Why Was Goldman's 2010 Profit Down 38%?

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Today investment bank Goldman Sachs reported net earnings of $8.35 billion for 2010. That's 37.6% lower than the bank's 2009 earnings of $13.39 billion. This news comes alongside some other big banks like JPMorgan and Wells Fargo posting gains over 2009. Is Goldman losing its mojo?

Relative Earnings Weakness

In fact, the relative weakness of Goldman's earnings compared to some of its competitors is easily explained. The reason for its somewhat lackluster results is actually the opposite of the explanation for Wells Fargo's relatively weak first quarter results. At that time, the Wells Fargo's weak Wall Street presence held it back, as trading profits were soaring. In the latter part of 2010, however, the situation reversed. More recently, trading revenue was down, while banks with a big consumer lending business saw gains from loss provisions declining.

To see this in action, let's look at the fourth quarter results of Goldman, Wells Fargo and JPMorgan:

big bank revenue 2010-q4.png

One of the major reasons for JPMorgan's strong performance was its credit loss provisions declining by $6.4 billion from 2009 to 2010. Similarly, Wells Fargo's quarter-over-quarter loss provision for its community banking operation was down $2.2 billion. But Goldman doesn't benefit as much from better consumer credit performance, since it doesn't have a giant consumer loan portfolio like banks with large retail arms like Wells and JPMorgan.

In fact, much of Goldman's decline came from weakness in its market making business. Its revenue was down about $8.4 billion or 38% last year compared to 2009. Its investment banking division also had lower revenues by about 3%. 

So the story here is pretty simply. Goldman's concentration in investment banking and trading hurt it in the latter part of 2010. JPMorgan also saw its investment banking and trading profits down year-over-year, but its relative diversity resulted in a pretty good second half anyway, since the credit picture brightened.

Compensation

It's hard to talk about Goldman without bringing up compensation, since the Wall Street giant is infamous for paying better than any other bank. Its compensation pool declined 5% in 2010 to $15.4 billion. Its per-employee compensation declined slightly more, by 6% to $430,812 per employee. Of course, that's still much better than the pay of the average JPMorgan investment banker, who made an average of $369,651 each.

Although Goldman's bankers saw less compensation in 2010, they actually were paid a larger share of earnings. In 2010, its ratio of compensation and benefits to net revenues was 39.3%. That's higher than its ratio for 2009 of 35.8%. In other words, Goldman didn't cut its bankers' pay for 2010 by as large a margin as its earnings declined.


So what should we take away from Goldman's performance? It had a relatively weak second half of the year, but still did pretty well. Although its bankers received less compensation in 2010, they were paid a larger portion of earnings than last year. As additional financial regulation is implemented this year, Goldman will likely face even greater challenges than other banks with more diversification of products of services. Of course, we're talking about Goldman here, so the bank will likely find a way to continue to find ways make lots of money despite the new obstacles from Washington.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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