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Goldman Sachs ( GS) is the class leader among investment banks, a perennial winner in a group of overachievers.

But Goldman Sachs isn't your typical financial institution: It's a hedge fund masquerading as a "bank holding company," and its profits are derived from risky bets.

TheStreet.com Ratings

Shares of Goldman Sachs, rated "hold" by TheStreet.com Ratings, have declined 36% over the past year, outperforming the S&P 500 index and industry competitors such as Morgan Stanley ( MS) and Citigroup ( C). Former rival Bear Stearns has been absorbed by JPMorgan Chase ( JPM), and Lehman Brothers is defunct.

Just three months after posting its first quarterly loss since going public a decade ago, Goldman Sachs returned to profitability. First-quarter earnings per share were $3.39, trouncing analysts' expectations. Investors have sent the stock up 65% since the market rebound began March 9. But Goldman Sachs isn't a safe stock for most individual investors. The New York-based bank's disclosure is opaque and its business model is founded upon volatility.

Almost $6.6 billion, or 70%, of quarterly revenue came from Goldman Sachs' FICC unit, which stands for Fixed Income, Currency and Commodities. The division takes bets from clients and charges a fee, and also places bets with its own money.

This is the engine of the Goldman Sachs profit machine: speculating where the market (or markets) is heading. But there is no transparency on how the banks' traders are placing their bets, who is placing them and how much they are betting.

Goldman Sachs' value-at-risk in the first quarter rose to $240 million, about nine times more than at JPMorgan. Value-at-risk is the sum that a bank thinks it could lose from trading in a single day.

The reason for this lack of disclosure is simple: Goldman Sachs prides itself on attracting and retaining top Wall Street talent. If the company divulged trading strategies, profit-making opportunities would evaporate. Goldman Sachs' talent doesn't come cheap, either. The company's largest expense is compensation and benefits, which burned through $4.7 billion, or 50%, of quarterly revenue.

Since Goldman Sachs became a publicly traded company, the share of revenue from traditional investment banking, such as equity and debt underwriting and financial advisory, has declined. During fiscal 1999, investment banking comprised 33% of revenue, while trading and principal investments, which encompasses all investing done in proprietary accounts, took up 43%. By fiscal 2007, investment banking contributed a meager 16% of annual revenue, while trading and principal investments accounted for more than 68%.

This shift is intuitive. If you have the wherewithal to beat the market, after all, you shouldn't waste your time advising clients. You ought to bet. And bet big.

But Goldman Sachs isn't infallible. The company is burdened by an exorbitant leverage ratio of 14.6. The company believes that its liquidity position justifies the leverage. Goldman Sachs boasts a Tier 1 capital ratio of 13.7%, which is well above the regulatory requirement of 4%.

Unlike JPMorgan and Citigroup, Goldman Sachs isn't straining under the weight of a consumer-lending business. JPMorgan and Citigroup will be hindered by delinquent mortgages and credit-card defaults for the rest of 2009. Goldman Sachs faces less downside as the economy bottoms and may actually benefit from more volatility if traders are able to capitalize on market swings.

Goldman Sachs is an inherently risky company, and individual investors should be wary. The company holds over $59 billion of illiquid Level 3 assets, which are priced using an in-house model, whose criteria is unknown. Until the outlook for banking becomes clearer, it would be wise for individual investors to avoid Goldman Sachs' stock.

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