The shine is coming off Goldman Sachs (GS), long the country’s — and arguably the world’s — top investment bank. The financial titan last year had to pay $550 million in fines for betting against a mortgage-related investment product that it had created for clients. The customers, principally two European banks, were left holding the bag, while Goldman and hedge fund mogul John Paulson, its ally in setting up the investments, cleaned up.
Then, in April of this year, a Congressional report stated that Goldman may have misled investors and profited from the collapse of the mortgage market at the expense of its clients during the recent credit meltdown.
In May, the Commodity Futures Trading Commission (CFTC) lodged a fraud complaint against Goldman and in June the Manhattan District Attorney’s office subpoenaed Goldman for information about its conduct during the crisis.
But that’s not the end of the bad news. In July, Goldman reported a plunge in earnings for the second quarter. Adding insult to injury, the poor performance stemmed from weakness in Goldman’s traditional powerhouse — the trading desk.
Overall, profit fell 38 percent in the quarter from a year earlier, excluding one-time costs from the 2010 numbers. Revenue from fixed income, currency, and commodity trading plunged 53 percent to $1.6 billion in the second quarter, far worse than analysts predicted.
Clients stayed away from volatile markets, and Goldman reined in its risk profile. The effect was huge since trading has accounted for between 35 percent and 48 percent of the firm’s revenue total in recent years. That number dropped to 22 percent for the second quarter.
"Without sugarcoating it, we did underperform during the quarter," Goldman CFO David Viniar said in the earnings conference call. "Maybe we made a bad decision in taking too little risk.”
Star bank analyst Richard Bove of Rochdale Securities hasn’t sugarcoated it either. The CFTC action and the insider trading conviction of former hedge fund heavy Raj Rajaratnam led Bove in May to cut his rating on Goldman shares to sell from neutral. The company next reports on or about Oct. 20.
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