- The Washington Times - Wednesday, July 15, 2009


Goldman Sachs is emerging as the king of post-meltdown Wall Street. The New York-based banking giant took advantage of improving markets to widen the gap between itself and its competitors, earning more than $2.7 billion during the second quarter.

The result is a remarkably speedy recovery from last fall, when Goldman lost $3.29 billion in four months during the worst of the financial crisis. Goldman, which was already the strongest financial institution heading into the financial crisis, has now staked its claim as the undisputed powerhouse on Wall Street with the ability to take on more risk than its struggling competitors.

“Goldman really is in a class by themselves,” said Phillip Silitschanu, a senior analyst with Aite Group. “They’ve always been the golden child of the market.”

That has been even more amplified during the recent credit crisis and ensuing recovery as credit and debt markets have started to open up. While other banks have been trying to preserve cash to protect against further losses, Goldman has been getting back to its core businesses that made it so profitable in the past.

Profits at Goldman, the first bank to report second-quarter earnings, came from strength in underwriting stock and debt offers, and higher-risk trading. Goldman’s peers, meanwhile, have been stung by greater loan losses because of their focus in retail banking, and thus have had to stick with a more conservative approach to business.

“Some competitors reined in risk-taking activity,” said Cubillas Ding, a senior analyst with consulting and research firm Celent. Goldman’s historically strong and disciplined risk management allowed it to enter trading where its competitors might have been more hesitant, Mr. Ding added.

Also during the second quarter, Goldman freed itself of restrictions tied to the government’s Troubled Asset Relief Program. Last fall, as the credit crunch worsened and Goldman’s competitor Lehman Brothers collapsed, the U.S. Treasury Department launched a program to provide $700 billion in funds to the financial sector.

Though it had adequate capital to handle the downturn, Goldman was compelled to participate in the program, receiving $10 billion. As part of the program, the government placed certain restrictions on banks, such as additional oversight and executive compensation caps.

Goldman, relying on its healthy capital base, paid back those funds in June, freeing itself of the added restrictions. Not all other banks have been able to repay their government debt yet. Bank of America Corp. and Citigroup Inc. have been among the hardest hit by the downturn and each received $45 billion from the government.

The government is now in the midst of converting part of its loan to Citigroup for about a one-third stake in the company. Both Bank of America and Citigroup are expected to report second-quarter results later in the week.

Goldman’s profit would have been even larger during the second quarter had it not recorded a one-time charge to repay the $10 billion to the government. The charge reduced earnings by 78 cents per share.

While Goldman was preparing to repay the government, it was also taking advantage of the thawing credit markets and a rallying equity market. With its own balance sheet intact, Goldman became a primary source for other companies looking for an underwriter to help them tap the reopened markets.

“When times are bad, the thinking goes, go with the best of the best,” Aite Group’s Mr. Silitschanu said.

On the New York Stock Exchange Tuesday, Goldman rose 22 cents to $149.66.

Goldman’s equity underwriting division generated record revenue from the surging business. Trading revenue also soared, jumping more than 51 percent from the previous quarter and nearly doubled from the comparable period last year. Goldman was able to cash in on fixed-income, currency and commodities trading during the April through June period.

Goldman earned $2.72 billion, or $4.93 per share, after paying preferred dividends, for the quarter ended June 26.

Analysts polled by Thomson Reuters, on average, forecast earnings of $3.54 per share for the quarter. Profit also exceeded last year’s fiscal second-quarter results. For that period, which ended May 30, Goldman earned $2.05 billion, or $4.58 per share.

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