Can Bank of America and Citigroup compete with Goldman?
Analysts are not expecting to see B of A and Citi do as well. And, let's face it, they're still wards of the state -- holding onto a combined nearly $400 billion in TARP and other bailout money. Not only that, but their first quarter earnings were overshadowed by non-cash gains related to a change in accounting rules for toxic waste.
Before examining what B of A and Citi are expected to earn for the second quarter, let's look at Goldman's $3.4 billion second quarter profit, which was 48 percent higher than its Q2 2007 profit of $2.3 billion -- the year when it paid its record bonuses. Some analysts are now expecting Goldman to pay a compensation of $773,000 per employee in 2009 -- 17 percent more than the $662,000 it paid in 2007. If Goldman can sustain this profit growth for the second half, it will have earned its money.
How did Goldman do it? Beyond vague references to profits in fixed income, commodity, currency trading and equity issuance -- it's hard to tell. But I wonder whether a detailed description of how Goldman profited on its trading -- beyond putting 33 percent of its capital at risk -- would withstand the light of day. In fact, thanks to Goldman's use of so-called dark pools, its electronic trading, say, to profit from minute millisecond price discrepancies between the S&P 500 index and individual stocks, is hidden through an "immediate or cancel" feature.
Goldman does have a huge advantage over the competition when it comes to people. Goldman hires brilliant team players -- one might think of this as an oxymoron, but it really is the key to Goldman's success. That's because when brilliant people debate, they consistently come up with better answers than a lone superstar.
Meanwhile B of A and Citi both look to post better earnings -- though a far cry from Goldman's. Analysts expect B of A to report a profit of 21 cents a share for the quarter compared with 72 cents a share in the year-ago quarter. And B of A faces a raft of one-time charges, including a special assessment of $900 million from the FDIC; mark-to-market hits on its fair value debt of $2 billion; another mark-to-market expense on its counter-party insurance agreements of $1.5 billion; and further costs associated with its Merrill Lynch acquisition.
Citi revenues and losses are tough to predict. Revenues may range between $22 billion and $24 billion. Its second quarter loss per share could range from a nickel per share to 76 cents per share. Barclays Capital analyst Jason Goldberg thinks Citicorp will be profitable, while Citi Holdings -- the bad bank -- will post an operating loss. The FDIC's special assessment fee could hurt Citigroup's results by 10 cents a share. IStockAnalyst forecasts revenues of $23.33 billion and EPS of 24 cents.
In a nutshell, Goldman sets a record while B of A and Citi continue to stumble.
Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares and has no financial interest in the other securities mentioned.