Thursday 20 October 2011

Goldman Sachs: Superstar firm falls back to Earth

Goldman Sachs posts higher-than-expected loss of $428 million. Quarterly loss is only the second since the firm went public.

Goldman Sachs, the banking industry's perpetual winner, was this quarter's loser.

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The storied investment bank lost $428 million in the third quarter, driven by sharp drops in underwriting and trading revenue brought on by the wild swings in markets this summer. Goldman also had losses from souring investments in stocks, bonds and other holdings.

The loss announced Tuesday, which was worse than analysts expected, marked just the second time thatGoldman has posted a quarterly loss since going public in 1999. Other Wall Street banks also had trouble in their investment banking divisions, but Goldman fared worse.

It's too early to tell if the loss at Goldman Sachs Group Inc. is a temporary blip driven by a wild period in the markets or a sign of cracks in the bank's long-held business strategies. Whatever the case, the results of the bellwether company suggest that big banks are still struggling to figure out how to navigate a new world of weaker economies and tighter government control.

"This is the best proof that the financial crisis is far from over," said Ken Thomas, a Miami-based banking consultant.

Analysts point out that Goldman is naturally more susceptible to swings in the stock market, which has been under pressure because of fears about weak European banks and the losses they could suffer if the Greek government goes through a messy default. Those banks have large holdings of Greek bonds.

Goldman relies heavily on market-driven investment banking services, such as trading bonds and underwriting companies' stock offerings, for its revenue. It doesn't have the same level of plain-vanilla borrowing and lending to fall back on when the investment banking operations falter.

Chief financial officer David Viniar said on a conference call with analysts that he's confident the economy and markets will improve, eventually.

"Last week, big market rally; yesterday, big market decline," Viniar said. "So I think there's still a lot of uncertainty and a lot based on who says what on what day."

Goldman Sachs is known for beating the pack of other Wall Street banks. That didn't happen this time. Bank of America's investment banking and trading business reported a loss of $302 million, on a 26 percent decline in revenue. Goldman's overall revenue fell 60 percent. Citigroup Inc. reported a 12 percent decline in its securities and banking division, excluding an accounting gain.

Goldman's losses in the third quarter included losses of $1.1 billion on its stake in the Industrial and Commercial Bank of China, $1 billion on other stock holdings and $907 million from bonds and loans.

Source: http://rss.csmonitor.com/~r/feeds/csm/~3/zPoV7lHrO8U/Goldman-Sachs-Superstar-firm-falls-back-to-Earth

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