Goldman Sachs takes a hit

published 23 July 2010

The party on Wall Street came to a juddering halt in the second quarter. US investment banks have reported sharp drops in revenue and earnings, with Wall Street's Goldman Sachs looking particularly off-form. It announced an 83% year-on-year drop in second-quarter earnings to $453m as revenue fell by 36% to $8.8bn.

The bottom-line figure factored in a $600m charge for the UK's new tax on bonuses and $550m to settle a charge that it misled investors when selling a structured credit product before the crunch. This is the biggest penalty ever extracted from a Wall Street firm by the Securities and Exchange Commission.

"The trading division is where Goldman's fortunes rise and fall," David Weidner pointed out on Marketwatch.com. Trading revenue is now six times bigger than investment banking revenue. The problem for Goldman (and others) is that "investors were fleeing" the rocky and risk-averse markets in the second quarter, denting trading income. Investment banking was hit as companies pulled deals and floats, added Simon Duke in the Daily Mail. Risk aversion has returned after last year's "state-funded adrenaline shot" sent markets soaring.

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Part of the blow was self-inflicted, however, noted David Crow in City AM. As stockmarket volatility rocketed, the bank failed to cut its exposure fast enough. It was a "poor performance". Longer term, it is too soon to gauge the exact impact of the new financial reform bill in the US. However, the clampdown on proprietary trading and obscure derivatives could be a significant blow to Goldman, reckoned Morningstar's Michael Wong. Goldman's spot at the "pinnacle of Wall Street" may be under threat.

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