Never any surprises with Goldman Sachs (NYSE:GS). No matter what gets thrown its way, it finds a way to generate ridiculously huge numbers.
Even if they aren't, oh ... what's the word ... true?
OK, Goldman's fourth-quarter $4.95 billion, $8.20 per share profit that blew expectations away was legitimate. No rules were broken, as far as I know. But digging deeper shows just how important it is to take these headline numbers with a grain of salt.
Breaking out major segments' revenue for the quarter, here's what you get:
|
Segment |
Q4 2009 |
Q3 2009 |
|---|---|---|
|
Investment Banking |
$1.6 billion |
$899 million |
|
Trading/Principal Investments |
$6.4 billion |
$10 billion |
|
Asset Management |
$1.6 billion |
$1.4 billion |
|
Total Net Revenue |
$9.6 billion |
$12.4 billion |
That looks pretty bad. Revenue tumbled, primarily in the trading segment. JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) showed the same trend when they reported earnings. Same with Bank of America's (NYSE:BAC) results yesterday, when I wrote, "Goldman reports earnings tomorrow morning. If the same trend in capital markets continues, it could be a very, very interesting report."
And it is. The two largest divisions of trading and principal investments fell dramatically:
|
Segment |
Q4 2009 Revenue |
Q3 2009 Revenue |
|---|---|---|
|
Fixed Income, Currency, Commodities |
$4.0 billion |
$6.0 billion |
|
Equities Trading |
$1.0 billion |
$1.8 billion |
But if revenue fell so much, why was net income so strong?
You've probably heard by now; every news agency picked up on it: Goldman reduced its compensation expense last quarter, leaving more money for shareholders.
What hasn't been discussed enough is the extent of which this took place:
Compensation and Benefits Expense
|
Q4 2009 |
Q3 2009 |
Q2 2009 |
Q1 2009 |
|---|---|---|---|
|
($519 million) |
5.4 billion |
6.6 billion |
4.2 billion |
You're seeing that right: Goldman computed a negative compensation expense for the quarter. That's the equivalent of paying its employees nothing. Now, of course, workers will still get paid for the year, since year-end bonuses accrued heavily over the previous three quarters.
But this "payless" quarter is obviously a one-time deal. If you take a normalized compensation expense -- heck, take half a normalized compensation expense -- it's safe to say net income would have been reduced by $2-$3 billion. When we're talking about a $4.95 billion profit, that's sort of ... kind of ... completely ... important.
What do you think? Share your thoughts in the comment section below.
