Goldman Sachs boss Lloyd Blankfein didn’t meet a fourth quarter expense he didn’t cut—producing a 58 percent drop in quarterly profits, a better result than Wall Street expected. (AFP/Getty Images)
Goldman CEO Lloyd Blankfein may not want to cut his way to prosperity — but scissors do appear to be the most effective tool he has at his disposal right now.
With nagging US economic concerns cutting into trading volumes, paring precious profits, and tougher regulation fueling a massive retrenchment by the smartest guys on Wall Street, slashing costs — including doling out a healthy number of pink slips — was Blankfein’s main weapon in the fourth quarter.
Although yesterday Goldman posted earnings that beat most analysts’ expectations, its quarterly profits of $1.01 billion, or $1.84 a share, were off 58 percent from a year ago.
Welcome to the new Wall Street.
Goldman’s profit is down 80 percent since the bank posted record profits of $4.95 billion in the 2009 fourth quarter and few observers see signs business will pick up any time soon.
Lately, Goldman’s results have been markedly un-Goldman-like. The firm known for eliciting Wall Street envy for its successes has been garnering attention for its dwindling profits and skillful cost-cutting.
However, Wall Street investors appeared to take some solace in the fact that Goldman’s less-than-stellar results beat analysts’ expectations of $1.23 a share — something Citigroup and JPMorgan Chase failed to do — sending the firm’s stock up 6.8 percent, to $104.31.
Adding fuel to the optimism was a sanguine David Viniar, financial chief at Goldman, who noted that early signs suggest that public offerings this year and mergers and acquisitions could mount a recovery after an abysmal 2011.
Investment banking represents a mere 12 percent of Goldman’s overall game. Its bread and butter — trading stocks and bonds — comprised 51 percent of fourth-quarter revenue and some 64 percent of its 2011 revenues.
That means that investors in the equity and fixed-income markets will help determine Goldman’s success in the coming years.
Viniar noted that the firm didn’t plan on “cutting its way to prosperity” but hoped to return the franchise to its former glory in the near future.
Boasting a return on equity of 5.9 percent, roughly half of what it was a year ago, the firm has done anything but grow.
Goldman slashed its compensation by 21 percent, setting aside $12.2 billion to pay out salaries, bonuses and other benefits, this year.
That would be enough to pay the firm’s 33,300 employees an average of $366,366.
Of course, most employees will get far less than the average, and bankers accustomed to million-dollar bonuses could see payouts slashed to nothing.
So far, Goldman has eliminated some 2,400 of its bankers with as many as 50 vaunted, highly paid partners heading for the exits.
That said, Goldman’s top brass is betting that the gold-encrusted franchise will start to mint money once the markets stabilize and more clarity on regulatory rules are provided.
“We’ve seen downturns before,” Viniar said. “Every time you’re in one, it feels like it’s never going to end and that the world is different now.
“I wouldn’t say, for example, that the environment feels worse than it felt in the fall of 2008 or necessarily after the tech bubble burst, nor necessarily after the fall of 1998.”