Goldman Sachs (GS) announced an 11% drop in earnings for Q2, although their EPS beat estimates. The hit comes most from declining M&A fees as merger activity has slowed down. While YoY numbers look good, their earnings over Q1 seem to be fading. For example, its trading revenue, a staple of strong revenue for the company was up 37% from a year earlier but down 37% from Q1.
Like many big banks, they are gearing up for the impacts of Dodd-Frank which requires them to comply with the Volcker Rule, which limits proprietary trading activities, and to increase their Tier 1 capital reserves. They are also trying to slim down, shedding about 10% of its employees. According to CFO David Viniar, more heads will roll at the senior level as they seek to cut another $500 million in costs.
But what struck me were the losses they suffered on their own investments. According to the Wall Street Journal,
Goldman lost $194 million on its stake in Industrial & Commercial Bank of China and another $112 million on its equity stakes in other companies, leading to an 81% drop in second-quarter revenue from its investing and lending business, to $203 million.
It always amazes me that in their quest for profit, they lose money by guessing wrong on the markets and the economy. When you can borrow at the Fed window at <0.2%, one would think that’s a slam dunk. But leveraged out as they are, little slips can become big misses (ask JPM).
Perhaps GS were advisers to CalPERS, the $234 billion California state employee pension fund, one of the world’s largest. They announced yesterday that they had a 1.0% return for its FYE. The implications are ominous:
The 1 percent gain was well below CalPERS’ 7.5 percent official forecast and will likely prompt the nation’s largest public pension fund to impose higher contribution rates on the state and participating municipalities. That could create additional stress on cash-strapped public agencies throughout California – and create new fodder for the political debate over the cost of public employee pensions. … [Its sister fund,] CalSTRS, said last week it earned 1.8 percent in the year ending June 30.