Goldman Sachs Posts $3.44 Billion Profit

July 14, 2009— -- Goldman Sachs this morning announced huge profits during its second-quarter: a whopping $3.44 billion, vastly surpassing analyst predictions of a $2 billion profit.

The stock market was poised for a sharply higher open today, thanks to the surprisingly higher profits from Goldman. The firm's stock was trading around 150 points today, up more than triple from a low of 52 points a share in November.

In this troubled economy, just how did Goldman do it?

"They've taken bets. They put their money behind those bets, and they've made a tremendous amount of profit," said Seamus McMahon, president of McMahon Advisory LLC.

CEO Lloyd Blankfein pointed to "improving financial market conditions and a deep and diverse client franchise" as a reason for the massive profits.

Investors are interested to see if massive bailouts helped banks get their finances back in order. Goldman Sachs was the first major U.S. bank to report its earnings, and will be followed by JPMorgan Chase, Bank of America and Citigroup later this week.

Aside from banks, Intel, the world's largest chipmaker, will also report its earnings today, followed by American Airlines Wednesday and Google Thursday.

The Treasury spent more than $200 billion to bail out financial institutions, $10 billion of which went to Goldman Sachs. The Wall Street firm has since paid it back.

"Have we offered them very cheap financing backed by the government, which has allowed them to take great risk? Absolutely," Alexis Glick of the Fox Business Network said on "Good Morning America," today. "At the end of the day, though, if they are able to turn the page, which they're starting to do, it means higher taxes. And for right now, if you look at what's happening to states, to municipalities, to the federal government, that is what we need."

"I know it's one of those oxymorons," she continued. "You feel like you should be really angry about the outrage here. But on the other hand, we need the money. We need them to turn, because we're inextricably linked."

After receiving $10 billion from the Treasury in October and paying it back with interest only eight months later, Goldman Sachs reaffirmed its position as one of the nation's strongest and most profitable banks after turning in better-than-expected earnings. Yet even as the bank reaps the benefits of being one the less bruised banks in the financial system, it remains to be seen whether it can sustain these levels of revenues and profits.

Taxpayers may still question whether these profits are a direct result of their tax dollars.

"Why are they allowed to make this kind of money, and when are we, the taxpayer, going to see our money back?" said McMahon.

"The American taxpayer did actually help fuel this trading profit -- the money stabilized the firm at a time when it needed to be stabilized. But they should take heart, on the other hand, because someone is actually making money in this environment despite the risk -- and that is good for the economy," said Charlie Geisst, author of "Collateral Damaged."

Congress Reacts

Asked today about the profits at Goldman, neither Republicans nor Democrats seemed particularly mad about the firm's record profits earned even as the unemployment rate and the federal deficit swell.

"We need regulation reform," said the Senate Majority Leader Harry Reid, who supported the Wall Street bailout last Fall. "And I'm not in this statement criticizing Goldman Sachs because I don't know how they made their money. Okay? But I'm glad, as I've indicated, someone made some money. We're going to take a look at regulation reform. We know in the past that non-regulation has not worked."

To the issue of taxpayers seeing the unemployment rate on the rise, Reid pointed to the stimulus, only 15 percent of which is paid out.

Mitch McConnell, the ranking Republican leader in the Senate, who also voted for the government bailout in October, sees it a bit differently. He thinks there's already too much government involvement. McConnell did not want to talk specifically about Goldman Sachs, but he said the pattern of government intervention that started with the Wall Street bailout needs to be stopped.

"Well, I'll give you a general response," McConnell said., "I think that the American people are appalled to look up and find the government's in the banking business, the insurance business, the automobile business, the student loan business, and now want to be in the health care business even more so than it already is through Medicare and Medicaid. I think the American people are recoiling not only at the amount of debt and spending we're running up, but also witnessing the government involved in all of these businesses. The government needs to get out of these businesses as rapidly as possible."

Goldman Has History of Taking Risks

Critics ask if it's wise for any one bank to take such huge risks while the rest of the economy is still stuck in recession. Huge gambles are, after all, what pushed banks to the brink the first place.

"It's a bit worrisome; because in this marketplace, we realize that profits of that sort require large risks that have been taken," Geisst said.

Goldman Sachs has a long history of taking risks -- and it is profiting from that strategy in this recession.

"Quite a few other banks, large banks, have retreated in terms of risk taking -- trying to guard their bottom lines. But Goldman has forged ahead, looking for profit," Geisst said.

Are Other Banks In Trouble?

Other banks, including Citigroup and Bank of America, are still struggling.

"No one likes obscene profits in times like this, but on the other hand, Americas do like money, and they admire firms that take a risk in order to get a profit," Geisst said.

After receiving $10 billion from the Treasury in October and paying it back with interest only eight months later, Goldman Sachs reaffirmed its position as one of the nation's strongest and most profitable banks after turning in better-than-expected earnings. Yet even as the bank reaps the benefits of being one the less bruised banks in the financial system, it remains to be seen whether it can sustain these levels of revenues and profits.

Goldman's profits came largely from its trading activity for institutional clients at a time when stock markets were bouncing back from significant lows in March. Goldman also made record fees underwriting new stock offerings and assisting companies and municipalities to issue new debt.

For example, Goldman took the lead for the state of California's $6.9 billion municipal bond offering. It was also the lead underwriter for HSBC's $20 billion stock right offering. In some cases, as banks issued stock in order to raise funds to pay back the TARP funds to the Treasury Department, Goldman was the bank hired to manage the stock offering.

With the disappearance of banks able to do this work such as Bear Stearns and Lehman Brothers, and with other banks less willing to take on this type of risk, Goldman stepped in and successfully turned a healthy profit. Compared to a normal trading environment Goldman is not taking huge amounts of risk, according to analysts, but they are one of the few banks taking any risk at all.

Michael Wong with Morningstar said these profits are unsustainable and with each quarter, more banks will become less risk averse and the "trading revenue gravy train is going to run out." Of Goldman's net revenue of $13.8 billion this quarter, $10.8 billion is coming from trading. David Trone with Fox Pitt Kelton pointed out that Morgan Stanley has started to take on more trading risk after not doing so in the first three months of this year.

But not all risk is the same. "The risk that got us in trouble was not this," Kelton said. That risk that helped send the economy into recession came from mortgage-backed securities which imploded as homeowners could no longer able to afford their money payments leading to massive losses on Wall Street.

With these solid earnings, Goldman put aside $6.6 billion for employee compensation. The company is quick to defend this pointing out this money covers salaries, health care and bonuses -- awarded at the end of the year – and is the single biggest cost of running an investment bank. A spokesman for the company also pointed out that despite earning a profit last year, total compensation at the bank was down 50 percent for employees and 75 percent for partners.