By Stephen Gandel
April 17, 2012

Profits rise at the bank, but Goldman appears to be losing business to rivals. Analysts say show us the profits.

FORTUNE – All of a sudden, the vampire squid appears to be hurting for blood.

Goldman Sachs (GS) reported on Tuesday that its bottom line profits more than doubled in the first quarter from a year ago to $2.1 billion. On a per share basis, the company had $3.96 in earnings. That was more than double a year ago, and far better than analyst expectations. But sink a little deeper into Goldman’s results and it’s clear what once seemed like an open supply of profits for the firm is scabbing over. Indeed, following the seemingly strong profit release, shares of Goldman were only up slightly to $118.

First of all, a good deal of the improvement in Goldman’s results were the result of a one-time $1.64 billion payout Goldman made to preferred shareholders a year ago. Exclude that and Goldman’s earnings, in one of the best quarters for Wall Street in at least a year, actually dropped 23% from a year ago. And while the firm retained its top position in mergers and acquisition advisory, in other businesses Goldman seems to be falling behind rivals.

On Facebook, it was beaten out by Morgan Stanley (MS) and JPMorgan Chase (JPM) for the top slots in what is likely to be the hottest IPO of the year. Private equity firm Carlyle has eight investment banks working on its IPO, none of them are Goldman. In all, Goldman’s fees from leading stock offerings plunged 40% from a year ago. Goldman’s debt underwriting business dropped as well, down 16% from a year ago.

But the real driver of profits on Wall Street in the first quarter has been bond trading, an area where Goldman has long been a leader. Institutional investors are getting out of government bonds and shifting into corporate bonds and other investments with higher yields. That created huge commissions and trading profits for investment banks in the first quarter. But there, too, Goldman seems to be losing its footing. Goldman got $3.5 billion in revenue from debt and commodity trading. That was nearly triple what the firm had in the last three months of 2011. But it was less than the revenue that rivals Citigroup (C) and JPMorgan got from the same line of business, suggesting it is losing clients and market share to rivals. A year ago, Goldman’s sales in its so-called fixed income group topped Citi’s by $534 million. In this year’s first quarter, Goldman trailed Citi, long considered a Wall Street laggard, by nearly $200 million. Morgan Stanley has yet to report their earnings for the first quarter.

One of the problems is the traditionally market savvy Goldman appears to have miscalled the market this year. On a conference call with investors Tuesday morning, Goldman CFO David Viniar said the bank took a cautious approach to the market in the first quarter, even as stocks continued to rally. That stance may have hurt its trading revenue. He also said that Goldman is facing more competition in its trading business than it did a few years ago. “We took a tremendous amount of market share in 2009,” said Viniar. “But we said that competition would be back and they are.”

Worse, one of the biggest boosts to earnings in the quarter compared to the last three months of 2011 came from Goldman’s principal transactions unit, which includes its private equity division and other ways in which the firm invests its own money. Revenue in that unit jumped 133% versus the quarter before. But that’s a business, due to new banking regulations, that Goldman may be soon forced to exit.

The latest quarter is only one of a growing number of signs that Goldman’s most profitable days may be behind the firm. Profits at the firm fell nearly 50%. It’s stock dropped the same amount. But even with its lower bottom line, Goldman still is handing out rich compensation to its employees. Employee expenses at the firm did fall 16% from a year ago, as Goldman cut its staff 3%. But that still means the average Goldman employee was paid (including benefits) $135,000 for the first three months of the year ago. That was more than rival Morgan Stanley handed out in cash bonuses for all of last year.

On the conference call with analysts, CFO Viniar was asked about a recent spate of top level departures from the firm. Viniar said the departures were a healthy for the firm, and would allow the next level of bankers to take on more senior roles. That response seemed to back some news reports that the firm had been pushing out some of its senior bankers. “I expect before the end of the year you will see more senior level people leaving,” said Viniar.

Analysts say the larger question is that in post-Dodd-Frank world, where banking regulations could largely change the business of Wall Street, it’s unclear where Goldman will get its profits from. Goldman has always been a firm built on trading. Dodd-Frank makes that harder to do. The amount of cash on hand at Goldman rose to 14% of its outstanding loans and investments. That’s one of the highest ratios of capital on Wall Street. One way to read that is that Goldman remains one of the strongest financial firms in the country. Another way to read that is that Goldman has no idea where to deploy its cash. The firm’s executives may be struggling to find businesses to invest in that will produce growth. Analyst Brad Hintz, who follows investment banks for Sanford Bernstein, says among Wall Street firms, the future is the cloudiest for Goldman. “The big question is Mr. Goldman what are you going to do with all that capital,” says Hintz. “What comes next? The company hasn’t been able to frankly discuss this with investors.”

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