Goldman Sachs has posted its second quarterly loss as a public company after its investment portfolio lost billions of dollars in value.
Goldman, the largest US investment bank by assets, set aside 59 percent less money for compensation, the latest sign of how much Wall Street bonuses are likely to fall this year.
Goldman's drop in pay reflects a 4 percent staff reduction as well as a 60 percent decline in revenue from the year-earlier third quarter.
Goldman's results underscore the headwinds that banks face as new regulations and market turmoil squeeze profits. Its investment losses also show that even as regulators clamp down on short-term risk-taking, banks can suffer losses on longer-term holdings.
"The one glaring problem area was their investment account, and particularly their stake in the Chinese bank," said Stanley JG Crouch, chief investment officer of Aegis Capital.
"That's what really kind of imploded them."
Goldman lost US$2.48 billion in its investing and lending group, including a US$1.05 billion paper loss on its stake in Industrial and Commercial Bank of China.
The European debt crisis triggered market turmoil in the third quarter, and Goldman Chief Financial Officer David Viniar was reluctant to say that markets have settled down in recent weeks.
"There is still a lot of uncertainty (in markets), and a lot of it is based on who says what on what day," Viniar said on a conference call with investors and analysts.
Investors seemed to take Goldman's quarterly performance, which executives labeled a disappointment, in stride. The bank's shares were up 2 percent at US$98.87 in afternoon trading.
Charlie Smith, chief investment officer of Fort Pitt Capital Group, which owns Goldman shares, said the stock was likely up because Viniar said it was undervalued and Goldman might buy back more shares. The bank spent US$2.16 billion ($2.71 billion) on stock repurchases in the third quarter.
"Goldman is the best house in a bad neighbourhood," said Smith. "You heard the CFO say he'd love to buy back more of the stock because it's so cheap."
The bank's quarterly loss was just its second since going public in 1999; its only other quarter in the red came at the end of 2008 after the demise of Lehman Brothers.
Goldman Sachs posted a shareholder loss of US$428 million, or 84 cents a share, far worse than analysts' average forecast for a loss of 16 cents a share, according to Thomson Reuters I/B/E/S.
In last year's third quarter, Goldman earned 1.74 billion, or US$2.98 a share.
Because the bank repurchased its shares during the quarter at a discount to their tangible value, the bank's tangible book value per share was essentially unchanged from the second quarter at US$120.41. Goldman ended the quarter with US$164 billion of unencumbered cash and liquid securities.
THE NEW NORMAL
Goldman's profits are being squeezed by new regulations and choppy markets. Its return on equity was just 6 percent for the first three quarters of 2011, even ignoring a special charge, compared with pre-crisis levels of more than 30 percent.
The bank is responding with cost-cutting.
Compensation as a percentage of revenue was around 44 percent, in line with prior quarters this year but up slightly from a year earlier.
Although revenue declined in some of Goldman's core banking and trading businesses, the main source of losses was its Investing & Lending division, which uses the firm's own capital to make long-term investments.
Revenue from that division has fluctuated wildly since Goldman restructured into different business segments at the start of 2011.
The financial reform law known as Dodd-Frank features a provision called the Volcker Rule, which is meant to limit banks' betting with their own money. Regulators last week released a draft of the rule. which focuses on short-term trading.
Goldman is still talking to regulators about how the rule will work out, Viniar said.
With credit and equity markets broadly weakening in the third quarter, the cost of protecting Goldman's debt against default rose. Because of the bank's hedging, those changes tend to have a minimal impact on its results, unlike its competitors.
Big declines in Goldman's bond-trading and underwriting revenue weighed on results, more than offsetting gains from equity sales and trading and its advisory business.
Goldman's fixed income, currency and commodities client trading business -- once a key profit driver for the bank - reported US$1.73 billion in revenue, a 36 percent decline from a year earlier.
Equities sales and trading is now a larger slice of Goldman's revenue pie, as higher trading volumes led to bigger commissions. That business reported US$2.3 billion in revenue, up 18 percent.
The bank's underwriting business suffered as clients held back on issuing new securities into volatile markets. Underwriting revenue dropped 61 percent to US$258 million, while advisory revenue rose 5 percent to US$523 million.