Goldman profit is a record setter

December 13, 2006|By New York Times News Service

NEW YORK -- Money is not supposed to grow on trees. Unless you happen to work at Goldman Sachs.

The investment bank reported earnings yesterday that left jaws agape on Wall Street. Quarterly profit soared 93 percent. The bank earned nearly as much per share in 2006 as it had in the past two years combined. Immediately after the results were released, they were labeled the best ever by an American investment bank.

Investment banking earnings are often proxies for the health of the American and global economy. And conditions have been ripe for Goldman and its competitors to mint money.

Stock markets have been on a tear for months, while credit markets have continued to be robust. Credit derivatives continue to grow at a geometric pace, with $27 trillion outstanding. Opportunities to invest in companies, trade securities or advise clients in markets around the world abound. Private equity firms continue to buy increasingly large companies, and hedge funds represent significant profit-making potential for Wall Street.

For the year, Goldman produced record revenue of $37.7 billion and a record profit of $9.5 billion, or $19.69 per share. In the quarter, the bank earned $3.15 billion, or $6.59 a share, on revenue of $9.41 billion. Investment banking revenue climbed 42 percent, to $1.3 billion, and trading and principal investments rose 57 percent, to $6.6 billion.

"Our economists' view is that we will continue to have good economic growth, somewhat slower in the U.S., somewhat better in Europe and very good in Asia," said the normally cautious Goldman Chief Financial Officer David Viniar.

Fueling Viniar's optimism is the number of deals the bank has in the pipeline - a pipeline more robust than it has been since 2000, Viniar said.

Like many universal and investment banks, Goldman Sachs has transformed its business to capitalize on sea changes in the capital markets, particularly new opportunities in far-flung markets and a shift from issuing and trading plain vanilla stocks and bonds to building and trading complex derivative products.

In 1997, investment banking and trading and principal investments produced about the same revenue ($2.6 billion and $2.9 billion, respectively), for total net revenue of $7.4 billion. In 2006, investment banking earned $5.6 billion while trading and principal investments produced $25.6 billion - almost 70 percent of the total $37.7 billion in net revenue.

Investors seemed to question whether the good times could continue. Goldman's stock traded down 1.2 percent, to close at $200.

"The stock being down almost shows they are victims of their own success," said Jeffrey Harte, a securities industry analyst at Sandler O'Neill.

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