Goldman Sachs Group Inc. said Tuesday its second-quarter net income dropped 83 percent to $453 million as its trading revenue fell and it booked a charge for its settlement of civil fraud charges with the Securities and Exchange Commission.
The company's revenue fell short of expectations and helped send the stock market falling. Goldman followed IBM Corp. and Texas Instruments Inc., which late Monday reported revenue that disappointed investors.
Goldman's stock dropped $1.89 to $143.79 in morning trading.
Goldman took a $550 million charge to cover the cost of the settlement with the SEC that was announced last week. Earnings were also reduced by a one-time, $600 million charge tied to a new tax on bonuses in Britain.
Excluding the one-time costs, net income after payment of dividends on preferred stock came to $2.75 per share, easily topping the $2.08 analysts forecast. Analysts typically exclude one-time charges from their estimates.
Revenue fell 36 percent to $8.84 billion, short of the $8.94 billion predicted by analysts.
The drop in revenue that a number of companies have reported is unnerving investors, who see it as a sign that the economic recovery is stalling. Banks, however, have their own revenue issues. Goldman's trading revenue fell along with that of competitors including JPMorgan Chase & Co. and Bank of America Corp. that were hit hard by the spring plunge in the stock market. The drop in their revenue is adding to investors' concerns about how new federal regulations will affect banks' ability to profit from trading operations.
David Viniar, Goldman's chief financial officer, said during a conference call with reporters that there is no way yet to estimate the impact of the new regulations on revenue or profits. He said it could take more than a year as the detailed regulations are written before Goldman can assess their potential impact.
New York-based Goldman, considered the strongest of the big investment banks, said its trading revenue dropped 39 percent to $6.55 billion.
Goldman historically has had revenue from its bond, currency and commodities trading business that beat analysts' forecasts. Now, those revenues are slipping as market volatility replaced the steady gains seen through most of 2009 and earlier this year.
"This was really driven by a lack of activity by our clients," Viniar said. Market volatility in the second quarter and concerns about financial regulation and mounting government debts in Europe kept many customers out of the market, he said.
He warned that if customers remain nervous about the markets, revenue and earnings could remain low in the coming quarters.
When asked about potential third-quarter results, Viniar said, "I don't make predictions." He did say, however, that at this moment the "business environment is pretty slow."
The company said its revenue from trading of bonds, currencies and commodities fell 35 percent from a year earlier, while revenue from stock trading dropped 62 percent. During the first three months of 2009, the markets were soaring as they recovered from the financial crisis. But during this latest quarter, the Standard & Poor's 500 stock index fell almost 12 percent.
The cautiousness in the trading operations could be seen in a key measure known as value at risk, or VAR, which estimates the probability of losses at any given time in the market. Goldman's average daily VAR dropped to $136 million in the second quarter from $245 million during the year-ago quarter. That means there was less money being invested because customers were taking fewer risks.
With the added market turbulence, Goldman's corporate customers were also issuing fewer bonds and shares of stock. That hurt the bank's investment banking business during the quarter. Revenue in that unit fell 36 percent to $917 million.
By taking a charge for the SEC settlement in the second quarter, Goldman was attempting to put the entire case behind it. The government had filed civil fraud charges in connection with Goldman's sale of complex mortgage-related securities.
Viniar reiterated that the SEC has completed a review of other mortgage-related transactions and does not plan to bring any charges against the bank or its employees for those deals.
The $550 settlement includes $300 million in fines to be paid to the government and $250 million to compensate two European banks that lost money on their investments.
The company reported that its costs for employee compensation and benefits came to 43 percent of its net revenues during the first half of the year. That compares with 49 percent in the first half of 2009. Goldman has been sharply criticized over the past year because of the huge bonuses it gave its employees while it accepted government bailout funds in 2008.
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