Goldman decides to play nice and, intentionally, pays the price in revenue

07/21/2010 11:23 am EST


Jim Jubak

Founder and Editor,

I’m looking at the earnings report from Goldman Sachs (GS) yesterday, July 20, as the second part of the company’s fine for bad behavior.

The first part, the official part, was the company’s $550 million settlement with the SEC (Securities & Exchange Commission.) The second part is the big 39% drop in net revenue from trading and principal investments from the level recorded in the second quarter of 2009. The biggest part of that drop, Goldman said, was a result of trading losses from increasing volatility in stocks during the quarter. Goldman’s clients, the company said, went short to hedge their risk and that resulted in Goldman winding up long stocks in a quarter when stocks fell.

In other words, Goldman took a big trading loss in the quarter because it traded in its clients’ interests before its own.

If you’re really, really cynical, you can see that trading loss as a demonstration designed to refute arguments raised during the SEC investigation that Goldman took care of its own profits even if it meant clients suffered.

Me? I’m just that cynical.

Knowing that everybody in the world would be looking over its shoulder this quarter, Goldman decided to play not just by the rules but by the most conservative possible interpretation of those rules. And if that resulted in a big drop in trading revenue in a quarter when all Goldman’s competitors were reporting trading losses, well, that would be okay.

Just the cost of doing business.

You think that’s too cynical, too conspiratorial?

We’re talking about Goldman here. Learned anything about the company in recent hearings and investigations to suggest that it isn’t fully capable of cold-bloodedly assessing how much it has to pay in the short-term to restore its long-term ability to do business as usual?

That means the key question for investors is How long will it be before Goldman figures it can go back to being the biggest shark on Wall Street?
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