Banking & Finance

Goldman Sachs Crushes Estimates As Critics Stew, Firm Appears To Moderate Compensation As UK Starts New Probe

Goldman Sachs Group (NYSE: GS), in the shadow of an SEC investigation, beat earnings estimates handily. It was not a surprise after Citgroup Inc. (NYSE:C), Bank of Americ (NYSE: BAC), and JPMorgan Chase (NYSE: JPM) posted strong investment banking results. The UK’s Financial Services Authority began of formal probe of Goldman’s derivative sales activities at the same hour that the firm released its number

The news may touch a nerve at the SEC and among others that would like to bring the firm’s reputation and profitability down a notch. Big profits at Goldman means big paydays for management and talented traders and bankers. But, the bonus ratios to earnings may be falling by design

Goldman posted net revenues of $12.78 billion, a 36% improvement, and net earnings of $3.46 billion for its first quarter ended March 31, 2010. Diluted earnings per common share were $5.59 compared with $3.39 for the first quarter of 2009.

Net revenues in investment banking were $1.18 billion, 44% higher than the first quarter of 2009. Goldman’s place as the world’s premier investment house is still firmly in place.

Net revenues in trading and principal investments were $10.25 billion, 43% higher than the first quarter of 2009 and 60% higher than the fourth quarter of 2009. The number show Goldman’s vulnerability if Congress elects to put any significant restrictions on propriety trading at financial firms considered “banks.”

The accrual for compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as payroll taxes, benefits and severance costs) was $5.49 billion for the first quarter of 2010. The ratio of compensation and benefits to net revenues was 43.0% for the first quarter of 2010, down from 50.0% for the first quarter of 2009. Given Goldman’s numbers, this may be a sign that it is backing off the lavish bonuses that is has paid its bankers.

Goldman may have decided that its PR problem will improve if every employee at the firm is not being paid millions of dollars.

Douglas A. McIntyre