What the leading investment bank's second quarterly loss since 1999 means for the firm
How bad was the market in the third quarter? It was so bad that it battered investment banking titan Goldman Sachs to a quarterly loss for just the second time since the firm went public in 1999. To be sure, this will provide the Occupy Wall Street crowd some reason to cheer in the streets today. Goldman Sachs has become a symbol of everything wrong with the financial industry over the past couple of years. What went wrong in the third quarter for the firm, and what are the implications of its loss?
Yesterday, I wrote that most big banks actually managed to do pretty well in the third quarter. Goldman didn't: it posted a $393 million loss. What was different here? Goldman still has more of a traditional investment bank structure, and it has a huge trading presence. So a rough market can affect the firm more than the other big institutions: it lacks the diversification that those other banks enjoy, like in business segments like consumer lending.
And the third quarter was a very rough one for the stock market. The S&P 500 was down 17%. That alone can cause a firm with a big exposure to equities to post a loss. And Goldman's "Investing and Lending" revenues were negative $2.5 billion. Predictably, Goldman blames "a significant decline in global equities" and "unfavorable credit markets." The firm lost $1 billion on its investment in Chinese bank Industrial and Commercial Bank of China Limited (ICBC) alone.
But trading was only a part of the story: its investment banking revenues also took a big hit. They were down 33% compared to a year earlier and 46% lower than the second quarter. You might recall that as the second quarter ended, the economy began to weaken. When firms' outlook fades, they aren't as likely to do as many deals. That means less revenue in fees for a bank like Goldman from merger advisory and underwriting.
Why Did It Happen?
Investors should find this result a little bit troubling. Over the past twelve years, the market has experienced plenty of bad quarters, but this is only the second one during which Goldman recorded a loss. So this should leave shareholders wondering what changed this time. Here are a couple possible theories:
Just Bad Luck?
Even the best poker players lose from time to time. No matter how good you are at the game, sometimes the cards just aren't dealt in your favor. Take the ICBC investment, for example. From a long-term strategy play, it makes tons of sense for Goldman to have exposure to a major Chinese banks. China is a rapidly growing market. But Chinese institutions had a particularly rough quarter as the nation's growth is thought to be trending down in the near-term. So this investment wasn't so much a bad call as it was bad luck. In time, however, this loss could quickly reverse as China's growth eventually strengthens.
Fears of Bad PR?
Another possibility is that the firm has become less willing to seek profit at any cost. If we think back to dark period of 2008-2009, Goldman managed to remain profitable in part because it was ahead of the curve on recognizing the housing bubble's pop. It hedged, or possibly even profited from, the housing market's collapse. However, some of its antics led to a high profile lawsuit brought by the Securities and Exchange Commission. In this quarter, however, it's not entirely clear what sort of bad public relations could have resulted from better hedging. But the firm could just be generally less aggressive covering its bets for fear of public perception.