Goldman Sachs (NYSE:GS) announced its revenues and earnings this week, and not only did it beat estimates, but did well enough such that it is increasing its dividend payouts. Any shareholders worth their salt may be happy campers with this kind of news. Still there are some issues that the bank must continue to deal with, including the role it played in the housing crisis, as well as its seeming penchant to encourage deceptive practices.
Specifically, Goldman Sachs reported net revenues of $9.95 billion for the first quarter, which ended on March 31, 2012. For the same period, it had net earnings of $2.11 billion. Diluted earnings per common share were $3.92 compared with $1.56 for the first quarter of 2011 and $1.84 for the fourth quarter of 2011. The annualized return on the average common shareholders' equity was 12.2% for the first quarter of 2012.
These numbers are impressive, but they are not enough to make me feel the bank staffers have learned from the egregious practices they carried out that led to the housing market collapse. At the time, it was one of the largest banks in the country. Greed among its staffers, like that experienced by other companies, will continue to be a burden if it can't figure out how to deal with problems that seem to fester at the company. Sloppy management practices that smack more of something corrupt is disturbing.
In mid-April, the Securities and Exchange Commission charged Goldman for failing to have adequate policies and procedures in place to address the risks that during weekly "huddles", the firm's analysts could share material, nonpublic information about upcoming research changes. Huddles were a common practice for Goldman's stock research analysts. They would meet with the firm's traders to go over their best trading ideas and then would feed that information to a select group of its top clients, according to the SEC. For this, just three years after it was penalized for the housing market debacle, Goldman must pay a $22 million penalty.
Goldman also agreed to be censured, to be subject to a cease-and-desist order, and to review and revise its written policies and procedures to correct the deficiencies identified by the SEC, according to the SEC.
With all of that being said, Goldman has the tools to continue to grow. For example, it was able to hold down its payroll costs during the last quarter, which I think is very important. Its stock has bounced back on a year-to-year basis. In fact, at $2.1 billion, these earnings are the largest quarterly earnings from the firm in a year. I believe, that its stock is poised to surge when the market improves.
Company CEO Lloyd Blankfein credited the firm's improvement to several factors. It included stronger global markets combined with the firm's broad client franchise. Blankfein did acknowledge that client activity remains relatively low in certain areas, especially in parts of its investment banking business. I believe that the bank's mix of businesses will lead to revenue growth, especially as market conditions continue to improve.
When you look closely at the revenues from what used to be Goldman's cash cow, you can see the challenges that lay ahead. Investments banking net revenues were 9% lower than they were for the first quarter of 2011. They totaled $1.15 billion. However, this figure was 35% higher than they were for the fourth quarter of 2011.
For its financial advisory arm, net revenues were $489 million, 37% higher than the first quarter of 2011. Net revenues from the firm's underwriting business were $665 million, 27% lower than the first quarter of 2011. Net revenues in its equity underwriting division were significantly lower than the first quarter of 2011. Goldman blames a decline in industry-wide activity for that loss.
Net revenues in debt underwriting were lower compared with a first quarter of 2011 earnings, which Goldman chalked up to a decline in leveraged finance activity. Goldman also saw a decline in revenues in its institutional client services. Net revenues from this division were $5.71 billion, which was 14% lower than the first quarter of 2011. However, they were 87% higher than the fourth quarter of 2011.
Goldman's earnings report for the first quarter was impressive. With all the numbers about them beating estimates and receiving higher revenues, the bank has left a sour taste in the mouths of investors and shareholders. You do not earn money based on how nice you are, but how can you sleep well at night knowing your growth is on the backs of someone you screwed over?
The Financial Industry Regulatory Authority (FINRA) also announced in April that it had reached a settlement with Goldman for supervisory and other failures related to the huddles.
"Higher-risk trading and business strategies require higher-order controls," said Robert S. Khuzami, Director of the Commission's Division of Enforcement. "Despite being on notice from the SEC about the importance of such controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients."
I think that sums up Goldman, and all the other banks that had a hand in the housing market collapse. Without holding itself accountable through internal controls, it runs the risk of contributing to widespread damage to not only itself, but also the markets and people.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.