Why Goldman's $2 billion profit is no big deal
Filed under: Company News, Earnings
When Goldman Sachs Group (GS) reports on its second quarter tomorrow, analysts estimate that earnings will total $2 billion. That sounds like a big number, but two years ago, when it paid its workers an average bonus of $661,000, it earned $2.3 billion in the second quarter. It looks like Goldman is going to try to pay near-record bonuses in 2009 despite less than record earnings.
How so? Goldman's 2009 pay, expected to average $643,000 for its 28,000 employees, is only 3 percent lower than its average 2007 bonus of $661,000, which seems a bit high if its 13 percent lower earnings for the second quarter of 2009 -- compared to the same quarter in 2007 -- continue for the rest of the year. (Interestingly, the current $18 billion in 2009 bonuses is 10 percent less than the $20 billion estimated in early June.)
This raises several questions: How would anyone but Goldman know that it will report $2 billion in earnings? If so, is Goldman violating the rules regarding discussing its earnings during the so-called quiet period? If it turns out that Goldman did make that much, how did it make a profit when its peers are suffering? Beyond vague references to trading, why is Goldman not required to disclose the sources of its profit? And why is Goldman so eager to pay such high bonuses this year?
It appears impossible that outsiders would be able to estimate so precisely how much profit Goldman would make without some inside information. But these outsider believe that Goldman made its money by taking more risk -- its Value at Risk (VAR) rose over 20 percent in the first quarter -- and outsiders believe that its VAR was high in the second quarter as well.
In taking greater risk, outsiders believe that Goldman made money trading bonds, stocks, currencies, and commodities like oil. They also believe Goldman made money from the high-margin business of underwriting stock offerings, which rose as other financial institutions struggled to raise capital. But it's unclear why other banks could not have done the same thing -- at least in trading.
Why is Goldman going to try to pay such high bonuses this year? As I posted, it could be fear of comp cop, Kenneth Feinberg. But now that Goldman has paid back its $10 billion in TARP money, it may hope to be able to avoid the reach of his claws. This, despite the fact that Goldman still relies on cheap government financing for its borrowing needs.
Nevertheless, with 6.5 million people unemployed, it is probably not good optics for Goldman to be paying its 28,000 people so much. After all, such earnings during bleak economic times might make others -- from Wall Street to Main Street -- just a tinge envious.
Update. Bloomberg surveys analysts who expect Goldman to earn $2.17 billion in the second quarter and analyst Meredith Whitney rates Goldman a buy with a price target of $186 -- the stock is already up 68 percent this year.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
7-13-2009 @ 9:57AM
Patriot Games said...
The controversial climate bill that is set to be taken up by the Senate on Monday after its passage in the House will legislate home inspections by government regulators who will demand to audit every aspect of your property under the threat of substantial and repeated fines if their visits are denied or their demands not satisfied.
The climate legislation is written in a manner that automatically assumes that global warming is taking place and that it is attributed to rising CO2 levels, despite the fact that this is a highly contentious question and is being rejected by more and more scientists as time goes by.
As Tony Pacheco writes in his excellent article today, the bill will “audit every aspect of your home and life”.
The bill states every home owner will receive an energy audit. What is a home energy audit? It is an intrusive visit made by the bureaucrats at the Home Energy Team or a similar group. They will examine and report the way you live your life directly to RESNET (Residential Energy Services Network) . Light fixtures, socket types, spas, hot tubs, windows, appliances, walls and roofs will all be under review. Energy tests will be conducted throughout your house. At the end of the visit you will receive a report and a rating. The report will focus on the changes you need to make and the rating=2 0is called a HERS rating (Home Energy Rating System). RESNET will perform the audits through authorized contractors. RESNET has adopted the Mortgage Industry National Home Energy Rating Standards. The standards set the national procedures for home energy ratings.
According to RESNET, an audit consists of:
Comprehensive Home Energy Audit - A level of the RESNET Home Energy Audit process defined by this standard to include the evaluation, diagnosis and proposed treatment of an existing home. The Comprehensive Home Energy Audit may be based on a Home Performance Assessment (“Comprehensive Home Performance Energy Audit”) or Home Energy Rating (“Comprehensive HERS Audit”), in accordance with the criteria established by this Standard. A homeowner may elect to go through this process with or without a prior Home Energy Survey or Diagnostic Home Energy Survey.
Regulations already in place in some cities for non-residential buildings already carry fines of $2000 a time for preventing bureaucrats from carrying out=2 0inspections. These will simply be expanded to cover all premises under the new climate bill.
Under the RESNET standards for a home audit, the following procedures will become law under the climate bill.
704.1.2.3 The Home Energy Survey Professional shall request copies of utility bills or
written permission to obtain the energy use information from the utility company, and use
them to produce an estimate of generalized end-uses (base, heating, and cooling).
704.1.2.5. Minimum Procedures for an In-Home Energy Survey:
704.1.2.5.1.1 R-values of wall/ceiling/floor insulation
704.1.2.5.1.2 Square footage and approximate age of home
704.1.2.5.1.3 Type of windows: glazing type(s) and frame mater ial(s)
704.1.2.5.1.4 Type, model number, and location of heating/cooling system(s)
704.1.2.5.1.5 Type of ductwork, location and R-value of duct insulation, and any
indications of previous duct sealing
704.1.2.5.1.6 Type of foundation is crawl, basement, or slab
704.1.2.5.1.7 Checklist of common air-leakage sites indicating likely opportunities
for leakage reduction
704.1.2.5.1.8 Estimated age and efficiency of major appliances such as
dishwashers, refrigerators, freezers, washing machines and dryers
704.1.2.5.1.9 Number and type of hardwired light fixtures and screw-in bulbs in
portable lamps suitable for energy efficient re-lamping
704.1.2.5.1.10 Visual indications of condensation
704.1.2.5.1.11 Presence and location of exhaust fans, and determination of whether
they are vented outdoors
704.1.2.5.1.12 Number and type of water fixtures (e.g. faucets, showerheads)
704.1.2.5.1.13 Presence and type(s) of combustion equipment; identification=2 0of
visually identifiable evidence of flame rollout, blocked chimney, and corroded or
missing vent connector.
As we have warned, the climate bill is nothing more than a feast for=2 0bloodthirsty government vampires, who are ready and waiting to suck off the fat hog of the American taxpayer once more.
Ohio Republican Senator George Voinovich says it will take a “miracle” for the Senate to pass the controversial climate bill next week, meaning that the legislation won’t be in place before United Nations climate talks in Copenhagen in December.
The Senator told Bloomberg News that the bill contains “a lot of crap” and that cutting CO2 emissions by 17 per cent before 2020 was an unobtainable goal.
Voinovich’s prediction that the bill will fail is echoed by Senator James Inhofe of Oklahoma, who said that the “razor-thin vote in the House spells doom in the Senate.”
However, Senator John Kerry claims that the bill will pass the Senate next week but that there won’t be enough sway to approve a global treaty that commits other nations to follow the same regulations.
Reply
7-13-2009 @ 10:55AM
Sheng Jing said...
Such populist opinion is nothing but too common sense nowadays. It is pure competition and those excel survive. Simple as that. In good markets, almost everyone benefits and make money. However, in bad days (like now), someone went bellyup (like Bear Stern and Lehman Brothers), but someone come out of the crisis stronger and stronger (like Goldman and Morgan). Life is harsh and simple comparison demonstrates everything. So, it is just socialism if you claim that Goldman employees should receive the same payment as other unemployed people out there. Remember, people are different! Different amount of effort lead to different amount of payment. Hehe
Reply
7-13-2009 @ 11:45AM
j jon said...
GOLDMAN SACHS is just another BERNIE MADOFF scam that is unravling slowly ... GS days are numbered once the USA TAXPAYERS find out that $13,000,000,000 of THEIR MONEY is FLOATING GOLDMAN this year ... the FRENCH said "LET THEM EAT CAKE" then the HEADS ROLLED.
Reply
7-17-2009 @ 9:02AM
ed said...
Goldman has made alot of its money by working the system. How much does their gold manipulation make? How about their advanced computer programs? It's no longer about investing in companies for growth and potential.......its become about how to beat the system without getting caught. No wonder our economy is in trouble. Those principles that made our country great have been sacrificed to greed........and we will all pay!!!!!!
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