Last Updated Jul 14, 2009 10:12 AM EDT
Here's a thought you don't often hear expressed: Goldman Sachs is saving your 401K.
In a financial landscape that's threatened by regional bank bankruptcies, sluggish growth by TARP-laden institutions, and a whole load of pessimism, Goldman Sachs is lifting investors' spirits -- and as a result, their stock portfolios. In fact, right now the firm is a pretty far cry from Matt Taibbi's Great American Bubble Machine.
Contrary to all expectations, earnings hammered expectations in the April to June period, proving the firm could pull off stellar trading profits for a second straight quarter this year. This morning, Goldman Sachs said that its earnings leaped 65% from the same period last year, to $3.44 billion, or $4.93 a share. Analysts estimated that the firm would earn $3.54 a share.
What Goldman Needs To Do Now
But the glory will only last so long, unless Goldman Sachs shapes up other areas of its operations.
There's a good reason for the spike in the latest quarter's earnings. Speaking from Saudi Arabia earlier, Treasury Secretary Timothy Geithner said that "it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals," according to The Wall Street Journal. Those "ups and downs" that Geithner is referring to are the nuggets of Goldman Sachs's traders' stellar performance: namely, volatility.
Earnings were mostly derived from Trading and Principle Investments, where revenue grew 93% over the same period in 2008, to $10.8 billion. Of course, that will also herald a return to bumper bonus packages for Goldman sales and trading executives.
Given that Goldman Sachs bankers have sold $700 million in stock since the collapse of Lehman Brothers last year, it can, now more than ever, be considered a privilege to have job at the firm.
But, here's the catch. Investment Banking revenue fell by 15% from the second quarter last year, to $1.44 billion. In an environment where top bankers are moving firms at an unprecedented rate, unless Goldman funnels more of its cash into making its investment banking division much more aggressive, some of its key employees in areas such as Mergers & Acquisitions will surely be tempted towards firms that look a little less hedge-fund like.
As many banks have found in years past, without an equal distribution of earnings power, a separation of cultures forms within a firm that eventually leads to resentment and lack of cohesion in operations. As I have pointed out before, Goldman Sachs's key advantage in this crisis has been its iron-clad, unified culture.
It's also worth bearing in mind that volatility -- the lifeblood of a trader's profits -- can collapse just as quickly as it rears its ugly head. In that event, a bank is forced to rely on profits from operations such as Prime Finance, which while steady, should grow steadily but aggressively when they are invested in consistently.
So while Meredith Whitney is giving Goldman Sachs the thumbs up right now, I'd want to see the firm rediscover some of its original partnership values again before endorsing it so wholeheartedly.