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Goldmans Stunning Earnings

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by Yves Smith and Felix Salmon
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Sep 20 2007 12:00am EDT

Goldman's Stunning Earnings

Hank Paulson surely has a hint of a smile on his face this morning. Even as he earnestly tries to protect Main Street from suffering too much as a result of the Wall Street crunch, in the back of his head he'll know that his his alma mater, Goldman Sachs, just reported earnings of $2.85 billion in the third quarter.

For a firm whose hedge funds are imploding, Goldman Sachs certainly seems to be doing astonishingly well: everything else it touches turns to gold. Profits were up 79% from a year ago; revenue is up 63%; return on equity is now well over 30%. The firm made money in mortgages, thanks to its hedging strategy, monetized the green-technology bubble by flipping a wind-power company for $2.15 billion, and, oh yes, saw investment-banking revenues rise above $2 billion for the quarter as well. That $1.5 billion write-down on junk-rated loans? Who cares?

It's a commonplace to describe Goldman Sachs as a glorified hedge fund, but in fact it's much better than that, as these results show. Somehow, its prop traders can consistently make enormous sums of money with Goldman's own capital much more effectively than the same traders can do with other people's money when they start up a hedge fund either internally or externally.

Goldman's results also make it much harder for Morgan Stanley or Bear Stearns to blame market conditions for their weak earnings. A good investment bank should be able to thrive on volatility; Goldman certainly seems to be doing so.

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