Trading shortfall smacks Goldman Sachs

Jan 19, 2011

Goldman Sachs beat fourth-quarter profit estimates but fell short of revenue targets, as revenue in its institutional clients business plunged. Its shares dropped 3%.

Goldman (gs), the top U.S. investment bank, made $2.4 billion, or $3.79 a share, for the fourth quarter. That compares with a profit of $3.76 a share forecast by Wall Street analysts, and the year-ago profit of $4.9 billion, or $8.20 a share.

Revenue tumbled 10% from a year ago to $8.64 billion, missing the $9 billion Wall Street consensus estimate. Goldman said revenue in its once-hot fixed income, currency and commodities segment -- trades conducted for customers -- tumbled 48% from a year ago, driving a $1.6 billion revenue decline in its institutional clients segment.

“Market and economic conditions for much of 2010 were difficult, but the firm’s performance benefited from the strength of our global client franchise and the focus and commitment of our people,” said CEO Lloyd Blankfein. “Looking ahead, we are seeing signs of growth and more economic activity and we are well-positioned to help our clients expand their businesses, manage their risks and invest in the future.”

Revenue dropped 10% to $1.5 billion at Goldman’s investment bank. But the latest quarter was aided by a 45% revenue increase in the firm’s investing and lending segment, driven by $1.6 billion in gains on stock, debt and loans, and a 14% rise in investment management revenue.

Goldman shares, which have risen more than 10% over the past two months in a banking sector rally, dropped more than $4 to $170 in premarket trading.

As mixed as this quarter’s performance was, Goldman has racked up $21.7 billion in profits in the two years since it and other big banks were bailed out by the government. But life is increasingly complicated for the New York-based trading power.

Goldman this month released an internal report calling for a reorganization that would help the firm to better manage conflicts of interest with clients. Goldman embarked on the report after it took a public relations bath last spring, starting with a Securities and Exchange Commission suit that accused it of defrauding investors and continuing with congressional hearings that exposed the firm’s aggressive behavior.

Goldman settled the SEC suit for $550 million and promised in this month’s report to put clients first. But the firm is expected to face further challenges on that front from a Senate panel headed by Sen. Carl Levin, D-Mich., and from the report of the Financial Crisis Inquiry Commission. 

What may be even worse for the firm is its mishandling of this month’s private placement of Facebook shares. A few weeks ago that looked like the latest coup for Wall Street’s most connected, highest-performing bank. But Goldman’s decision to shelve the offering for U.S. investors has left some of its clients irate and is making the firm look like it has lost its golden touch.

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