Goldman Sachs sheds Midas sheen

GOLDMAN Sachs, once Wall Street's highest flyer, has reported a quarterly loss - its first since the financial crisis and only its second since going public in 1999.

By InvestSMART · 20 Oct 2011

By InvestSMART ·
20 Oct 2011

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GOLDMAN Sachs, once Wall Street's highest flyer, has reported a quarterly loss its first since the financial crisis and only its second since going public in 1999.

The misstep by the financial leader speaks to what could be a more lasting shift on Wall Street. Banks, required by regulators to discontinue high-profit businesses such as proprietary trading, reduce borrowings and hold more capital, may no longer be able to produce the supercharged earnings common before the financial crisis.

Trading operations are muted. Risk-taking is tempered. And boring businesses are back in vogue.

"These firms are going back to the traditional investment banking model of the 1980s and early 1990s," said Tom Marsico of the mutual fund firm Marsico Capital Management, once a large owner of financial stocks.

While Goldman posted decent results in equity trading and investment management, it lost nearly $US3 billion on its investments in stocks and bonds, more than offsetting the pockets of strength.

Investors have been anticipating the weakness for months. Since the beginning of the year, shares of financial companies have plummeted. While shares of Goldman jumped 5.5 per cent on Tuesday, reflecting investor expectations and favourable developments in Europe, they were still down almost 40 per cent for the year.

Goldman reported a loss of $US428 million for the third quarter, compared with a $US1.74 billion profit a year ago. It got hit by its stakes in stocks and bonds, losing $US1.05 billion on its stake in Industrial and Commercial Bank of China, a strategic investment the company made in 2006.

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Frequently Asked Questions about this Article…

What caused Goldman Sachs to report a quarterly loss?

Goldman Sachs posted a US$428 million loss in the third quarter after nearly US$3 billion of investment losses in stocks and bonds offset gains elsewhere. A US$1.05 billion loss on its long‑held stake in the Industrial and Commercial Bank of China (ICBC) was a major contributor.

How big was Goldman's loss compared with the previous year?

The firm reported a US$428 million loss for the third quarter, a sharp swing from a US$1.74 billion profit in the same quarter a year earlier.

How did Goldman’s stake in Industrial and Commercial Bank of China (ICBC) affect results?

Goldman lost about US$1.05 billion on its ICBC stake, a strategic investment made in 2006, and that hit was a significant part of the overall investment losses that produced the quarterly loss.

If equity trading and investment management were decent, why did Goldman still lose money?

Even though equity trading and investment management showed decent results, those strengths were more than offset by large mark‑to‑market losses on the bank’s investments in stocks and bonds, producing the net quarterly loss.

What does Goldman's loss tell everyday investors about Wall Street and bank earnings?

The result highlights a possible lasting shift on Wall Street: regulators have forced banks to scale back high‑profit, high‑risk activities (like proprietary trading), reduce leverage and hold more capital. That means many banks may no longer generate the supercharged earnings common before the financial crisis.

Why did Goldman shares jump 5.5% when the stock is down almost 40% for the year?

The article says shares rose about 5.5% on a Tuesday due to investor expectations and favourable developments in Europe, but year‑to‑date the stock remained down roughly 40%, showing short‑term market reactions can differ from longer‑term trends.

Are banks returning to older, more traditional business models?

Yes. Market commentators quoted in the article say banks appear to be moving back toward the traditional investment banking model of the 1980s and early 1990s, with muted trading, tempered risk‑taking and a focus on less flashy, more stable businesses.

What should investors watch in Goldman Sachs’ future results?

Investors should monitor future investment gains or losses, the performance of equity trading and investment management, any further write‑downs related to strategic stakes like ICBC, and the broader regulatory and market environment that is reshaping bank profitability.