Page last updated at 15:28 GMT, Tuesday, 14 July 2009 16:28 UK

Controversy surrounds Goldman success

By Simon Atkinson
Business reporter, BBC News

Wall Street sign
Goldman succeeded in making money during fragile times on Wall Street

Within minutes of Goldman Sachs unveiling its latest results - the numbers began to attract a mixture of admiration and controversy.

The US bank reported a net profit of $3.44bn (£2.1bn) in the April to June period from record revenues of $13.8bn.

Those figures are pretty staggering given that just six months ago it saw its first quarterly loss since going public in 1999.

Along with its rivals, Goldman had been battered by an economic crisis not seen since the Great Depression and the Wall Street institution was forced into taking $10bn in federal aid.

But that loan, under the Troubled Asset Relief Programme (Tarp), has now been paid off as Goldman begins to operate free from state shackles.

'Meeting expectations'

Theories abound as to how it has managed to turn things around.

Goldman should be celebrated, not demonized
William Smith
Smith Asset Management

But after a fairly successful first three months of the year - where it made $1.8bn - it has continued to capitalise on the turmoil in the markets - making bets in the right direction on commodities and volatile currencies as well as shares - and profiting handsomely.

William Smith, chief executive of Smith Asset Management added that while the markets were fragile, Goldman managed "to make money in all environments, which is what you're supposed to do."

"Goldman should be celebrated, not demonized," he added.

And Barclays Capital analyst Roger Freeman, told the Boston Globe: "It is, in many respects, business as usual at Goldman."

Too much risk?

But while the business model and the tales of success may be familiar, the context in which it is trading is quite different.

US President Barack Obama
US President Barack Obama is clamping down on bank pay

While once there was little but applause for huge returns, Goldman and its rivals are operating in a different sphere from 18 months ago.

The bank is likely to be criticised for taking too much risk - gambles that may have paid off this time but which could have left them vulnerable.

There will be complaints too that they are now operating in a much smaller marketplace - that the likes of Lehman Brothers were allowed to fail, while other institutions can now profit thanks to the taxpayer.

Like its rivals, Goldman had to turn to the state for help - including guarantees for its debt and access to central-bank liquidity and capital.

BBC business editor Robert Peston says that, while the bank has declared that it can stand on its own feet again, "some may well ask whether taxpayers shouldn't have demanded a bit more for their succour, given that Goldman is once again the world's pre-eminent money-making machine".

Headline grabbing

There is also inevitably going to be a backlash from those who saw their investments crumble because of the actions of big banks, especially when it comes to bonus time.

The bank said it had set aside $6.65bn for pay and bonuses in the quarter - an average of $226,000 for each of its 29,000 employees.

That takes remuneration per employee for the first six months of the year to $384,000.

There was shock when analysts predicted that its annual staff payout this year could be nearly $18bn - or an average of more than $600,000 per person. But now that could easily be surpassed.

The Obama administration is trying to clamp down on such hefty remuneration.

But having got approval to exit the TARP scheme - after raising cash through the sale of debt and equities - it is much freer to pay its staff as it sees fit.

There has been plenty of other publicity in recent weeks - including allegations of employee theft and an unflattering feature of the firm in Rolling Stone magazine accusing it of playing an important role in market bubbles.

All this ensures that while JP Morgan Chase, Citigroup and Bank of America will also be revealing more about their financial performance in the coming days, it will be Goldman's results which really grab the headlines.

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