Goldman Reports Earnings

Goldman posted net income of $2.09 billion, or $4.58 a share, on revenues of $9.42 billion for the second quarter.  Although this was a decline from the previous year's quarter, it beat analysts' lowered expectations and it actually reported earnings instead of losses, in contrast with Lehman.  The firm said the 29% drop in fixed-income revenue was affected by $775 million of writedowns and credit market losses.  The amount of write-downs and credit market losses seems remarkably small relative to other firms and the size of Goldman's balance sheet.  But given how little information investors can glean about investment banks portfolios, they must trust that management is appropriately marking positions.  Revenues from commodities were higher, although the firm does not provide a breakdown between commodities, fixed-income and currencies, which are all lumped together.  The firm also trimmed its holdings in commercial and residential real estate, and leveraged loans, reducing its level III assets from $96 billion to $78 billion.  

How did Goldman have such a solid quarter while rival Lehman was busy puking assets and taking write-downs?  Part of it must come from the commodities business, where Goldman has been the most vocal about predicting ever higher prices for oil.  They are clearly bullish on commodities, which has absolutely been the right call.  Goldman is also a more diversified financial services firm, with other departments offsetting losses when one area suffers.  Goldman's shares currently trade at a significant premium to other investment banks and perhaps this quarter's earnings report justifies some premium.  But the outlook for investment banking, which is a cyclical business, remains murky at best, particularly with the Fed poised to reverse its recent banking-friendly easy-money policy.