Goldman's profit doubles, helped by underwriting

NEW YORK (AP) -- Goldman Sachs said Tuesday that its second-quarter profit doubled as the bank underwrote more stock and bond offerings for clients and netted big gains on its own investments.

But investors homed in on the uncertainty of the future, lobbing question after question at Chief Financial Officer Harvey Schwartz about how the bank would deal with potential regulations that could force it to hold more capital, and also how rising interest rates would affect clients.

Goldman's stock dipped 1 percent in morning trading. So did Morgan Stanley, which, like Goldman, is heavily dependent on institutional clients. Shares for other big banks that have more of a consumer focus, like Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, were up slightly.

The possibility of higher capital requirements for U.S. banks has been the topic du jour as big financial companies have reported second-quarter earnings over the past few days. U.S. regulators said last week that they might institute a new rule that would essentially require U.S. banks to hold greater amounts of capital. The regulators say this would protect the banks in troubled times; the banking industry has protested that it will put them at a disadvantage to their international peers and constrain them from lending.

Unlike JPMorgan on Friday and Citigroup on Monday, Goldman Sachs did not release estimates of how close its current capital levels would come to meeting the proposed new rules. Schwartz said the bank was "comfortable" with its position, but wouldn't release details until it knew more about what regulators wanted.

In a statement, CEO Lloyd Blankfein called the quarter "solid," especially considering the "mixed economic sentiment." The earnings covered a period far calmer than a year ago, when markets were fitful over worries about debt-riddled Europe and U.S. budget standoffs.

The latest period did have some volatility, in June, as investors tried to guess how long the Federal Reserve will keep propping up the economy. Though underwriting and trading on behalf of clients did good business compared to a year ago, those areas were down compared to the first quarter. Bond prices have been falling in recent weeks as investors try to guess when the Fed will pull back on its huge bond-buying program. Schwartz said that the willingness of Goldman's clients to take risks had "fluctuated" throughout the quarter.

"Clients are basically sitting on the edge of their seats for every communique out of the Federal Reserve," he said.

While the earnings blew away analysts' forecasts, some were unimpressed. They noted that results had been helped by a lower tax rate and the bank's sale of most of its reinsurance business. And while Goldman traded more in bonds, currencies and commodities on behalf of clients, it also noted that revenue from trading mortgage and interest rate products was down.

Citigroup analyst Keith Horowitz called the results "a relatively low quality beat" and said he had expected a bigger increase in revenue from trading bonds for clients. Evercore analysts, led by Chris Allen, added that the bond trading revenue was below levels seen at JPMorgan Chase and Citigroup.

Like many of its peers, Goldman is slimming down both to save money and to try to avoid extra scrutiny from regulators. New regulations have dried up old sources of revenue and made it more expensive for banks to hold risky assets. Total assets were down about 2 percent over the year. The bank also cut about 2 percent of its staff, or 600 jobs.

Profit was $1.9 billion after payments to preferred shareholders, compared with $927 million a year ago.

Per share, those profits were $3.70. Analysts polled by FactSet had expected $2.83.

Revenue was $8.6 billion, up 30 percent from $6.6 billion a year ago. That also beat the expectations of analysts, who had forecast $8 billion.

Revenue from the unit that trades on behalf of clients was up 11 percent. Revenue from underwriting stocks and bonds soared 45 percent.

The bank said it set aside more money, $149 million, for potential lawsuits and regulatory proceedings, but didn't give details. The bank has been setting aside more money for legal and regulatory expenses recently. In the most recent three quarters, it has set aside a combined $519 million. In the three quarters before that, it set aside $176 million.

A former Goldman Sachs trader, Fabrice Tourre, went to trial Monday in New York, accused of selling mortgage-backed securities that he knew were going to fail. Goldman already settled related charged with the Securities and Exchange Commission in 2010, though it still faces private lawsuits.

Goldman's stock fell $2.30, or 1.4 percent, to $160.70. It's still up 26 percent this year.