Goldman profit and pay surge in blowout quarter

NEW YORK Tue Jul 14, 2009 7:07pm EDT

1 of 2. Lloyd Blankfein (R), CEO of Goldman Sachs, walks by the New York Stock Exchange in New York October 10, 2008.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - Goldman Sachs Group Inc said quarterly earnings surged 33 percent on blowout trading results, trouncing forecasts and putting the bank on pace for hefty bonuses that could draw unwanted scrutiny.

The results continued Goldman's extraordinary rebound from a near meltdown of the U.S. banking industry last fall that led to a $125 billion taxpayer bailout for its largest members.

Goldman set aside $6.65 billion for salary, bonuses and benefits in the quarter, up by nearly half from the quarter ended in May last year.

That puts the average Goldman employee on pace to earn more than $900,000 this year. Chief Executive Lloyd Blankfein, senior officers and star traders will likely receive tens of millions of dollars.

The U.S. government wanted "to make sure that the banks are making money, so they do make money," said Francis Campeau, a broker at MF Global Canada in Montreal. "The flip side is now one could argue they're making too much."

Goldman reported net income for common shareholders of $2.7 billion, or $4.93 a share. That compares with $2.05 billion, or $4.58, in the quarter ended May 30, 2008, before the bank switched to a calendar-year schedule.

Analysts on average had forecast earnings of $3.49 a share, according to Reuters Estimates.

Goldman shares ended Tuesday's trade on the New York Stock Exchange up 22 cents to close at $149.66. The shares are up nearly 80 percent this year, compared with a 24 percent rise in the NYSE Arca Securities Broker/Dealer index.

The first major U.S. bank to report second-quarter results, Goldman said trading income nearly doubled from a year ago to $10.78 billion while its equity underwriting business produced record revenue of $736 million. Goldman's traders thrived in an environment of wide price swings, robust demand and fewer rivals.

"There's less competition out there," Chief Financial Officer David Viniar told reporters in a briefing.

In a subsequent interview, Viniar told Reuters he could not predict whether the firm could keep up the pace all year.

"I wouldn't tell you we will have this level of earnings every quarter," he said.

NOT OUT OF THE WOODS

The financial crisis wreaked havoc on Wall Street last year, collapsing Bear Stearns, sending Lehman Brothers into bankruptcy, and forcing Merrill Lynch into a shotgun wedding with Bank of America Corp.

Goldman's second-quarter investment banking revenue of $1.44 billion was down 15 percent from a year ago but rose 75 percent from the first quarter.

"The environment is very conducive to the type of things they do," said Keith Davis, an analyst at Farr, Miller & Washington. "Spreads are very wide, fixed-income and equity issuances have been pretty strong."

Goldman has come under fire for its government connections, seemingly sailing through a deep recession shortly after accepting $10 billion of taxpayer bailout money and benefiting from a host of other government programs, including access to the U.S. Federal Reserve's borrowing window.

The bank incurred a one-time $426 million charge in the second quarter related to last month's repayment of loans from the U.S. Treasury's Troubled Asset Relief Program, known as TARP. Viniar said there was "no timeline" for buying back stock warrants issued to the government under TARP.

In the conference call with investors, Viniar said the company has amassed substantial capital as it awaits word from the government on new capital requirements.

"There are going to be new capital regulations coming out," said Viniar, adding that he didn't expect them to harm Goldman's business. "We don't know what they are going to be so we have to wait and see."

WASHINGTON MUTED ON GOLDMAN'S BIG DAY

Reaction to Goldman's earnings was muted among U.S. lawmakers, some of whom have been harsh critics of Wall Street's excesses proceeding the credit crunch and bailout.

"I want all the people we gave money to make profits. Pay the money back with interest and have a net zero cost to our program," House Majority Leader Steny Hoyer told reporters.

Representative Paul Kanjorski, a senior Democrat on the U.S. House Financial Services Committee, said Goldman's soaring profits were a sign of economic recovery.

"Is there a law in the United States that you can't make profits?" Kanjorski asked reporters after a panel meeting. "It shows that there will be some capital available to be invested and that's a good sign for the economy."

Others were angered by bonuses that they felt were subsidized by taxpayers.

"There should be at least some ethical obligation on the part of the Goldman Sachs because their bonus pool is backed by taxpayers who are suffering through the poorest economy that we've seen in 70 years," said Rich Ferlauto, director of corporate governance and pension investments for the American Federation of State, County and Municipal Employees.

The Obama administration and key lawmakers in Washington are preparing plans to overhaul regulation of the banking sector. The plans include clamping down on the largely unregulated derivatives market -- a major source of profit for Goldman in the quarter -- and establishing a consumer protection agency.

Viniar said his firm was "not immune to public sentiment."

"We know it. We see it. We don't like it," Viniar said of the firm's vilification in parts of the media. "We believe we are doing good things. We are helping the economy recover. I don't like reading bad things about Goldman Sachs."

(Reporting by Steve Eder, Elinor Comlay, Juan Lagorio, Jonathan Spicer in New York, Richard Cowan, Kevin Drawbaugh and Rachelle Younglai in Washington; writing by Joe Giannone, editing by John Wallace, Leslie Gevirtz)

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