Goldman Sachs’ New Normal

October 17, 2012, 11:22 PM UTC

FORTUNE — Goldman Sachs used to make making money look easy. Not anymore.

In the third quarter, profits at Goldman (GS) beat exceptions. It’s profitability, though, was still a drag. Those are two different things. And on Wall Street often it’s the latter that’s more important.

Most companies make things. They then sell those things to make money. These days increasingly the thing that U.S. companies are selling is often knowledge or services, or some other piece of intellectual property. But it’s a product, even if not a true widget, so the model is essentially the same.

Wall Street, though, doesn’t work like other businesses. Essentially they cut out that whole middle messy part of actually going through the trouble of making something. Instead, they make money by selling money.

A mergers & acquisition banker will say that Wall Street sells advice. And that might work for some boutique investment banks. But increasingly the m&a business for the big financial firms is too about who can offer the cheapest financing.

That’s why a figure called return on equity, which measures how much money you can make with the money you have (minus the money you have to borrow), matters so much on Wall Street, since that’s essentially all a financial firm does.

Goldman used to be the king of turning money into more of it. For a long-time it had the highest return on equity on Wall Street. Goldman’s ROE used to regularly top 20%. In 2006, it hit 40%, meaning every dollar it had magically minted $0.40, nearly overnight. You try that with your 401(k).

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You can’t. Perhaps it’s not surprising, given the Dodd-Frank financial reform and the financial crisis, that Goldman can’t anymore either. But what’s surprising is that Goldman is all of a sudden much worse at it than its rivals.

In the third quarter, Goldman had a return on its tangible equity (which excludes some money that is not real but appears to be on an accounting sheet) of 8.8%. That’s near the bottom on Wall Street. Rival JPMorgan Chase (JPM) had 13%. Even Wells Fargo (WFC), which is mostly a straight lender, and not a New York investment bank, beat Goldman, with 17%. Bank of America (BAC) said return on equity soared at its investment bank, which is the old Merrill Lynch, to an astounding 25%, but it’s likely that included some funky accounting adjustments as well.

Only Citigroup (C) ranks lower on return on equity than Goldman, and Citi just parted ways with its CEO. Because, not surprisingly, being on the bottom on Wall Street is not viewed all that kindly.

In part, this is Goldman’s plan. Goldman has been trying, and forced to, transition its business into something that produces more stable earnings. And that is a pretty good strategy if you can pull it off. Wall Street rewards companies that have strong, predictable earnings quarter in, quarter out. But $1.8 billion of Goldman’s $8.4 billion in revenue in the last quarter essentially came from trading, which is a risky, undependable business, and may be going away because of Dodd-Frank.

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In the end, what drives profits on Wall Street these days is cheap money. And Goldman is never going to be able to get it’s money as cheaply as say JPMorgan, or Bank of America. It’s trying by building a bank for high-net worth individuals, but that’s still relatively small.

Given that, it’s amazing that Goldman still sees fit to pay its employees an average of more than $330,000 each for just the first nine months of the year, which is up from a year ago. And that’s average. Plenty of Goldmanites make much, much more. Goldman isn’t the top dog on Wall Street anymore, and it doesn’t have a shot to become that again until it acts that way.