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New York » Another financial quarter, another period of blowout profits for Goldman Sachs. With some of the other big banks still losing money, what's Goldman's secret?
Gutsy trading, talented employees and influence in Congress and the White House have helped. But Wall Street's largest remaining investment bank has also benefited from billions in taxpayer-funded bailouts, as well as a sharp drop in the number of competitors.
Even as the recession drags on, the 140-year-old firm is having a very good year. The latest evidence is that Goldman on Tuesday reported second-quarter profits of $2.7 billion, off a stunning $13.8 billion in revenue. That's a 65 percent profit jump over the same quarter last year.
Other big banks are set to report earnings in the coming days, but analysts predict they won't be as strong as Goldman's. Here are some questions and answers about how the investment bank manages to thrive when the financial sector -- and the economy as a whole -- are struggling.
Q: What exactly does Goldman Sachs do?
A: Goldman started out trading short-term corporate debt. Today, it buys and sells securities and financial products that include stocks, bonds, currencies and commodities such as oil. It also underwrites securities offered by other firms, and advises on billion-dollar mergers and acquisitions. In addition, the firm sells research and helps rich clients manage
Q: Doesn't it seem like Goldman always makes more money than other Wall Street firms?
A: Goldman has long had a reputation as one of the world's top investment banks. It's known for stacking its ranks with the best and the brightest, and rewarding them.
The strategy seems to have worked. The firm has had just a single money-losing quarter since going public in 1999, and its stock is up a whopping 77 percent this year. In contrast, the S&P 500 index -- a good measure of where the overall market stands -- is down 0.2 percent.
Q: But what does Goldman do that others don't?
A: It doesn't hurt that several of the bank's alumni have gone on to take top jobs in government, including Henry Paulson, the last Treasury secretary under the Bush administration and a former Goldman CEO; Josh Bolten, chief of staff under President George W. Bush; and former co-chairman Robert Rubin, who served as Treasury Secretary under President Bill Clinton.
Many experts believe Goldman's success also is rooted in its savvy, high-octane trading style. The bank took in a record $6.8 billion in revenue during the second quarter. Other firms haven't been as aggressive, limiting their risk exposure but also their profit potential.
Goldman has also made a mint underwriting securities, for which it takes a cut of each share offering it handles.
Q: How has Goldman benefited from government bailouts?
A: Goldman took $10 billion as part of the government's $700 billion bank rescue. Last month, it became one of the first banks to repay the money, freeing it from onerous restrictions on executive pay and hiring.
It also was among several U.S. and foreign banks that were paid a $12.9 billion chunk of the $182.5 billion in federal aid used so far to rescue crippled insurer American International Group. The money went to cover banks' losses on complex mortgage investments.
Goldman also took advantage of a Federal Deposit Insurance Corp. program that guarantees banks' newly issued debt.
Q: Who are Goldman's competitors?
A: Because of the financial mess, of the five big stand-alone U.S. investment banks in business last year, one (Lehman Brothers) filed for bankruptcy and two (Bear Stearns and Merrill Lynch) sold themselves. That leaves Morgan Stanley as Goldman's main rival.
Q: I'm just an ordinary investor with a 401(k). How does Goldman affect me?
A: Some believe Goldman has an outsized influence on the financial markets. During oil's record-breaking run last summer, some market watchers blamed the spike on Goldman's prediction that prices would hit almost $150 a barrel.
Q: How will the Obama administration's proposed financial reforms affect Goldman?
A: It's too early to tell, but many experts say the proposed rule changes won't dramatically change the way Wall Street firms do business. Since converting to a bank holding company last year, Goldman is under tighter scrutiny from regulators. That has limited the amount of leverage Goldman can take on when betting on securities and other financial products.
