Goldman's income jumps but still misses estimates

In this June 29, 2011 photo, the headquarters building of Goldman Sachs in shown, in New York. Investment bank Goldman Sachs Group Inc. said Tuesday, July 19, 2011, it earned $1.05 billion for common shareholders in the second quarter, more than double its net income compared to a year ago. (AP Photo/Richard Drew)

NEW YORK (AP) — Goldman Sachs more than doubled its profits last quarter, to $1.05 billion, but even that wasn't enough to satisfy its investors.

The results announced Tuesday came in well below what analysts were expecting because of a sharp drop in bond and currency trading. The 63 percent slump in that business from the previous quarter was much worse than the declines of 18 percent and 20 percent at rivals JPMorgan Chase & Co. and Citigroup Inc. Goldman attributed the decline to investors being nervous about global economic issues.

Goldman Sachs Group Inc., which has made a reputation for embracing risk before other Wall Street banks, also said it reduced a key measure of investment risk last quarter to the lowest level in five years. Goldman also said would eliminate as many as 1,000 jobs as part of an effort to cut costs.

The investment bank earned $1.85 per share in the three months ending in June, below the $2.35 per share that analysts surveyed by FactSet were expecting. Revenue was also less than analysts were expecting, declining 18 percent from the same period a year ago to $7.3 billion. Analysts had forecast $8.2 billion.

The unusual miss for Goldman sent its stock down 2 percent in afternoon trading to $126.60.

Goldman earned $453 million in the same period a year ago, or 78 cents per share.

The bank's chief financial officer, David Viniar, told analysts on a conference call that Goldman had reduced its "value at risk," a measure of how much money it could lose in any given day, to the lowest level since late 2006. That ramping down of risk "may have been a bad decision, it may not have been a bad decision. We don't know and we may not know for a while," Viniar said.

Glenn Schorr of Nomura Equity Research asked Viniar whether the results reflected just one poor quarter or whether there were more serious problems at the bank.

"Is there something bigger going on that is impacting the Goldman franchise?" Schorr asked.

Viniar said bank hadn't been able to predict markets swings as accurately as before because the volatility was related to political uncertainty rather than economic fundamentals. Financial markets have been unusually turbulent this spring as Europe's debt crisis appeared likely to spread beyond Greece and as the United States risked getting its top-tier credit rating cut because of a stalemate in Washington over raising the country's borrowing limit.

Goldman will be cutting about $1.2 billion in expenses, which could include as many as 1,000 employees nationwide, Viniar said. He also said the bank will be "prudent" with spending and maintaining high levels of reserves.

Investment banking revenue jumped 54 percent on an increase in mergers and acquisitions and underwriting other kinds of deals. Revenue from investment management, which includes portfolio management and financial counseling for companies and individuals, increased 14 percent.

Viniar said the bank would consider how to increase its asset management business, which can provide more stable returns relative to trading. Goldman's CEO, Lloyd Blankfein, didn't comment during the call with analysts.

Goldman did relatively well throughout the financial crisis and its aftermath, earning a profit every quarter except for three months in late 2008. At the same time the bank has been a lightning rod for wrath from the public and lawmakers, who see the storied investment house as a symbol of the kind of risky practices that helped lead to the financial crisis.

Goldman was able to increase net income even as revenue fell because it cut costs, though it didn't disclose many details. Goldman set aside $3.2 billion for employee pay, 16 percent less than a year ago.

Other expenses fell 18 percent, though that was partly because Goldman had to pay a $550 million fine to regulators last year — the largest ever paid to settle Securities and Exchange Commission charges — after it was accused of misleading investors about mortgage securities.

Goldman did not admit or deny wrongdoing. Similar charges could still haunt it, however. The Manhattan District Attorney's office recently subpoenaed the bank for information on its activities leading up to the financial crisis. A subpoena is a request for information and doesn't mean the bank has done anything wrong.

Goldman paid its employees an average of about $90,000 in the second quarter. It's difficult to predict annual pay based on one quarter because compensation can swing greatly in volatile units like investment banking.