Commentary: Scrutiny of the brokerage’s practices may be to blame
By MarketWatch
NEW YORK (MarketWatch) — Shareholders, analysts, the public and certainly Goldman Sachs Group Inc.’s rivals are wondering Tuesday just how long can these lackluster performances go on?
Maybe they should get used to disappointment.
Goldman GS -2.10% , of course, stunned Wall Street with another sputtering quarter. The bank reported profit of $1.05 billion, but 18.5% below analysts’ expectations, and, as Dow Jones Liz Moyer noted, only the fifth miss in Goldman’s 12 years as a public company. Read more about Goldman’s earnings disappointment .
By now, Goldman hasn't just missed a couple of quarters here and there. The brokerage now is on pace to underpeform its dismal 2010, a $7 billion profit, in addition to its more respectable 2009, $12 billion.
This prolonged slump may not be a slump after all. It certainly isn’t just a slowdown in trading. It could be a brokerage that under pressure from the public and Washington has had to rein in risk.
Under former chief executive Henry Paulson and current CEO Lloyd Blankfein, Goldman became primarily a trading firm. Its asset management and traditional investment banking arms were dwarfed by the trading and risk-taking of the traders.
Between 1998 and 2008, Goldman more than doubled in size. Its roll of employees rose to 30,522, up from 15,361. Its principal investments grew to $13.96 billion, up from $1.4 billion and its leverage ratio rose to 26.2-to-1, up from 24.7-to-1. In other words, Goldman was on steroids.
Today, risk is off. The firm is facing a raft of litigation from its mortgage deals. It has instituted internal controls designed to keep the firm out of legal trouble. Goldman is playing it safe.
