UPDATE 6-Goldman earnings fall on trading slump, charges

* Adjusted EPS $1.72 vs Street view $2.08

* Fixed income trading revenue $4.4 bln vs $6.8 bln

* Investment banking revenue $917 million vs $1.4 bln

* Growth worries blamed for dip in client activity

* VaR lowest since 2007; RoE lowest since 2008

* Shares seesaw, up 1.7 percent at midday
(Updates throughout, adds details on earnings)

By Steve Eder

NEW YORK, July 20 (BestGrowthStock) – Goldman Sachs (GS.N: ) could
turn out to be a mere mortal after all.

The investment bank on Tuesday said that its quarterly
earnings tumbled 82 percent, steeper than forecast. A trading
and underwriting slump tempered profits and raised questions
about whether the firm is losing its ability to outsmart the
competition.

“We’ve grown accustomed to Goldman bucking the trends in
(investment banking), but this quarter it seems like maybe
they’re more susceptible to broader industry issues,” said
Walter Todd, portfolio manager with Greenwood Capital
Associates. “Maybe Superman is turning into Clark Kent.”

Profit at the bank long famed for lavish pay and political
influence slumped to $453 million, hurt by $550 million for
settling the fraud suit brought by the U.S. Securities and
Exchange Commission and $600 million to compensate its City of
London bankers for a special 2009 UK bonus tax.

Even after stripping out those costs, Goldman’s return on
equity, a measure of the bank’s ability to squeeze profits out
of shareholders’ money, was just 9.5 percent. Over the prior
four quarters, the average was close to 25 percent.

Goldman Chief Financial Officer David Viniar, on a
conference call with reporters, said client activity fell in
the quarter. He blamed worry about global growth rather than
concern about the SEC suit.

“Hopefully things will pick up and we hope that (return on
equity) over the cycle will be higher than this,” Viniar said.

Goldman’s chief rival, Morgan Stanley (MS.N: ) (Read more about the money market today. ), is due to
report quarterly earnings on Wednesday. Morgan Stanley shares
were up 0.3 percent in early afternoon trade. Goldman shares
were up 1.7 percent after opening lower.

Goldman’s weak numbers were expected by analysts after
rivals including Bank of America Corp (BAC.N: ) and Citigroup Inc
(C.N: ) also saw their investment banking results get pummeled.

“The bad is in the (Goldman) stock,” said Anton Schutz,
president of Mendon Capital Advisors. “I think it is pretty
well built in. The whole group has gotten punished pretty hard
and I’m not sure how bad the sins really are.”

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Goldman earnings http://link.reuters.com/fyk58m

Goldman table [ID:nN20256848]

Breakingviews [ID:nLDE66J1M7] [ID:nN20252077]

Reuters Insider http://link.reuters.com/ruk58m

U.S. banks’ Q2 profits http://link.reuters.com/ryh97m

A year at Goldman (interactive timeline)

http://link.reuters.com/tur63m

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

REFORMING WALL STREET

Viniar underscored the significance of a financial reform
package approved by the U.S. Congress, but said it was far too
early to assess the impact of the new rules.

The legislation targets lucrative trading in risky
over-the-counter derivatives and aims to force banks to end
trading for their own profits. It will also limit how much
large financial firms can invest in hedge funds and private
equity funds. [ID:nN25214727]

“The new financial regulatory legislation represents the
most sweeping change for the financial industry in decades,”
Viniar said.

Uneasiness over financial reform was just one factor that
rattled markets and weighed on trading and underwriting profits
in the second quarter. In a quarter marked by increasing
currency volatility, higher risk premiums for corporate bonds
and plummeting stocks, client activity dimmed and Goldman
scaled back risk.

“Most of our risk is driven by client activity, and there
was just so much less in activity in the quarter,” Viniar
said.

By one measure, the bank took less trading risk during the
period. Its value-at-risk, or the maximum possible losses on 95
percent of the trading days during the quarter, fell to $136
million from $245 million in the same quarter of 2009. The
second quarter 2010 figure was the lowest in three years.

THE NUMBERS GAME

Goldman’s revenue fell a greater-than-expected 36 percent
to $8.84 billion, reflecting weakness in fixed income trading
as well as investment banking.

Equity trading revenue tumbled 62 percent to $1.2 billion
as extreme volatility hampered the market. [ID:nN24151454]

“Goldman’s numbers were not good,” said Peter Kenny, a
managing director at Knight Equity Markets in New Jersey. “…
Their business is down, and it’s down in virtually every
segment — not just trading but product sales, innovation in
terms of product offerings. The business is down, demand is
down, volumes are down.”

Even though Goldman’s quarter missed expectations and the
firm dealt with the SEC charges, its investment banking
franchise still was strong compared with its rivals.

The bank reclaimed the top spot for mergers and
acquisitions advice in the first half of 2010, advising on
nearly $190 billion of transactions, although Goldman slipped
to a fourth-place ranking when the second quarter is taken on
its own.

SEC SETTLEMENT

Viniar said there was no evidence that clients fled from
the firm in the second quarter as it faced the SEC charges.

“As best we can tell, for the most part, our clients stayed
quite supportive of Goldman Sachs,” he said. “Our market shares
did not suffer.”

“I can’t tell you there weren’t some calls that we would
have gotten that we didn’t get,” he added. “We don’t know about
those.”

Some customers with large public profiles have been more
cautious in working with the firm recently, and analysts
speculated that a prolonged legal battle with the SEC would
have been damaging to Goldman’s brand. [ID:nN23261598]

It was the first time Goldman has missed analysts’
forecasts since January 2009, when it reported a
deeper-than-expected loss following the financial crisis. It
was also the smallest profit the bank has reported since the
financial crisis.

The SEC civil fraud suit stemmed from Goldman’s marketing
and packaging of the Abacus collateralized debt obligation. The
bank agreed to settle the case last Thursday. [ID:nN15236037]

As Goldman’s earnings swung lower, so did its set-aside for
compensation. The firm slashed its compensation and benefits
expense by 42 percent to $3.8 billion.

Stock Analysis

(Reporting by Steve Eder; Additional reporting by Dan Wilchins
and Chuck Mikolajczak; editing by John Wallace)

UPDATE 6-Goldman earnings fall on trading slump, charges