Goldman Makes It Rain

Three weeks ago, it was reported that Goldman Sachs (NYSE: GS  ) was on track to pay its employees the biggest bonuses ever, corresponding with what was shaping up to be the best quarter in the investment bank's history.

And that it was. Net income for the second quarter came in at $3.4 billion, or $4.93 per share on record revenue of $13.8 billion. Without a $426 million dividend paid to taxpayers for the $10 billion TARP payment (which has since been repaid), Goldman would have earned $5.71 per share -- up 25% from the year before.

Record results might seem odd just nine months after Wall Street bit the dust. But the reason Goldman has turned into such a rainmaker is, ironically, precisely because of both Wall Street's and the economy's collapse.

The bulk of Goldman's earnings came from a) divisions with much less competition now that Bear Stearns, Lehman Brothers, and armies of hedge funds have died, and b) divisions that help other companies raise debt and equity to make it through the economic downturn. Have a look:  

Division

Net Revenue

Change (YOY)

Equity Underwriting

$736 million

19%

Debt Underwriting

$336 million

25%

Fixed Income, Currency, and Commodities

$6.8 billion

186%

Investment Banking Advisory (mergers and acquisitions)

$368 million

(54%)

Total Trading and Principal Investments*

$10.8 billion

93%

*Houses fixed income, currency, and commodities division.

The big standout -- fixed income, currency, and commodities -- is blowing up not only from less competition, but a steep yield curve thanks to low interest rates and continued volatility in debt markets. This isn't unique to Goldman. Last quarter, JPMorgan Chase (NYSE: JPM  ) and Citigroup (NYSE: C  ) both had big quarters in fixed-income trading as well.

The other moneymakers, equity and debt underwriting, have the wind behind their backs as companies from all industries exploited market optimism to raise capital in the second quarter. After markets rebounded in March, everyone from Bank of America (NYSE: BAC  ) to Microsoft (Nasdaq: MSFT  ) lined up at investment banks' doors, begging to raise capital while they could. All of this underwriting translates to big investment banking fees.

This is all great news for Goldman -- and will likely spill over to Morgan Stanley (NYSE: MS  ) when it reports next week -- but we have to ask how sustainable these record earnings are. Credit spreads will eventually retract, companies will stop issuing one-time equity boosts, and competition will return. Ultimately, that could make Goldman's blowout earnings look more like a one-off event than a permanent return to greatness.

But for now, Goldman is minting money. Enjoy it while it lasts.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Microsoft is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (21)

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  • Report this Comment On July 14, 2009, at 4:07 PM, PSU69 wrote:

    GS will go above $300 before Santa does his run (09).

  • Report this Comment On July 14, 2009, at 5:17 PM, plange01 wrote:

    a few months ago goldman was near failing and begged for bank status.as soon as things pick up they are right back to their old ways taking huge risks.those giant profits can just as easily swing the other way next quarter.US taxpayers can be expected to bail them out after this...

  • Report this Comment On July 14, 2009, at 6:23 PM, AdirondackFund wrote:

    I think it was 'Fletcher' in 'The Outlaw Josie Wales' who quipped the unforgetable phrase "Don't pi$$ down my back and tell me it is raining." 1 Billion was earned from 'underwriting operations', not too dissimilar to the 'program trading' scandal GS pulled in the 1987 Crash, and which is now illegal.

    It was Mighty White of GS to run to the rescue of failing Banks to help raise money as a result of an Economic Collapse which occurred under their Former Chairman's Reign as Treasury Secretary. Please explain to me how this is not insider trading?

    Adding insult to injury is the additional fact that all of these 'deals' were 'financed' with our grandchildren's money. And you thought the Iranians were the only ones who hide behind human shields; except in this case GS is hiding behind 'unborn children' which makes things worse still.

    No. It seems closer to the truth to say that GS is emminently skilled at robbing the public....and very little else. It certainly has no track record at all of managing a successful Economy. Their expertise is more in the field of destroing things, which they do OH SO WELL.

    Did somebody say 'call a Cop?'

  • Report this Comment On July 14, 2009, at 8:37 PM, kellogg9 wrote:

    Was watching TYT the other day regarding this and i am appaled by what they are doing in robbing the american people. It's a shame this is the wya it goes. $600K bonus on AVERAGE for each employee (that is if it actually goes to each) is insane for nothing done.

    Michelle

    http://www.stockcoupons.com/

  • Report this Comment On July 14, 2009, at 9:52 PM, RaulChapin wrote:

    Don't blame the company for using the TARP money, blame the corrupt politicians that pushed despite its unpopularity, the corrupt politicians with their fear mongering... the change leader (Obama) as well as Bush... the world was coming to and end with no bailout.. well a few benefited from it... and everyone gets to pay its costs... even if the money was given back. If i take 10 billion dollars from the goverment, go to vegas, and return with 11 billion.... it is still illegal... if the goverment and banks do the same with 10 billion from the unborn... then it is financial rescue.

    O well... people have the governments they deserve and elect...

  • Report this Comment On July 14, 2009, at 10:52 PM, xetn wrote:

    It doesn't hurt that a large percentage of ex-GS employees are now working for the Obama administration. (The same could be said for the Bush administration)

    And, it doesn't hurt that $13 billion of TARP that went to the AIG bail-out went to G.S.

  • Report this Comment On July 14, 2009, at 10:57 PM, xetn wrote:

    I forgot to post these two articles that give some insite into the history and workings of GS:

    http://www.lewrockwell.com/orig10/taibbi7.1.1.html

    and

    http://www.lewrockwell.com/taibbi/taibbi8.1.1.html

  • Report this Comment On July 15, 2009, at 6:16 AM, plange01 wrote:

    both JP Morgan and poorly run Goldman saks have gone right back to their old ways in just a few months.now that they know the can expect a bailout WHEN they screw up they are taking even bigger risks than before!

  • Report this Comment On July 16, 2009, at 5:01 PM, AustinAndy wrote:

    From the former treasury secretary to the others who are overseeing the TARP and government bailouts, almost all of the individuals were or are employees of Goldman Sachs. Lehmann Bros.was their biggest competitor; they were allowed to go bankrupt even though it shook the entire world economic community. Bear Stearns was a big competitor and it was allowed to go bankrupt. Merrill Lynch sold itself as a basket case to Bank of America, and the overseers told the CEO that he had to follow through with the takeover even though losses at ML were HUGER than divulged to BofA, and the GS employees now with the government forced the merger. Solomon Bros. was a big competitor; yep, you guessed it, it was allowed to fail. If your employees are in bed and in control with the government overseers, and you follow the money, GS feathered its own nest at taxpayer expense very profitably well.

    If you want to really break news, follow the Goldman Sachs influence in government and you will be (unpleasantly) surprised.

  • Report this Comment On July 20, 2009, at 10:58 AM, plange01 wrote:

    last winter when goldman sachs was on the edge of failing we found out just how weak this company is.they had to beg the government for a loan and bank status to survive.as soon as things started to change the enornous greed of the people running this company took right back over.to make the recent profits they showed huge amounts of risk were taken.this works both ways this quarter they won but if next they lose then this time they will be allowed to fail..

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