Goldman Sachs reveals plunging Wall Street profits

• Revenues down 36% year on year
• Profit down from $3.4bn to $613m
• Pay and bonus pot hits $9.2bn for first half of 2010
• Lloyd Blankfein said activity had dropped in Q2

Fears that the US economy is slowing and anxiety about a sovereign debt crisis caused investment banking business to seize up in the second quarter of the year, Goldman Sachs warned as its profits fell 82% on the previous quarter.

The weaker than expected results from Goldman, which were also affected by Alistair Darling's one-off bank bonus tax cost of $600m (£395m) and a $550m hit from its record-breaking settlement with the securities and exchange commission over its Abacus collateralised debt obligation, rattled Wall Street which fell by 79 points or 0.78% to 10,075 amid fresh concerns about the state of the US economy.

Even as Goldman revealed that its wage and bonus bill had reached $9.2bn in the first half of the year – $235,000 per employee – it painted a bleak outlook for financial markets.

Chief financial officer David Viniar said he did not know "what the catalyst will be" to rejuvenate activity as net income – profit – slumped to $613m compared with $3.4bn a year earlier. He insisted that the slide in business was unrelated to any reputational damage that might have been caused by the SEC's Abacus allegations, saying the firm had maintained its position in important league tables measuring its performance against rivals.

"Our clients were largely supportive," Viniar said, acknowledging, though, that it was difficult to know if Goldman had lost out on new mandates.

He also played down any suggestions that management changes were on the way following the furore caused by the SEC case. Lloyd Blankfein, the Goldman chairman and chief executive whose continued tenure at the top has been questioned, also acknowledged that activity had dropped off in the second quarter of the year, a trend that has been reported by other US investment banks.

"The market environment became more difficult during the second quarter and as a result, client activity across our businesses declined," said Blankfein.

The accrual for compensation and benefits expenses was $3.8bn in the second quarter of the year, taking the bonus and pay pot for the second half of the year to $9.2bn. The bank, which employs roughly 39,000 people, said this gave a ratio of compensation to net revenues for the second quarter of 43% which was lower than the 49% in same period last year although did not appear to equate to the 82% fall in profits during the quarter.

A higher average of $272,580 can be reached if only the 34,100 staff directly employed by Goldman are included, although the firm said the pay figures also included its share of some 4,000 staff employed by affiliates.

If the firm continues to accrue bonuses at the same rate the average pay and bonus bill could reach at least $470,000 by year end – more than it paid out last year. This prompted Lord Oakeshott, Liberal Democrat Treasury spokesman, to raise concerns, given that "the ink is hardly dry on the SEC fine". "Aren't they remotely interested in the reputations at a time when the whole world is tightening its belt?" Oakeshott said.

A TUC spokesperson said: "Goldman Sachs's bonus pool proves beyond doubt that we are not all in this together. Austerity is clearly just for the little people." Viniar insisted no decisions have been made about year-end pay outs.

The 36% fall in revenue to $8.8bn on the same period a year ago was greater than analysts had feared although other banks which have reported in recent days had begun to show the slowdown facing Wall Street. An analysis by Nomura showed that the average fall in revenues at JP Morgan, Bank of America (Merrill Lynch) and Citi was 41% compared with the previous quarter and 45% on the same period a year ago.

Viniar tried to illustrate the scale in the reduction of business in the second quarter by value-at-risk, which is a measure used by banks to gauge the maximum possible losses on 95% of the trading days during the quarter, which in second quarter 2010 figure was the lowest it had been for three years. As has been the case with other firms, revenue from trading bonds fell in the second quarter after a buoyant period last year when profits were fuelled by issuance of debt by governments around the world.


Jill Treanor

The GuardianTramp

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