Goldman Sachs' earnings may raise some interesting questions

Two big questions loom over Goldman Sachs' first-quarter earnings announcement tomorrow morning. The first is obvious: How well did the company do? Rumors are already circulating that Goldman Sachs (GS) will post its second-most-profitable quarter ever, so the market will probably be looking for good news. That leads to the second question: What is it going to do next?

Goldman Sachs could take advantage of better-than-expected results to formally announce a big stock offering. The news broke last week that Goldman would sell shares to help rid itself of the $10 billion investment it received from the Treasury Department last fall. What better time to unveil such a move than when expectations-beating earnings already have investors cheering?

For Goldman, the bar is high. The company posted a $7.01 a share profit in the fourth quarter of 2007, a period that included the final spurts of economic expansion before the recession set in. Analysts expect Goldman to report a profit of $1.59 a share, a modest 5.3 percent increase over last year's first quarter net income. To get into second-best-quarter-ever territory, it would need to beat that consensus estimate by at least a factor of four.

Such a feat will undoubtedly leave investors asking a third question: How did they do that?

After all, Goldman Sachs isn't immune to the financial crisis and its chilling affects on the investment banking business. In fact, according to data compiled by Thomson Reuters, Goldman advised on $160.3 billion worth of mergers and acquisitions in the first three months of 2009, down 25.5 percent from the same period last year. And even as fewer companies are issuing new stock and bonds, Goldman's share of the debt and equity underwriting market has shrunk, falling 0.4 percent in the first quarter, Thomson Reuters estimated.

Yet those businesses don't provide all -- or even most -- of Goldman Sachs' revenue. And given the cloud of bailouts banks and investment firms are operating under these days, investors will be watching closely to see how much Goldman Sachs benefited from being the largest recipient of payments AIG (AIG) made to its trading counterparties. Or how much it will gain from the recent change in accounting rules governing how banks value hard-to-price assets like mortgage-backed securities and collateralized debt obligations.

Investors may get their answers tomorrow.
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