Goldman Sachs Earnings Plunge As Trading Income Sinks
share this story
Goldman Sachs's earnings dropped 38 percent last year as the economy finally took a toll on the most profitable securities firm in Wall Street history.
The firm announced Wednesday that it underwrote fewer stock offerings and less debt and conducted fewer trades for its clients, reflecting the decreased trading activity that marked 2010. Investors fled equities last year for the safe haven of bonds as the market continued to face threats such as the sovereign debt crisis in Europe. Less trading leads to decreased revenue for firms like Goldman.
But the firm more than made up for the dropoff by trading with its own money. Goldman generated $7.5 billion off its own investments and trades, up 163 percent from 2009. Of that, roughly $5.3 billion came from trading stocks and bonds. Goldman's investments in exotic financial instruments earned $1.5 billion, up 81 percent.
Overall, the firm earned $8.4 billion last year off $39.2 billion in revenue. Though both figures are down from 2009, last year still ranks among the most profitable years in Goldman's storied history.
Economic and market conditions in 2010 were "difficult," the firm's chairman and chief executive officer, Lloyd C. Blankfein, said in a statement. He anticipates growth and more economic activity this year.
Among its challenges last year were the fallout from revelations that Goldman profited off trades where clients lost, and that it allegedly helped set up a mortgage-linked investment for a favored client that was designed to fail, yet sold it anyway to its other clients, reaping the favored client nearly $1 billion. Goldman settled that case with the Securities and Exchange Commission for $550 million.
In an April hearing in the Senate, lawmakers accused the firm of deliberately trading against its clients and profiting from their losses, a debilitating charge for a firm in an industry that's supposed to be all about putting the client first.
This came after Goldman became a poster child in 2009 for Wall Street greed and excess. The firm was accused of playing a pivotal role in the global financial crisis and resulting taxpayer bailout, yet all the while paid its employees handsomely.
Last year, the firm faced a dip in the funds it invests for clients. Its assets under management declined by $31 billion, or 4 percent. Clients actually took out $71 billion, but that was mitigated by a rise in the value of the holdings.
As a result of the bad publicity, Goldman last week released an updated set of business principles it hopes will guide its future dealings.
A survey commissioned by Goldman in which it surveyed its own clients revealed the extent of the damage to its brand. The survey, released last week, polled more than 200 of Goldman's clients. "In some circumstances," the resulting report declared, "the firm weighs its interests and short-term incentives too heavily."
Recently, as the firm pitched customers on buying shares in privately-held Facebook, it reportedly didn't disclose that one of its fund managers rejected the deal for his own clients. The report recommended that the firm strengthen client relationships.
"Clients raised concerns about whether the firm has remained true to its traditional values," the report noted.
Revenues from its "market-making" activities -- essentially, setting up trades for clients -- were also down 38 percent last year. Goldman's revenues off trades with its own money more than doubled, though.
Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.
Loading comments… 
First Posted: 01/19/11 10:07 AM ET Updated: 05/25/11 07:25 PM ET