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INVESTMENT BANKING

Goldman Sachs' massive profit creates a stir

The firm's $3.4 billion in quarterly earnings feed concerns that some banks benefited unduly from U.S. bailouts. Some say, however, that the results come thanks to smart moves and a market rebound.

July 15, 2009|Walter Hamilton and Jim Puzzanghera

NEW YORK AND WASHINGTON — Burnishing its reputation as Wall Street's premier banking firm, Goldman Sachs Group reported a record quarterly profit that topped expectations and underscored the speed with which the firm has rebounded from last year's financial crisis.

Smart stock trades and reduced competition from rivals contributed to the $3.4 billion in earnings. Critics, however, said a nation still mired in recession could take little comfort in Goldman's rapid turnaround.

"We've got millions of people with no jobs," Rep. Elijah E. Cummings (D-Md.) said Tuesday. "It just doesn't make you feel too good, and it doesn't make my constituents feel too good."

Others said Goldman owed a debt to the taxpayer-funded bailout, which provided the firm with $10 billion in loans last year. But Wall Street analysts said Goldman's strong showing could be traced largely to the rebound in global stock and bond markets, which boosted trading activity by clients and increased the value of securities on Goldman's own books. Goldman had the added advantage of reduced competition. Bear Stearns Cos. and Lehman Bros. Holdings Inc. collapsed during the financial maelstrom, while Morgan Stanley and others cut their exposure to risky assets.

"This was a sweet spot for them because a lot of their competitors literally vanished or their appetite for risk-taking was taken away," said Glen Capelo, a bond trader and co-head of rates at Broadpoint Gleacher, a New York investment bank.

Goldman also suffered fewer losses on mortgage-based investments than its Wall Street rivals and thus was in a stronger position when financial conditions improved.

"The volatility in the market plays wonderfully for a savvy firm like Goldman Sachs," said Guillermo Kopp, executive director of TowerGroup, a financial industry research and consulting firm.

Goldman's second-quarter profit was up 65% from a year earlier, and it was significantly higher than the more than $2 billion that analysts had projected.

"While markets remain fragile and we recognize the challenges the broader economy faces, our second-quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise," said Lloyd C. Blankfein, Goldman's chief executive.

On Wall Street, big profits also mean big paydays. The money set aside for salaries and bonuses so far this year would provide average annual compensation of more than $770,000 for each of Goldman's nearly 30,000 employees.

That sort of compensation struck some as inconsistent with a firm that took $10 billion in bailout money.

"They owe a lot to the American taxpayer, and being profitable is the first part of the payback," said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group. "The second is being more accountable to the public and making their pay scales rational."

Goldman accepted $10 billion in the government's Troubled Asset Relief Program in October. It repaid the loan last month, along with a $426-million dividend. It was among a group of banks that contended they took the aid at the behest of former U.S. Treasury Secretary Henry M. Paulson, even as they chafed at the strings attached -- including caps on executive pay.

"There was great pressure on banks to provide liquidity and take risk on behalf of clients," Goldman spokesman Lucas van Praag said Tuesday. "We did that, we did it efficiently and we made money for our shareholders. It seems contrarian [to argue] that that is somehow wrong."

But though Goldman may not have needed the $10 billion in loans it was extended, it benefited from the bailout in other ways. Among those was a program in which the Federal Deposit Insurance Corp. guaranteed the debt of financial firms. And it was aided significantly by the government's bailout of troubled insurer American International Group Inc., experts said.

AIG guaranteed billions of dollars of Goldman's derivatives trades, and Goldman could have suffered losses had AIG defaulted on its obligations, according to experts.

Although some Washington lawmakers expressed indignation at Goldman's profit, others took it as a sign that the struggling economy was on the rebound.

"What people do with their money is their business. What they do with taxpayer money is my business," said Rep. Jeb Hensarling (R-Texas), who serves on the government panel that oversees TARP. "At least for the moment, Goldman is out of the taxpayer money business. I hope to keep them out, and if they make a profit, there is a greater chance they will not come back to the taxpayer trough."

Sen. Richard C. Shelby (R-Ala.), a vocal TARP critic, said he was not concerned about Goldman's bonuses or salaries because the company had repaid its federal bailout money.

"If they're making money, that means they're doing something right. I wish everybody would make money and start loaning money to small and medium-sized businesses," he said.

Goldman shares rose 22 cents to $149.66 on Tuesday. They have nearly tripled since bottoming at $52 in November.

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walter.hamilton@latimes.com

jim.puzzanghera @latimes.com

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