By Steve Eder
NEW YORK (Reuters) - Goldman Sachs Group Inc
Second-quarter net income of $453 million was hurt by one-time charges, including a settlement of a civil fraud suit brought by the Securities and Exchange Commission and a British tax on bank executive bonuses.
But even stripping out those costs, Goldman's return on equity, a measure of the bank's ability to squeeze profits out of shareholders' money, was just 9.5 percent. Over the prior four quarters, the average was close to 25 percent.
"We've grown accustomed to Goldman bucking the trends in (investment banking), but this quarter it seems like maybe they're more susceptible to broader industry issues," said Walter Todd, portfolio manager with Greenwood Capital Associates. "Maybe Superman is turning into Clark Kent."
Goldman Chief Financial Officer David Viniar, on a conference call with reporters, said client activity fell in the quarter. He blamed worry about global growth rather than concern about the SEC suit.
"Hopefully things will pick up and we hope that (return on equity) over the cycle will be higher than this," Viniar said.
Goldman's chief rival, Morgan Stanley
Goldman's weak numbers were expected by analysts after rivals including Bank of America Corp
"The bad is in the (Goldman) stock," said Anton Schutz, president of Mendon Capital Advisors. "I think it is pretty well built in. The whole group has gotten punished pretty hard and I'm not sure how bad the sins really are."
REFORMING WALL STREET
Viniar underscored the significance of a financial reform package approved by the U.S. Congress but said it was far too early to assess the impact of the new rules.
The legislation targets lucrative trading in risky over-the-counter derivatives and aims to force banks to end trading for their own profits. It will also limit how much large financial firms can invest in hedge funds and private equity funds.
"The new financial regulatory legislation represents the most sweeping change for the financial industry in decades," Viniar said.
Uneasiness over financial reform was just one factor that rattled markets and weighed on trading and underwriting profits in the second quarter.
In a quarter marked by increasing currency volatility, higher risk premiums for corporate bonds and plummeting stocks, client activity dimmed and Goldman scaled back risk.
"Most of our risk is driven by client activity, and there was just so much less in activity in the quarter," Viniar said.
By one measure, the bank took less trading risk during the period. Its value-at-risk, or the maximum possible losses on 95 percent of the trading days during the quarter, fell to $136 million from $245 million in the same quarter of 2009. The second quarter 2010 figure was the lowest in three years.
THE NUMBERS GAME
Goldman's revenue fell 36 percent to $8.84 billion, reflecting weakness in fixed income trading as well as investment banking, which suffered from a 58 percent drop in debt and equity underwriting revenue.
Revenue fell short of analysts' average forecast of $8.94 billion.
Equity trading revenue fell 62 percent to $1.2 billion as extreme volatility hampered the market.
"Goldman's numbers were not good," said Peter Kenny, a managing director at Knight Equity Markets in New Jersey. "...Their business is down, and it's down in virtually every segment -- not just trading but product sales, innovation in terms of product offerings. The business is down, demand is down, volumes are down."
SEC SETTLEMENT
Viniar said there was no evidence that clients fled from the firm in the second quarter as it tangled with and faced the SEC charges.
"As best we can tell, for the most part, our clients stayed quite supportive of Goldman Sachs," the CFO said. "Our market shares did not suffer."
He added, "I can't tell you there weren't some calls that we would have gotten that we didn't get. We don't know about those."
Some customers with large public profiles have been more cautious in working with the firm recently, and analysts speculated that a prolonged legal battle with the SEC would have been damaging to Goldman's brand.
Excluding the cost of the SEC settlement, Goldman reported earnings per share of $1.72, compared with the average Wall Street forecast of $2.08, according to Thomson Reuters I/B/E/S. It was the first time Goldman has missed analysts' forecasts since January 2009, when it reported a deeper-than-expected loss following the financial crisis.
The SEC civil fraud suit stemmed from Goldman's marketing and packaging of the Abacus collateralized debt obligation. The bank agreed to settle the case last Thursday.
As Goldman's earnings swung lower, so did its set-aside for compensation. The firm slashed its compensation and benefits expense by 42 percent to $3.8 billion.
(Reporting by Steve Eder; Additional reporting by Dan Wilchins and Chuck Mikolajczak; editing by John Wallace)
