October 2, 2022

DealBook: Goldman’s Safer Positions Eat Deeply Into Its Profit

David Viniar, chief financial officer of Goldman Sachs.Yuri Gripas/ReutersDavid Viniar, chief financial officer of Goldman Sachs, told analysts that he would not “sugarcoat” the firm’s second-quarter results.

Goldman Sachs has long been known as a Wall Street firm with a Midas touch, wringing out significant trading profits in good times and bad.

But another major market miss has analysts and investors wondering if the company has lost its way.

On Tuesday, Goldman reported lackluster profit of $1.05 billion in the second quarter, or $1.85 a share. The results fell significantly short of analysts’ expectations of $2.27 a share.

The firm’s earnings reflect its struggles with navigating the market. Worried about the global economy, the bank moved to protect itself from potential volatility by taking a more conservative stance and hedging some trading activities.

But the costly positions ate into profits and robbed the firm of opportunities in oil and other markets. Revenue in the powerful fixed-income, currency and commodities department fell to $1.6 billion in the latest period, down 53 percent from a year ago.

“Goldman often does things better than their competitors,” said Richard Bove of Rochdale Research, who has a sell rating on the stock. “But that doesn’t mean they can escape the markets.”

It is the second notable hit at the firm in about a year.

In the second quarter of 2010, Goldman did not move fast enough to hedge against customers betting that volatility would rise. As a result, the firm reported earnings of just $453 million during the period.

Goldman’s financials — which stood in stark contrast to the healthy profits at JPMorgan Chase, Wells Fargo and Citigroup — took analysts by surprise. On a conference call, Glenn Schorr, an analyst with the investment bank Nomura, asked David Viniar, Goldman’s chief financial officer, if it was a bad trading quarter or if something bigger was going on that was “impacting the Goldman franchise.” Guy Moszkowski, an analyst at Bank of America Merrill Lynch, wondered if jobs were at risk in the risk management department.

“I don’t want to sugarcoat this and say, ‘Oh, no big deal,’” Mr. Viniar told analysts. “We underperformed in the quarter.”

Mr. Viniar said investors should not read too much into isolated stumbles. He noted that clients continued to trade at a decent clip. He also highlighted other major areas that were doing well, like investment banking, where revenue increased 54 percent from a year ago. The troubles in trading — among the worst in the firm’s 12 years as a publicly traded company — have “nothing” to do with Goldman’s franchise, Mr. Viniar said.

But the poor results did underscore management’s earlier decision to slash expenses and reduce staff. Mr. Viniar said Goldman planned to cut $1.2 billion in compensation and noncompensation expenses by the end of the year. That will translate to roughly 1,000 layoffs, or nearly 3 percent of all staff members — a culling that has already begun, according to a firm spokesman. Goldman has indicated that at least 230 employees in New York State will lose their jobs.

The remaining staff members will probably collect smaller year-end bonuses if Goldman remains on the same trajectory. Revenue dropped 18 percent in the second quarter compared with a year ago.

With the numbers falling, Goldman, which typically reserves 40 percent of its revenue to pay employees, earmarked less money for compensation, roughly $8.44 billion compared with $9.3 billion in the same period of 2010. “If performance is lower, compensation is going to be lower,” Mr. Viniar said.

The payoff for investors is in question, too, amid the lingering concerns about Goldman’s prospects in an anemic economy. The stock closed Tuesday at $128.49 and is down about 24 percent for the year. Goldman is now trading below book value, an important financial measure that refers to the liquidation value of the company. The stock has not traded at that low a level since the financial crisis.

For Goldman, it is another number that is no longer a point of pride.

Article source: http://feeds.nytimes.com/click.phdo?i=aa1011f15d2040af1cbd0858c3abfb6f

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