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Is All That Glitters Goldman?

Given the market's reaction to Goldman Sachs' (NYSE: GS  ) second-quarter earnings release, it's apparent that investors were hoping for more from the investment banking giant. It's not like Goldman completely missed estimates for the quarter -- though revenue was light, it beat Wall Street's average earnings per share estimate by $0.06. But investors have gotten used to Goldman not only beating both top- and bottom-line estimates, but blowing them away. They were likely also expecting the firm to top the strong results that competitor Lehman Brothers (NYSE: LEH  ) reported earlier in the week.

Like I said, it's not like it was a terrible quarter; in fact, "record" may be one of the most frequently used words in the press release. Goldman cited firm records with first-half earnings per share, quarterly investment banking revenue, investment banking backlog, asset management fees, and securities services revenue. Whew. But despite all the records, both revenue and net income for the quarter were basically flat versus the prior year.

The good news was that both investment banking/asset management and securities services showed solid year-over-year increases. I-banking revenues were up 13% year over year, thanks in large part to the strong mergers and acquisitions environment and all the recent LBO activity. Revenue for asset management and securities services was also up 13% year over year. In that segment, Goldman saw good growth from its prime brokerage business and asset management fees. It's a bit disappointing, though, to see that incentive income was down, suggesting that Goldman's funds may still be underperforming.

Trading and principal investments was where Goldman took the pain for the quarter. Specifically, its fixed income, currency, and commodities (FICC) arm was down 24% versus May 2006, largely because of continued problems from the subprime mortgage market. Though Lehman also took a hit in its fixed income segment, it was able to offset that softness with a knockout quarter from its equity capital market segment, a feat that Goldman couldn't quite match. For the quarter, Goldman's equity segment was up just 6% year over year.

Commenting on the results, Goldman's CEO, Lloyd Blankfein, noted that market conditions have remained favorable and that they "play to our strengths as a leading advisor, financier and investor." In other words, conditions are good, and it's not in the Goldman DNA to underperform.

In the end, this was not the "Goldman" quarter the market was looking for. Macro market conditions notwithstanding, it will be interesting to see how well the firm can rally the troops and regroup for the third quarter.

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...

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