Gold Into Lead Buried In The New York Times

Fall in Revenue at Goldman Sachs Raises Concerns

By SUSANNE CRAIG and PETER EAVIS

Saul Loeb/Agence France-Presse — Getty Images Lloyd Blankfein, the chief of Goldman Sachs, signaled that the resolution of the fiscal impasse would bode well for clients.

 

Updated, 5:53 p.m. | Among Goldman Sachs employees, the chatter started months ago that 2013 was going to be a good bonus year. The Wall Street bank began the year strong, and despite concerns about the economy, its profit doubled over year-ago levels in the second quarter.

These hopes were all but dashed Thursday when the firm announced that revenue in its fixed-income, currency and commodities division, a powerful unit inside the bank that in better years has produced more than 35 percent of Goldman’s entire revenue, dropped 44 percent from year-ago levels. It was the worst quarterly result in fixed income since the fourth quarter of 2008, when the financial crisis was raging.

The poor performance forced the company to cut its way to a decent profit, slashing the amount of money it sets aside for pay and bonuses.

The weakness in this division has led to renewed concerns from analysts and investors about the headwinds that Goldman and other banks are facing in big money-producing areas like the trading of interest rate products and currencies. There is some concern that the pull back is not short term and could be the new normal.

On Thursday, Goldman faced a number of questions on the revenue fall during an unusually long earnings call with analysts. At times, Goldman’s chief financial officer, Harvey M. Schwartz, sounded frustrated.

Analysts pushed, without much success, for more details on the reasons behind the drop in revenue for the unit. They also pressed executives about their expectations for the firm’s return on equity, which effectively measures the profit a bank is able to generate on its capital. That return is hovering around 8 percent on an annualized basis, significantly lower than it has been in previous years, and well below the company’s previously stated goal of 20 percent over time.

“It is a quarter,” Mr. Schwartz reiterated several times on the call.

By slashing what it sets aside for compensation, Goldman was able to post a decent third-quarter profit, despite the revenue weakness. Quarterly earnings came in at $1.52 billion on Thursday, largely flat compared with the period a year earlier.

Its profit of $2.88 a share managed to slightly exceed its performance of $2.85 a share in the third quarter of 2012. And earnings were well ahead of expectations of $2.43 a share, according to analysts polled by Thomson Reuters.

But revenue in the quarter fell about 20 percent, to $6.72 billion, well below analyst forecasts of $7.36 billion. Other core parts of Goldman’s business, and not just fixed income, suffered. Revenue from investing and lending activities was down 18 percent. And investment banking revenue, a core pillar for Goldman, was $1.2 billion, nearly flat from the year-ago period.

Goldman shares fell 2.4 percent Thursday to close at $158.32. In a sliver of good news for investors, the firm increased its dividend by 5 cents, to 55 cents a share.

Goldman disclosed that it set aside $2.38 billion in the quarter to cover payroll and benefits — 35 percent less than it set aside in the same quarter in 2012.

For the first six months of the year, Goldman’s compensation accruals were running $749 million ahead of year-ago levels. Now, it is $544 million below this time last year. The firm also added 600 more employees in the quarter over the previous quarter.

Still, all may not be lost for Goldman employees. The fourth quarter is still ahead, and the company struck a positive tone on the call for its prospects in the short term.

“The third quarter’s results reflected a period of slow client activity,” Lloyd C. Blankfein, Goldman’s chairman and chief executive, said in a statement. “Still, we saw various signs that our clients are prepared to act on significant transactions, and we believe that the firm is well positioned to help our clients accomplish their objectives.”

Banks like Goldman set aside compensation during the year but don’t pay it out until the full year’s earnings are clear.

The firm’s drop in fixed-income revenue wasn’t a total surprise. Analysts had been predicting it for weeks in part because of the turbulence in the bond market, caused by uncertainty about interest rates.

Still, the decline was steeper than analysts expected, prompting them to ask just how Goldman stumbled in the quarter.

In the fixed-income business, Wall Street firms amass enormous positions in bonds, currencies, commodities and derivatives. The aim is to match buyers with sellers in markets for such assets.

Though fixed-income trading can be hugely profitable, it carries significant risks. A bank can get stuck with large inventories of assets that are falling in value, which would lead to losses in its income statement. For instance, fixed-income divisions were the source of crippling losses in 2008, and it was swing-for-the-fences trading in credit derivatives that led to a failed bet of more than $6 billion at JPMorgan Chase last year.

In recent years, Goldman has gained a reputation for spotting fixed-income risks early — and sidestepping them. The bank was able to partly protect itself in 2008 by selling mortgage-backed bonds and hedging against losses in such assets.

In the third quarter, fixed-income revenue totaled $1.25 billion, well below the $2.5 billion in revenue that the bank posted on average in the previous four quarters. On Thursday, analysts wanted to know what led to the poor performance. One cause was that Goldman’s clients simply did less fixed-income business with the bank, choosing to sit on the sidelines of the tumultuous bond market.

But it appears that Goldman’s traders in foreign exchange may have positioned themselves poorly. “Revenues within currencies decreased significantly relative to the second quarter, on difficulty managing inventory and reduced activity levels,” Mr. Schwartz said.

The problematic currency position illustrates that making markets for clients is not necessarily a neutral activity. In serving customers, a bank might make a bet on the way that the price of a bond or currency will move. In theory, Goldman could have sold the position or hedged it, but for some reason, it chose not to.

On the call, one analyst asked Mr. Schwartz why Goldman would hold foreign exchange inventories “in the first place.” Currency markets trade heavily, making it easier to match buyers and sellers on a daily basis, and reducing the need for investment banks to hold large foreign exchange inventories.

“As you would perfectly understand, I’m not going to get into the details about specific positions,” Mr. Schwartz responded.

The lack of detail about the trading decline disappointed some analysts. “More disclosure would be better,” said Michael Mayo, a bank analyst at CLSA. “This is one reason that there is concern about large financial firms,” he said. “There is a lack of transparency in the areas that matter the most.”

http://dealbook.nytimes.com/2013/10/17/goldman-quarterly-profit-flat-but-beats-estimates/?hpw&_r=0