Goldman's profit engine stalls

Goldman Sachs Group Inc rattled investors with earnings that fell far short of expectations because of sharp declines in bond trading revenue, long a key source of profits for the investment bank. Goldman, once Wall Street's largest bond trading house, reported its sixth consecutive quarterly decline in that business, where Chief Executive Lloyd Blankfein earned his spurs.
Equities trading, which typically produces lower margins, produced stronger revenue for the company during the quarter. Goldman's fixed income, currency and commodities trading revenue fell 53 percent to $1.6 billion, far worse than analysts had expected.
On a conference call, Chief Financial Officer David Viniar said the bank is likely to lay off about 1,000 employees by the end of the year, or about 3 percent of its staff.
Analysts questioned whether Goldman and its Wall Street rival Morgan Stanley are losing ground to larger commercial banks, which are traditionally less nimble in trading than the investment banks. Overall, Goldman earned $1.05 billion, or $1.85 per share, in the second quarter, far below the $2.27 per share analysts had forecast. Adjusted for special charges, Goldman earned $2.75 per share a year earlier.
Goldman shares fell 2.7 percent at the market open but later recouped a bit. They were down 1.4 percent at $127.50 near midday. The shares are down by about a quarter so far this year, underperforming the broader market. Investors have been holding off buying the stock because of the weak trading environment and worries over financial regulation, which is set to cut further into Goldman's revenues.
Indeed, Goldman's value-at-risk, a key measure of how much risky trading activity it took on during the quarter, dropped nearly 26 percent from a year earlier and 11 percent from the first quarter. Value-at-risk is now at its lowest level since the third quarter of 2006. On the bright side, Goldman's performance in investment banking, where it advises clients on mergers or debt and equity issuance, was strong, although not strong enough to make up for the trading declines. Investment banking revenues overall rose 54 percent to $1.45 billion.
Net revenues in the bank's investment and lending business, where it trades and holds equity stakes for its own account, were hurt by weak equity markets and fell 42 percent to $1.04 billion. The bank took a loss of $176 million from its investment in Industrial and Commercial Bank of China Ltd.