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Goldman Does It Again With Profit Beat

Dan Freed

Goldman Sachs(GS Quote) posted sliding second-quarter profits Tuesday, but easily topped Wall Street's expectations tempered by the lingering credit crunch.

The firm earned $2.09 billion, or $4.58 per share, for the second quarter, vs. $4.93 per share for the second quarter of 2007 and $3.23 for the first quarter of 2008. Analysts polled by Thomson Reuters had expected a profit of $3.42 a share.

While Goldman's stock was flat in trading Tuesday, the firm, which had thus far escaped the credit crunch relatively unscathed, appeared to have dodged another bullet.

"Given the difficult market conditions, we are particularly pleased to be able to report strong results for the second quarter," Chairman and CEO Lloyd Blankfein said.

Rumors that the firm was preparing big writedowns to leveraged loans hit the stock last week, but the losses did not materialize. Reports did surface on Tuesday that the firm is close to bailing out a $7 billion structured investment vehicle, or SIV, which may have weighed on the stock. The SIV was run by British hedge fund Cheyne Capital.

Goldman's results, however, come as its competitors face much deeper struggles. On Monday, Lehman Brothers (LEH Quote), as it had warned a week earlier, reported a loss of $5.14 per share.

Richard Bove, analyst at Ladenburg Thalmann, said earlier today on CNBC that Goldman "may be the only firm in the world that really understands risk." Explaining his statement to TheStreet.com, Bove said Goldman spends more on its computer systems, has more historical data and dedicates more resources to the task of creating and analyzing computer models that assess risk.

"They've got more IT people than they do traders," he said.

Goldman CFO David Viniar said during a conference call Tuesday morning that the firm has made good progress selling off the overhang of loans made before the credit crisis struck. At the end of the third quarter last year, the bank had $52 billion worth of loan commitments, and it has brought that number down to $14 billion. The figure does not include the $3 billion loan that Goldman will get rid of when it sells Alltel to Verizon (VZ Quote), which did not figure into the second quarter numbers reported today.

True to form for Goldman, the biggest driver was trading and principal investments, which accounted for $5.59 billion of the giant securities firm's $9.42 billion in revenues in the quarter.

The world's largest securities firm also saw revenues 29% higher than it ever reported in its securities services division, which includes prime brokerage. Bank of America analyst Michael Hecht called this "impressive," as he posed a question about it during the call.

Viniar says the securities services growth was due both to global expansion and market share growth. He did not discuss whether Goldman's market share growth came at the expense of Bear Stearns, though that seems likely, given that Bear was viewed by many as the number three prime broker before it went into a tailspin and agreed to sell itself to JPMorgan Chase(JPM Quote) earlier in the year.

Goldman is the second of three major U.S. securities firms to report results this week.

Morgan Stanley (MS Quote) will report results Wednesday. Merrill Lynch(MER Quote), the remaining U.S. investment bank, will finish its quarter June 29.