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Goldman Sachs Profitable But Down From Last Year

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The New York Times

Published: September 17, 2008

NEW YORK - The investment bank Goldman Sachs, the firm that has looked the best throughout the credit crisis, reported a profit Tuesday of $845 million, or $1.81 a share, in the third quarter, down 70 percent from a year ago.

Profit in the quarter a year ago was $2.81 billion, or $6.13 a share.

The results, although in the black, showed that even the strongest on Wall Street are having a tough time making money. Revenue since the second quarter slumped 23 percent in Goldman's investment banking unit, 52 percent in trading operations and 5 percent in asset management. Across the firm, the drop totaled 36 percent from previous quarter. They included a $106 million positive mark-up on the firm's investment in the Industrial and Commercial Bank of China Limited.

Overall, revenue fell 51 percent, to $6.04 billion, from $12.3 billion in the quarter a year ago. Analysts projected a profit of $1.71 a share on revenue of $6.23 billion, according to Thomson Reuters.

Goldman executives tried to refute notions that their firm's business model may be broken. Just a day after Merrill Lynch announced that it would be sold to Bank of America, there were doubts in the market about whether Goldman and Morgan Stanley can survive as independent investment banks.
Bear Stearns and Lehman Brothers collapsed because of taking excessive risk and because they lacked secure funding models. Merrill Lynch is expected to gain some stability by becoming a part of the nation's largest bank, which has a large deposit base.

"We believe this is not about the model, this is about performance," said David A. Viniar, Goldman's chief financial officer, in an interview. "There have been a lot of firms that have suffered. They have not all been investment banks. They have been across the financial industry, whether they be commercial banks, regional banks, insurers."

In the first half of the year, Goldman and other Wall Street firms could easily explain why their performance looked dismal from the first half of 2007, a period that many in the industry are now calling a bubble. But Goldman is weaker this quarter compared with this spring.

"This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations," said Lloyd C. Blankfein, the company's chairman and chief executive, in a statement.

The third quarter was the most challenging Goldman has experienced as a public company, Viniar said.

Goldman does not have many mortgage assets left, Viniar said. The firm sold $4 billion in mortgages that were not backed by the finance giants Fannie Mae or Freddie Mac during the fourth quarter. He noted that the sales were at or above where Goldman had marked the assets. Asset prices spiraled downward Monday, particularly in the mortgage area, after Lehman filed for bankruptcy, he said.

"I think time's going to tell whether that's temporary or not," he said. "Or whether that was really just fear driven."

In a conference call with analysts, Viniar said Goldman had not been reluctant to sell assets that were troubled - even ones the firm believes will eventually rebound in value. Lehman stumbled in part because its executives did not want to sell investments at prices they believed were too low.

"You will never hear from us that we are reluctant to sell an asset because we are reluctant to take a loss," Viniar said on the call.

It is well known that part of Goldman's recent success came from the firm's early recognition of the mortgage meltdown. Goldman executives say that their asset valuation practice and strict marking allowed them to do that.

"We are fanatical about marking things to market," Viniar said in an interview. "We think it is the lifeblood of what we do. It is what allows us to see things early."

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