.

Making Money

"A lot of us struggle with just the size of the FICC line and understanding exactly how they make as much money as they do," said JMP Securities’ Hecht.
Principal investments, which includes the firm’s stakes in companies such as Industrial & Commercial Bank of China Ltd., recorded a gain of $1.26 billion, compared with a $453 million net loss a year earlier.
Goldman Sachs advised on $33.8 billion of takeovers completed during the quarter, compared with $232.9 billion in last year’s third quarter, Bloomberg data show. The firm managed
$11.7 billion of equity and equity-linked offerings in the period, compared with $10.2 billion last year, the data show.
Investment-banking revenue, which includes fees from advising on takeovers and underwriting stocks and bonds, fell to
$899 million from $1.29 billion in the third quarter of last year. The company, which has held the top spot among advisers on announced mergers and acquisitions for each of the last eight years, ranks second this year after Morgan Stanley, according to data compiled by Bloomberg.

IPOs, M&A

Revenue from initial public offerings and from mergers and acquisitions will probably continue to climb in coming months after stock market gains this year, said Fifth Third’s Fisher.
"The market’s going to finish the year pretty high so the IPO pace of things should pick up gradually into next year and M&A activity I think is going to pick up into next year,"
Fisher said.
Goldman Sachs’s annualized return on common equity, a measure of how well the firm reinvests earnings, was 21.4 percent in the quarter compared with 7.7 percent in the third quarter of 2008. Book value per share grew to $110.75 from
$106.41 at the end of June.
"What seems to drive the stock is growth of book value,"
said JMP Securities’ Hecht. "The stock’s going to continue to drift higher especially because I think their results are going to look pretty good, relative to others."
Goldman Sachs’s third quarter ended on Aug. 29 last year because the company’s fiscal year finished in November. The company changed its fiscal year-end to December after becoming a bank holding company.

Looks to me as if financial earnings were priced in already. I expected a pullback today after such a huge jump yesteday. Just a buncha heads covering gains.

I read this interesting editorial on a reuters blog. Thoughts?

===================================================================================================
Letting Goldman Roll the Dice
by: Rolfe Winkler October 15, 2009 | about: GS

On this morning’s conference call, David Viniar, Goldman Sachs’ (GS) chief financial officer, emphasized the bank’s valuable social role. His bank made markets and provided credit when other financial players were suffering.

But is Goldman really such an indispensible financial intermediary? One look at the firm’s revenue breakdown shows that it’s more casino than anything else, and some of the markets it makes still put the economy in danger.

With markets recovering and competitors falling away, Goldman’s trading and principal investment revenue through the first nine months of the year was nearly $24 billion, on pace to break the $30 billion record set in 2007.

(Click chart to enlarge in new window)

goldmans-revenue

Goldman, in other words, generates most of its revenue trading its own money and earning vigorish on customer transactions. It’s a hybrid hedge fund and bookie, with an investment bank and asset management business thrown in for good measure.

With that in mind, one is left to wonder whether Goldman was really worth saving last year. What have taxpayers received for the $50 billion worth of cash and guarantees, for giving Goldman access to the Federal Reserve as its lender of last resort?

Saving Goldman was mostly about saving the derivatives market, which is so big and unstable that the death of one counterparty could mean the death of all. With big commercial banks like JPMorgan Chase in deep, saving the derivatives business was as much about protecting depositors and maintaining the integrity of the payment system as it was derivatives themselves.

Many of us didn’t like it — we thought banks like Goldman should have been recapitalized the right way, by wiping out shareholders and forcing subordinated creditors to eat their share of losses. But that ship has sailed. We socialized the risk while privatizing the profit because we were told we had no other choice: The government had to guarantee the biggest banks’ liabilities because they were too unstable to survive bankruptcy or FDIC receivership.

If that’s true, why haven’t we seen any substantial reforms to reduce systemic risk? Congress is kicking around new resolution authority to help resolve failed systemically-important banks. But the goal should be reducing systemic risk to being with. Yet serious reform of the derivatives market — something that would reduce its size significantly — is nowhere on the radar.

Indeed, Goldman’s trading results suggest that market is coming back with a vengeance. It’s playing in very risky markets with a capital structure that remains vulnerable yet is guaranteed by taxpayers.

To Goldman’s credit, they’ve rebuilt their capital levels faster than anyone. Their leverage ratio has fallen from 35 to 16 in less than two years, despite pressure from equity analysts to juice returns by deploying “excess capital”.

But at $50 billion, the bank’s mark-to-myth, or level 3, assets remain as high as its tangible common equity, the cushion it has to absorb losses. And Lehman proved that conventional definitions of capital aren’t worth much when push comes to shove. On Sept. 1, 2008 the bank was “well-capitalized” according to regulatory measures, two weeks later it declared bankruptcy and was showing negative net worth in the tens of billions.

Derivatives have lead to systemic crises every 10 years or so — portfolio insurance in 1987, Long-Term Capital Management in 1998, the global financial crisis a year ago — yet cosmetic changes are all that is ever offered. The frequency and violence of such events prove that more is necessary to rein in these markets.

Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit.

Even as Goldman reported results that reflected in part the resurgence in derivatives, the House Financial Services Committee passed legislation that would increase derivatives regulation. But the bill is riddled with loopholes that Wall Street can easily exploit. A much tougher line is necessary.

You may know that URL : http://www.goldmansachs666.com/
Goldman back in the 90s was highly focused on prop trading, there were 200 prop traders but they reduced dramatically to a few of them. I read recently an interview from Christian Siva-Jothy, the former head of proprietary trading there and star trader in the late 90s : he told about his first day there : to show off in his new job, he put the biggest position on JPY he did so far, 50 million. When his boss saw this, he told him : "you average, good, I like the guys who average and don't put the whole position straight"

According to Siva-Jothy, Propr trading was used by Goldman to support their Franchise when the latter didn't perform well.
It looks like that what happened during the crisis : the franchise was hurt and the business went down, they highlighted their Prop trading capacities.
To me that's just show off (and in some way provocative) and a way to justify their large margins (larger than their competitors even on flow products). I like the "hybrid hedge fund and bookie" comparison in the previous article.

Sauros wrote:

You may know that URL : http://www.goldmansachs666.com/
Goldman back in the 90s was highly focused on prop trading, there were 200 prop traders but they reduced dramatically to a few of them. I read recently an interview from Christian Siva-Jothy, the former head of proprietary trading there and star trader in the late 90s : he told about his first day there : to show off in his new job, he put the biggest position on JPY he did so far, 50 million. When his boss saw this, he told him : "you average, good, I like the guys who average and don't put the whole position straight"

According to Siva-Jothy, Propr trading was used by Goldman to support their Franchise when the latter didn't perform well.
It looks like that what happened during the crisis : the franchise was hurt and the business went down, they highlighted their Prop trading capacities.
To me that's just show off (and in some way provocative) and a way to justify their large margins (larger than their competitors even on flow products). I like the "hybrid hedge fund and bookie" comparison in the previous article.

Wow Best Quote ever! "you average, good, I like the guys who average and don't put the whole position straight" - I see where you are coming from, but did the prop side to well during the crisises when all assets came crashing down? I think thats the point batman is trying to make is that if we get another crash to make the W recovery, can GS hedgie side make up for all the other losses. And will they even be able to avoid losses on the prop side as well?

Snapman wrote:

Wow Best Quote ever! "you average, good, I like the guys who average and don't put the whole position straight" - I see where you are coming from, but did the prop side to well during the crisises when all assets came crashing down? I think thats the point batman is trying to make is that if we get another crash to make the W recovery, can GS hedgie side make up for all the other losses. And will they even be able to avoid losses on the prop side as well?

I found the actual quote :
"I remember my first week on the job, i put on a 50 million deustche mark / Swiss Franc position, which was a fairly sedate cross, I'd been a trader for 4 years at that point and it was the biggest position i'd ever had on in my career. I thought, "I'm going to do it"
I remember the head of trading walking over and asking, "How's it going, Christian-you got anything on ?"
I said proudly, "Yes I'm short 50 Mark Swiss"
He paused, looked at me, and said, "I like a guy who averages into his positions," and walked off.

Commentary by Jonathan Weil
Oct. 22 (Bloomberg) -- Repeat after me: Goldman Sachs is not too big to fail. Goldman Sachs is not too big to fail.
Goldman Sachs is not too big to fail.
Are you laughing yet?
This might be funny, except that Goldman Sachs Group Inc.
wants us to believe it’s true.
Let’s begin with the obvious: Of course Goldman is too big to fail, and of course the government would intervene to prevent Goldman from collapsing if it ever came to that. It’s probably the most important investment bank in the world. There’s a decent chance it could take down the world’s financial system if it ever blew up. It’s the very embodiment of what’s known in government parlance as a "systemically significant" financial institution.
Only two U.S. bank-holding companies, JPMorgan Chase & Co.
and Bank of America Corp., held greater amounts of derivatives than Goldman as of June 30, according to the Office of the Comptroller of the Currency. Citigroup Inc., which would be dead already if it hadn’t been too big, was No. 5 on that list.
Fannie Mae and Freddie Mac also used to say they didn’t have any federal guarantee. Not many people believed them either.
It was against this backdrop that Goldman’s chief financial officer, David Viniar, got on a conference call with reporters last week and said Goldman enjoys no government guarantee. Not even an implicit one, he said.

How to Justify

Viniar’s remarks came after a reporter for the Daily Mail of London, Simon Duke, posed a perfectly reasonable question:
"It seems fairly clear that, post-Lehman, that the U.S.
Treasury’s not going to let any bulge-bracket firms go under,"
Duke began, according to an audio recording of the call. "How can you justify these levels of pay, when you effectively enjoy an implicit guarantee from the U.S. taxpayer?"
The pay Duke was referring to was the $16.7 billion that Goldman has accrued for employee-compensation expenses so far this year. Viniar responded by attacking his question’s premise.
"We’ve heard many people say that, but we certainly don’t operate the company that way," Viniar said. "We operate as an independent financial institution that stands on our own two feet." He didn’t stop there.
"If we felt that we had an implicit guarantee, we would not be holding nearly $170 billion of cash on our balance sheet.
We would not have reduced our balance sheet by $400 billion."
(Actually, the "cash" figure he cited also included certain securities that Goldman considers to be highly liquid.)

What Crisis?

After Duke pressed him further, Viniar turned emphatic. "I don’t believe any of our bondholders think that we have a guarantee, and we don’t think we have a guarantee," he said.
It’s as if last year’s bailouts of everything from the money-market industry to American International Group Inc. never even happened.
Sure, it’s of some comfort that Goldman is down to a measly
$882 billion of assets, or 13.5 times equity. And it’s nice to hear Viniar say Goldman is operating as if it had no federal safety net. To say Goldman doesn’t have one, though, is crazy talk.
Consider what former Federal Reserve Board Chairman Paul Volcker said in a July interview published last month by the Minneapolis Fed’s in-house magazine, the Region.
"Think of the situation with Goldman Sachs," said Volcker, one of President Barack Obama’s economic advisers.
"They’ve had government assistance. They were presumably deemed too big to fail. And at the same time, they have an enormous trading book. They’ve made a lot of money. There’s nothing wrong with making money, but I don’t want them to make money by taking those risks with the support of the taxpayer."

Leading the Polls

Likewise, here’s what Fed Chairman Ben Bernanke told the House Financial Services Committee in July, when asked to estimate how many systemically significant, too-big-to-fail companies there might be.
"A very rough guess would be about 25," he said. While Bernanke didn’t name names, leaving Goldman off that list would make as much sense as a Top 25 college football poll that didn’t include Tim Tebow’s undefeated Florida Gators.
Last spring, Goldman was one of the 19 major banks the Fed picked to undergo its so-called stress tests. Under that program, the government expressly committed to provide additional capital to any bank on the list that needed it and couldn’t raise enough from other investors. That capital would have been convertible into common-equity shares, meaning the government in effect was setting a floor for the banks’ stock prices.

Impossible to Imagine

True, Goldman passed the test, and in June it returned the $10 billion it received last year under the Treasury Department’s Troubled Asset Relief Program. Yet the point
remains: Goldman had a federal safety net. It’s just about impossible to imagine the government wouldn’t provide another lifeline if needed.
Goldman’s bosses obviously are concerned about the criticism they’ve received over the bank’s massive profits and bonus pool this year. Many Americans believe Goldman would have died were it not for last year’s taxpayer bailouts of the banking industry. And a lot of them feel like Goldman owes the country a debt -- of gratitude, if nothing else.
As long as Goldman keeps feeling the need to explain itself, the least it could do is ease up on the hubris. Goldman Sachs doesn’t have an implicit government guarantee?
Give me a break.

our forum needs a "like" button like facebook lol

Snapman wrote:

our forum needs a "like" button like facebook lol

and the scores from silly games like "Sauros has just lost £1,000,000, can you beat him ?"

Sauros wrote:

Snapman wrote:

our forum needs a "like" button like facebook lol

and the scores from silly games like "Sauros has just lost £1,000,000, can you beat him ?"

just sayin