Beyond big trading gains, Goldman saw banking revenues fall

Goldman Sachs (GS) announced it posted its biggest quarterly profit ever in the second quarter, thanks to headline-grabbing trading revenue. But what else did the financial powerhouse disclose?

As The New York Times' Cyrus Sanati points out, Goldman offers very few clues about how its record profit came to be. For outsiders, its fixed income, currencies and commodities trading desk might as well be a black box. But even so, there's plenty of revealing information in the results announced today.

Here are a few points worth noting:

1. Nothing to see here. Goldman has found itself in the middle of a couple of big news stories this week, but Viniar didn't really address them in his call with investors. On CIT, the teetering commercial lender to which Goldman has extended a $3 billion credit line, he said only that the firm is "fully hedged."

And none of the analysts on the call asked about the July 3 arrest of a former Goldman employee on suspicion of stealing the secret code that powers the company's high-frequency trading operation. And, not surprisingly, Viniar didn't volunteer any details of the potential impact of the alleged theft on Goldman's bottom line.

2. Trading gains mask decline in fee income. Everyone's talking about Goldman's massive gains from proprietary trading and investments. But that income is covering over big declines in its other businesses. And a heavier reliance on trading means more risk.

Fat income from underwriting stock sales couldn't stave off a 15 percent year-over-year decline in investment banking revenue, mostly due to the paucity of corporate takeovers. And Goldman's asset management arm saw revenue fall 28 percent from the same period a year ago.

3. Commercial real estate investments fall. Wall Street watchers have been warning that losses on investments in properties like office buildings, hotels, shopping malls and casinos will be the next big threat to banks' financial health.

Goldman, it would seem, is not immune. The results announced today include a $700 million loss on commercial mortgages and a $499 million loss on equity investments in business real estate, as well as an another $170 million in write-downs.

Viniar said Goldman has a $8 billion portfolio of commercial real estate investments, including $1.6 billion of mortgage-backed securities and $6.4 billion in loans. "That's marked, really, in the low 50's," he said on the call. That suggests Goldman's carrying those investments at about half of their face value.

4. Paying Uncle Sam. When Goldman bought back the investments it received under the Treasury Department's Troubled Asset Relief Program, or TARP, it also paid the government a final dividend of $426 million, it said in its statement.

And Goldman will set aside $1.5 billion to cover corporate taxes in the quarter. During the first six months of this year, its effective tax rate was 31.5 percent, it said.
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