Goldman Sachs, the most profitable securities firm in Wall Street history, took a beating in the second quarter as the bank’s profits fell 86 percent from the first quarter. Analysts are placing most of the blame for Goldman Sachs’ relatively lackluster performance on a hefty government fine for fraud and a multi-million dollar British bonus tax. But some of the most difficult trading conditions in the history of Goldman Sachs also hurt the bank’s earnings, which fell below expectations.
Goldman Sachs fraud fine and British bonus tax hit profits
Goldman Sachs announced Tuesday that profits in the second quarter of the year were $613 million. Those numbers are down 86 percent from the first quarter and 84 percent from the second quarter of 2009. The Los Angeles Times reports that the Goldman Sachs profits announcement came just a few days after it settled a lawsuit with the Securities and Exchange Commission. The SEC accused Goldman Sachs of fraud in a deal it made during the financial crisis to make money at the expense of its clients. In the Goldman Sachs fraud case, the bank escaped having to admit to a crime, but it coughed up a $550 million fine to sweep the case under the rug. The entire fine was taken out of second quarter earnings. Another hit to the bank’s bottom line was a $600 million British bonus tax imposed on Goldman Sachs for paying its executives working there.
Goldman Sachs bets against stock market volatility and loses
Goldman Sachs lost money in the second quarter, Bloomberg reports, by betting on a drop in stock market volatility just as a gauge of stock market volatility surged. To illustrate, Bloomberg used the Chicago Board Options Exchange Volatility Index, known as the VIX. The VIX is the most widely used measure of stock market volatility. The VIX, which started the second quarter at 17.47, rose as high as 45.79 on May 20 before ending the quarter at 34.54. The index, which measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, has averaged 20.38 over 20 years.
Goldman Sachs profits below expectations
In a statement, Goldman Sachs CEO Lloyd Blankfein said “The market environment became more difficult during the second quarter and, as a result, client activity across our businesses declined.” Daily Finance reports that for three months ending June 30, Goldman Sachs’ net income dropped to $613 million, or 78 cents a share, from $3.43 billion, or $4.93 a share in last year’s second quarter. Even with the SEC fine and British bonus tax, analysts were looking for $2.08 a share according to Thomson Reuters. Revenue dropped more than 35 percent to $8.84 billion, short of analysts’ average forecast of $8.94 billion.
Goldman Sachs bonuses still in the billions
Even though Goldman Sachs profits fell in the second quarter, the bank still made tons of money. The Los Angeles times article said Goldman Sachs, which has come under fire in the past for massive employee bonuses, didn’t let up in that department. In the second quarter, the bank dedicated $3.8 billion, or 43 percent of total revenues, to Goldman Sachs bonuses — the same percentage of revenue used for bonuses during the first quarter. And even as second quarter profits plunged, the bank hired 1,000 new employees.
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