Monday, April 13, 2009

Goldman Had a GREAT Quarter! ... Uh, Wait a Minute ...

First reaction to Goldman Sachs earnings: Wow! Goldman had -- surprise -- a really good quarter. Wait a minute -- did I say really good? I mean really, REALLY good. The company blew the doors off the dump. It smacked a towering home run over the long fence in center field. The AP reported:
The New York-based bank said it earned $3.39 per share, easily surpassing analysts' forecasts for profit of $1.64 per share.
Hell, when a ballplayer crushes the pitch like this, you might assume he’s on steroids or something. Hmm. Hold that thought. Let’s number-dive the Goldman earnings.

Total net revenue (all reference to revenue after this will be to “net”, fyi) was $9.4 billion. Profit was $1.66 billion. Good so far. Now let’s look at a few segments to see what drove this crazy-good news.

Investment banking? Well, no, that was only $823 million in revenue, down 30 percent from a year ago (and even 20 percent lower than the horrible last quarter of 2008, when the company as a whole lost $2.29 billion).

Okay, okay, it’s something else. Let’s try principal investments! That’s where Goldman should really shine: lots of smart guys putting its money at risk, making big scores in the market ... er, well, hold on, that operation lost $1.41 billion in the first quarter. Geez, that ain’t it.

Asset management (and securities services)? Okay, it’s not really sexy, but who knows? Oops, dead end. That category fell 29 percent to $1.45 billion in revenue. What’s more, it even dropped 17 percent from the disastrous fourth quarter of 2008. So that isn’t the answer, not at all.

Stumped? Okay, no more teasing. It’s the FICC division. Its contribution was huge: $6.56 billion in revenue for the quarter! FICC rocks! You go guys!

Uh, what’s FICC anyway? Well, it’s Fixed Income Currency and Commodities. So that group must have just made a whopping bunch of super-smart bets on the bond market or currencies right? But hold on a second: that's AFTER it made a huge amount of stupid bets in the fourth quarter of 2008 (when FICC lost $3.4 billion)? Let’s try to imagine this ... uh, it’s really hard ... uh, I’m not seeing it.

Here’s an alternative scenario: When taxpayers shoveled tens of billions of dollars into AIG, the giant failing insurer turned around and shoveled it right out the back door to certain large counterparties for its derivative trades (credit default swaps). Goldman Sachs received $12.9 billion. That money winds up in what category? My preliminary research leads me to conclude almost certainly FICC.

Irony alert: If you have high sensitivity/allergy to irony, please stop reading now.

Now Goldman says that, presumably because of its solid quarter and bright future, it's thinking of selling stock through an offering. That would enable the company to repay its TARP funds early and thus wiggle out from under the chafing TARP restrictions on pay, etc. So here’s the playbook version:

Tens of billions in taxpayer money -> AIG, which shuffles almost $13 billion to -> Goldman, which posts absurdly profitable quarter and says it doesn’t need the TARP loan anymore (but it’ll keep that AIG money, thank you very much).

Just for the heck of it, if you strip out the FICC line from Goldman’s earnings, how much better is it doing this quarter than the last one of 2008? Take a guess.

Fourth quarter 2008: profit of $1.12 billion.
First quarter 2009: loss of $4.9 billion.

If Goldman hadn’t got that massive AIG infusion (or other money from AIG -- I'm not positive how this worked, but will bet my last dime that AIG is in the middle of it), it would have suffered a huge bloodbath of a first quarter.

Oh yeah. Sign me up for that stock sale. (Cough, cough.)


  1. What about the change in their fiscal quarter reporting time period (as mentioned in the Yahoo article), their fiscal 1st quarter changed from a start date of Dec of last year, to Jan 2009. So December was reported separately for a $2.15 loss per share, and was not included in 4th quarter last year, or 1st quarter this year.

  2. Yes, very good point! Indeed, I was going to mention that little bit of corporate accounting three card monte, but thought this entry was getting too long just tracing through the Big Outrage (which is, that apart from siphoning money from AIG they did pretty damn poorly). But you are dead on: essentially they managed to dump December's fat losses in Never Never Land, if you look at their own accounting (though I think they will have to reconcile the losses eventually, sticking them in some quarter).