Earn What You Spend

Goldman Sachs - one of the most well-known and respected investment banks in the world - came out of a private partnership and went public in 1999.  Since then, it’s been all profit.  Until this quarter: 

Goldman Sachs suffered its first loss as a publicly traded company Tuesday, serving as yet another reminder that no corner of Wall Street has escaped the ongoing financial crisis.

The once-revered investment bank said it lost $2.1 billion, or $4.97 a share during the fourth quarter, representing the company’s first loss since it went public in 1999.

At first blush, this doesn’t sound that interesting - everyone is losing money, especially in the financial sector, so a loss shouldn’t be surprising.  

But let’s look at what they were doing just a year ago in this article from the NYTimes in November, 2007: 

For more than three months, as turmoil in the credit market has swept wildly through Wall Street, one mighty investment bank after another has been brought to its knees, leveled by multibillion-dollar blows to their bottom lines.

And then there is Goldman Sachs.

Rarely on Wall Street, where money travels in herds, has one firm gotten it so right when nearly everyone else was getting it so wrong. So far, three banking chief executives have been forced to resign after the debacle, and the pay for nearly all the survivors is expected to be cut deeply.

Late last year, as the markets roared along, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting in his meticulous 30th-floor office in Lower Manhattan.

At that point, the holdings of Goldman’s mortgage desk were down somewhat, but the notoriously nervous Mr. Viniar was worried about bigger problems. After reviewing the full portfolio with other executives, his message was clear: the bank should reduce its stockpile of mortgages and mortgage-related securities and buy expensive insurance as protection against further losses, a person briefed on the meeting said.

Last year, everyone - analysts, reporters, investors - was singing the praises of Goldman, marveling at how they had foreseen the credit crisis, acted accordingly, and profited handsomely.  So what happened?  Lots of things: 

Investment-banking revenue slid 48% as financial-advisory revenue dropped 54% amid a decline in industry-wide completed mergers and acquisitions. Goldman said its investment banking transaction backlog fell during the quarter and ended the year “significantly lower” than at the end of 2007.

Revenue plunged to negative $4.36 billion at Goldman’s trading and principal investments business, from revenue of $6.93 billion a year earlier. Equities revenue gained 2% as losses in principal strategies failed to offset higher revenue from derivatives.

Meanwhile, the principal investments group recorded a net loss amid losses from corporate and real-estate investments.

The asset-management and securities-services division, which includes lending and other services to hedge funds, posted a 5% drop in revenue as profits fell 19% due to lower fees amid market depreciation and outflows in assets.

There is a lot to conclude from this development, but one point in particular stands out: even those who foresaw the current financial difficulties are getting swept away by them.  It turns out that when things are this bad, accurate foresight sometimes isn’t enough.