What Credit Crunch? Goldman Posts Weak-ish 4Q Results But Strong Fiscal 2007 Performance

Goldman Sachs closed out the year on a high note. Despite the credit crisis that has hurt many of its rivals on Wall Street, net income at Goldman increased 2 percent in the fourth quarter

Goldman Sachs closed out the year on a high note. Despite the credit crisis that has hurt many of its rivals on Wall Street, net income at Goldman increased 2 percent in the fourth quarter to $3.2 billion thanks, in part, to its bet against the sub-prime mortgage market. Of course, the company still lost money on it “non-investment-grade credit origination activities,” as it noted today’s earnings release. Still, several of Goldman’s units posted a record fiscal year.

Things would have been even better, save for the tough fourth quarter in which revenue fell in its fixed income, equities trading, financial advisory and total-trading and principal investing units. Nevertheless, Mike Mayo, an analyst with Deutsche Bank, says “Goldman’s performance should still rank among the best of capital-market participants this quarter.”

Especially given the train wreck that other securities firms find themselves in. And, apparently, people are taking notice—perhaps too much notice. In fact, according to a Reuters report, “The disparity of results has some accusing Goldman of having an unfair edge, or of hiding its mistakes. The appointment of former Goldman CEO Hank Paulson as U.S. Treasury secretary has one New York-tabloid columnist convinced that Goldman gets inside information on the bond market.” (If only there were a bond-market god who could speak to us!)

Columnist and comedian Ben Stein, ever more rational than a certain friend of ours over at a certain tabloid located in a News Corp. building in New York (the columnist who says Goldman has inside info on the global-bond market—a pretty neat trick, since at year-end 2006, it was worth $67.4 trillion), had a more believable and yet as biting a criticism about Goldman’s change in strategy to short the mortgage market: That it was dishonest in doing so because it broadcast its negative position in a research report to help move the market its way (i.e. down). Stein wrote on December 2 in the New York Times, that the Goldman economist research report was “selling fear.” Why? Because Goldman had turned bearish on the CMO market—housing in particular—and had gone short. Stein writes, “But to me, his paper seemed like a selling document in the real Wall Street sense of selling — namely, selling short.”

But in truth, Goldman was hurt by the credit crunch in credit derivatives. For example, two of Goldman Sachs Asset Management unit’s flagship hedge funds took a pounding this year. On the conference call today, David Viniar, Goldman’s CFO, did not say how much November’s painful credit-market correction affected fiscal 2007 results, but he did allow that the month was the worst they had seen in 10 years in the credit market.
But the firm did disclose that—net of hedges—it had lost $1 billion “related to non-investment grade credit-origination activities” for the fiscal year. (Of course that’s way less than, say, Merrill Lynch or Citigroup, prompting some to wonder if Goldman has some sort of secret.)

And despite the blows to its hedge funds, investors seem to be racing into GSAM. Net revenues for the year in that unit were $7.2 billion for fiscal 2007, an 11 percent increase; assets increased by 28 percent to $962 million. On hedge funds, Viniar was optimistic: “The business is growing, it continues to grow. The hedge fund-asset class is an asset class that’s going to keep growing because people continue to put money into it. And we are one of the leaders in that business. We have a very high share of the business, and continue to gain a high share of clients in it,” he added.

Employees at the firm are reaping the benefits of having a good year in an unstable market. The firm reported that compensation and benefits expenses are up 23 percent from 2006 to $20.19 billion. That averages out to more than $600,00 for each of its 26,000 employees. The firm reports that half of the increase in compensation for the year is attributable to brokerage, clearing, exchange and distribution fees.

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