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As the trial of Fabulous Fab [8] gets under way in Manhattan, there is someone that will be hearing the clinking of champagne glasses as they celebrate the doubling in profits of the rogue ( well, we love a scapegoat in the story, even though we all know it can’t be true) trader’s [9] former employer, Goldman Sachs.
Goldman Sachs has just announced that their net income increased in the second quarter this year and announced this morning that it hit $1.93 billion. Last year they had a net income of only $962 million at the same time. Net revenue was also announced as having increased by 30%, which means either a jump or a leap from $6.06 billion to $8.61 billion. It had been suggested by some analysts that quarterly revenue would only rise by 20.5% (which in itself was already high), reaching $7.98 billion. Over the past year there has been a 37% growth in revenue for the bank.
Goldman Sachs in the meantime decided to cut 300 jobs in the second quarter this year in a bid to reduce expenses. That's certainly called living up to your name. Goldman does sack. Compensation (including salaries, bonuses and deferred pay) increased by 10% to $8.04 billion from January to June. But, it is debatable obviously as to who might be getting the biggest chunk of all of that. Total revenue increased by 13% (reaching $18.7 billion). It all seems rather surprising that there are cuts in jobs and yet increases across the board in net revenue, revenue and net income for the investment bank. The present Chief Executive Officer and Chairman of the bank is Lloyd Blankfein, who has an estimated net worth of $450 million, with an annual salary that hits the $55-million mark. He is estimated to be one of the highest paid guys in the business and his bonuses reach levels of over $27 million.
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Goldman Sachs: Lloyd Blankfein
So, the champagne should be flowing, right? Net income up, net revenue up. Both are better than estimates had predicted. But, it obviously doesn’t work like that, does it? The value of Goldman Sachs’ shares fell at 9:39 ET today by 0.07% (down$0.1100 to $162.89). Share value has ranged from $91.15 to $168.20 over the past52 weeks for the investment bank.
So, why the fall?
There have been growing concerns that Goldman Sachs will not be in a position to meet the stringent capital standards that are imposed on the largest banks in the USA. Financial regulators have made it a requirement to increase capital leverage from a 3% to a 5% ratio (of assets). This may mean that there will be a reduction in dividend payouts in order to maintain the capital. The ratio is regardless of whether there is a risk or not in the company. However, it does seem that that might be to the detriment of the number of employees in the bank. Skimming off a few hundred employees might just mean that they will be able to pay something out. Although, by the reaction of Wall Street this morning, the investors are not quite so certain.
However, there are some that might also suggest that if the banks are having to amass large amounts of capital to reach that ratio percentage, then the only ones that are going to suffer are going to be the people that see their access to loans being reduced and limited while the banks get the cash. Market volatility would undermine credit availability and there would be ensuing worsening of the situation. Looks as if we are ready to go round in circles again. The authorities and the regulators impose stringent requirements to protect the people, the banks close the taps and pull the plugs and the objective that was meant to be avoided actually comes into being. They will have done exactly what they wanted to avoid doing. The borrowers, the people will be the ones that are affected, certainly not the shareholders and not the banks themselves.
The Federal Reserve and the Federal Deposit Insurance Corp., with increased pressure being put on them by policy makers and the legal system decided to go even further than Basel III requirements which stand at 3% for capital leverage ratios. This means that the requirements imposed on US banks are almost double those that are being required of other banks around the world.
The banks are currently trying to push the regulators to accept a different type of calculation of leverage (including fewer off-balance-sheet assets, as well as the exclusion of some items). Some have even suggested excluding Treasury holdings and money that is held at the Federal Reserve. That alone would vastly improve their ability to meet the new standards and at the same time provide the possibility of still paying out dividends.
In the meantime, the trial of Fabrice Tourre opened yesterday and brought Goldman Sachs into the spotlight once again. As the trial opened Tourre was said to be either a ‘liar’ or a ‘scapegoat’ by his defense lawyers. He was said to be far from ‘fabulous’ at all and just a childish trader that wrote teenage love-letters to his girlfriend telling of the portending doom. Look as if we are getting ready for a complete descent into hell, with the destruction of one man’s credibility and character along the way as usual.
I guess Fabrice Tourre should have remembered that story about the guy that dies and gets to choose whether he wants to go to heaven or hell. He spends a day in heaven where life is cool, but nonetheless rather staid and boring. Nothing actually happens. In hell, as the lift doors open, he is greeted by good-looking people and everybody is having a whale of a time. Parties, smiles, back-slapping, laughter. Obviously the place to be! He opts for hell, tells God and then goes there the next day. But, when the doors open this time, it’s a different scenario, fire-breathing sweltering heat and the devil pops up, far uglier than he was the day before. The guy that’s just died says, "this wasn’t like this yesterday". The devil replies, “no, but yesterday, we were recruiting. Today, you are staff!”
Fabrice Tourre should have known that the doors opened onto a hellish nightmare.
Originally posted: Goldman Sachs Net Income Doubles [11]