At a time when many financial firms are shying away from risk, Goldman Sachs gs is betting the other way — and it's paying off.
On Tuesday, the Wall Street bank reported a 65% increase in second-quarter earnings to $3.4 billion, as revenue jumped 46% to a record $13.8 billion.
"This environment is not conducive to straightforward solutions, and our culture of innovation and nimbleness allows us to react quickly," said David Viniar, Goldman's CFO, in a conference call with analysts.
With decreased competition from the demise of Lehman Bros. and Bear Stearns, Goldman's trading desks have been busy, leading to record revenue from fixed-income, currency and commodity trading totaling $6.8 billion. Goldman shares rose just 22 cents to $149.66 Tuesday but are up 78% this year.
"There are fewer players, and competitors like Morgan Stanley have pulled back on risk-taking, which benefits Goldman," says Ben Wallace, securities analyst at Grimes & Co.
Goldman's solid reputation has also helped its capital markets performance. As the credit markets thawed and stock prices rose in the second quarter, corporations rushed to issue stock to raise financing, many using Goldman as an underwriter. Goldman's revenue from stock underwriting set a quarterly record of $736 million and stock trading generated $3.2 billion.
"Goldman is a beneficiary of the market disruptions of 2008. ... (It is) able to aggressively seek share gains while competitors continue to be distracted with integrating acquisitions or simply remain more risk-averse," says Steve Stelmach, an analyst at Friedman Billings Ramsey.
Traditionally one of the highest-paying Wall Street firms, Goldman is expected to give its employees fat pay packages this year to reward them for performance. In the quarter, it set aside $6.7 billion for compensation and benefits, up 47% from last year, for its 29,400 employees.
However, Goldman last fall was among the large banks that took government bailout money, receiving $10 billion. Though it has paid the amount back with interest, Goldman could find itself vulnerable to criticism about any perceived excesses.
Large payouts, such as the $68.5 million for CEO Lloyd Blankfein in 2007, could be controversial now that bonuses are a charged issue. "The payouts will generate political ire," says Benjamin Hermalin, finance professor at the Haas School of Business. Earlier this year, lawmakers blamed large Wall Street bonuses for encouraging a culture of outsized risks, thus leading to last year's financial crisis.
Goldman's stellar results might be difficult to match for other banks reporting this week, given their exposure to large residential and commercial mortgage loan portfolios, where defaults are high. JPMorgan Chase reports Thursday, followed by Citigroup and Bank of America on Friday.
In other earnings reports, health care products maker Johnson & Johnson JNJ said its second-quarter profit fell and server and software maker Sun MicrosystemsJAVA said it also expects results below estimates.
Johnson & Johnson's profit fell 3.5% due to lower sales, particularly for its prescription drugs, and the weak dollar.
Still, the world's most broadly based health care company handily beat Wall Street expectations, partly due to tight cost controls.
The maker of baby shampoo, contraceptives and biotech drugs earned $3.21 billion, or $1.15 a share. That was down from $3.33 billion, or $1.17 a share, a year ago.
Revenue totaled $15.24 billion, down more than 7%, on sharp drops in sales for two drugs with recent generic competition.
Sun Micro, which is being bought by Oracle in a $7.4 billion deal, predicts a loss of 24 cents to 34 cents a share in the quarter ended June 30. Excluding one-time items, Sun expects a loss of 6 cents to 16 cents a share.
Sun Micro expects sales between $2.58 billion and $2.68 billion, down from $3.78 billion a year ago.
Analysts polled by Reuters, who typically exclude special items, forecast a loss of a penny per share on sales of $3.03 billion.
Contributing: The Associated Press