- The Washington Times - Tuesday, April 14, 2009

NEW YORK (AP) - It’s hard to imagine that any bank could emerge victorious from the credit crisis and recession. But Goldman Sachs & Co. is thriving while many rivals still struggle.

As weaker banks failed or dialed down their trading over the past year, Goldman picked up the slack and turned it into profits. It could be a long time before the investment banking business is truly healthy again, but economic downturns often lead to industry shake-outs, and Goldman is positioning itself to come out on top.

“You just saw a huge shift in the competitive environment,” said Mark Lane, bank analyst at investment firm William Blair, after Goldman posted better-than-expected earnings late Monday of $1.66 billion for the first quarter. The unit that trades bonds, currencies and commodities pulled in $6.6 billion, its highest revenue ever.

The shift could become even greater if Goldman is successful with plans to quickly pay back the $10 billion in bailout money it received from the government. That could free the bank from restrictions imposed by the government _ including limits on executive compensation _ and help it to increase its lead over rivals that cannot repay their federal debt yet.

Last year, investment banking was turned upside down. Lehman Brothers went bankrupt, while Bear Stearns and Merrill Lynch were bought by JPMorgan Chase & Co. and Bank of America Corp., respectively. Goldman and Morgan Stanley were the last two big, independent investment banks, and they applied to become commercial banks _ meaning that they must follow the same capital restrictions that other banks do.

But it’s not just that Goldman now has fewer competitors. Many of its remaining rivals have turned more cautious and ratcheted down their trading activity.

Goldman became more conservative in its own way, boosting the amount of extra cash it has on hand by 47 percent to $164 billion in a single quarter. While it increased cash levels, though, it simultaneously ramped up trading _ which is why its “Value at Risk,” which measures potential losses on a given portfolio, was at its highest level ever at the end of the first quarter, noted Rochdale Securities analyst Richard Bove.

“The company has not backed off in any way from taking risk in the markets,” Bove wrote.

As Goldman traded more, it was able to take better advantage of historically low interest rates and high volatility. Lower rates make money cheaper, and Goldman was able to put that money in more lucrative investments like bonds and commodities, thereby turning a profit.

“Goldman is back and it is looking quite strong,” Bove wrote.

He and a few other analysts raised their stock price targets and earnings estimates for Goldman _ which has employed such notables as former Treasury Secretaries Henry Paulson and Robert Rubin; Merrill Lynch’s ex-CEO John Thain; federal bailout fund overseer Neel Kashkari; and New Jersey Gov. Jon Corzine.

Goldman Sachs is different from other big banks in that it is solely an investment bank. It doesn’t make loans and take deposits from average people as other banks do, like JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. Those banks have trading operations, but they make up a much smaller part of the overall business.

Because of Goldman’s focus on the markets and corporate clients, it does not have to worry as much about the effect of the recession on the average holders of mortgages, credit cards, auto loans and home equity loans.

“They don’t have the black hole of consumer credit exposure that some of these other large banks have,” Lane said.

To be sure, Goldman is not the only bright spot in the banking landscape _ Wells Fargo & Co. estimated that it made a record $3 billion in first quarter.

And Goldman still has some potential rough patches ahead of it.

It has already reduced its portfolio of risky corporate loans over the past year-and-a-half to $2.3 billion from $52 billion, but it still has exposure to commercial real estate loans. In the first quarter, it had to write down the value of its commercial real estate holdings by $800 million.

Moreover, trading itself is a risky business. The company had a lot of good bets in the first quarter, but that’s no guarantee that winning streak will continue.

Another factor that could hurt Goldman’s stock price is its commitment to raise more capital, a move that dilutes current shareholders.

On Tuesday, it sold $5 billion in stock, and its shares tumbled $15.04, or 12 percent, to $115.11. Goldman will likely need to sell more stock as it attempts to repay the $10 billion it took from the Treasury’s Troubled Assets Relief Program.

And it was only a quarter ago that Goldman had to take its first net loss ever. Goldman lost $2.29 billion in the September-to-November period, and another $1 billion in December. (The turbulent month of December was not included in the most recent quarter, because Goldman switched over to the calendar quarter system that starts in January.)

Goldman’s 2009 turnaround is promising, but the profits are still nowhere near where they were a couple years ago. In early 2007, when Goldman was benefiting from a surge in deal-making and continuing to make money on mortgage and credit products, the bank posted record quarterly earnings of $3.15 billion.

“It’s still a dangerous environment,” acknowledged Goldman’s chief financial officer, David Viniar, on a conference call Tuesday morning with investors.

What Goldman has on its side is that even in many of its weakest businesses, it is still leading the pack. Merger-and-acquisition activity revenue sank during the quarter, but Goldman remained the market leader, according to Thomson Reuters data. It advised on such deals as Roche Holding AG’s takeover of Genentech Inc. and Altria Group Inc.’s purchase of UST Inc. So when deal-making eventually bounces back, Goldman should be a prime beneficiary.

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