Goldman money machine is back in action

Goldman Sachs' trading prowess has earned it quarterly income of $3.4bn, and it is set to risk outraging America by paying huge bonuses. Stephen Foley reports

Goldman Sachs has put aside $6.6bn (£4bn) to pay salaries and bonuses for staff in the last three months – the equivalent of $226,000 for every person at the giant investment bank.

The number, revealed in its forecast-busting financial results yesterday, takes the total pot for bonuses to $11.4bn for the first half of the year and puts the bank on a potential collision course with US politicians, who began attacking the company almost as soon as the numbers came out.

Jon Tester, a Senator for Montana, raised the prospect of a revolt similar to the one that erupted earlier this year when AIG tried to pay bonuses to staff in the division that caused the company's collapse. "We've been down this road once before," he said.

Goldman has only just repaid $10bn in taxpayer bailout money, and still has not bought back the warrants that give the US government the right to buy its shares. The repayment means it is being released from the formal pay caps set for top executives. At the current rate, it could be paying record bonuses to staff this year.

But Senator Tester voiced a typical complaint on Capitol Hill, namely that major financial institutions must not go back to a pre-bust era when the pursuit of annual bonuses encouraged staff to take risks with the stability of their firm and the financial system as a whole. "We're not out of the woods economically," he said. "Quite frankly, they need to look at it from a perspective that it's not business as usual anymore, and they can't continue along these lines or there will be outrage."

Sherrod Brown, an Ohio Senator, also heaped condemnation on the bank. "I join the American people in being pretty incredulous about how they operate," he said. "It really makes the American people think, is it just going to be business as usual with Goldman Sachs and much of the rest of the financial industry?"

Goldman's results yesterday showed that business is far from usual – even if it is extremely profitable. The panic in the financial markets last year capsized several major rivals, including Lehman Brothers and Bear Stearns, and the reduction in competition has made trading in both equity derivatives and fixed income markets more profitable than before.

Overall, net income was $3.4bn in the three months to 26 June, up 89 per cent on the second quarter last year. Analysts had forecast little more than $2bn, and few had predicted a number so high even as rumours swirled and excitement built on Wall Street in the past few days.

The reaction on Wall Street was a polar opposite to that on Capitol Hill. Michael Holland, money manager at Holland & Co in New York, said: "Even though I was prepared for really good results, the magnitude of their success in trading I think is breathtaking. What they have continued to do during the worst financial crisis in 25 years shows that they are the smartest guys in the room."

The giant trading operations of Goldman were the standout profit centres for the company. In its fixed income, commodities and currency division, revenues were three times the level of the same quarter last year, even after absorbing $700m in losses on commercial mortgages because of the sharp downturn in commercial property values. Across Goldman's trading business, net revenues came in at $10.8bn, 93 per cent higher than last year.

The results came despite Goldman taking on less risk than it did before the wake-up call of 2008. The bank said it is still awaiting new rules and regulations that will set higher capital requirements for its riskiest trading activities, and it was too soon to predict how that might impact its business in the future.

Cubillas Ding, an analyst at the Boston-based consultancy Celent Group, said Goldman's blow-out trading quarter is not necessarily a sign that the good times are back, but that it certainly has a competitive edge whatever happens in the future.

"Goldman has possessed a sharp eye to jump into areas where others fear to tread," he said. "Delivering such stellar results in a still choppy market is a reflection of the markets showing a period of buoyancy as well as the firm's trading prowess. It is also a symptom of competitors being distracted by merger integration activities or reduced appetites for risk-taking. Being swift to remove the constraints of bailout arrangements also means that the firm can capitalise on opportunities to lure investment banking talent from faltering peers."

Analysts said it was unclear exactly how much of the trading profit might have come from Goldman's proprietary trading operations, but Lloyd Blankfein, chief executive, put the focus squarely on the business Goldman does for its clients. "While markets remain fragile and we recognise the challenges the broader economy faces, our second-quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise," he said. "Our role as an intermediary focused on making markets for buyers and sellers helped drive our performance. We were also active as an underwriter of many significant debt and equity offerings for clients."

By playing up its role as a facilitator of financial markets – rather than its own speculative dealing in the markets – Goldman is hoping to head off some of the criticism it has suffered since the crisis erupted, the erosion of its reputation beyond Wall Street, and the burgeoning number of conspiracy theories to which it has been subject on the internet. A widely circulated Rolling Stone magazine article this month called the firm "a great vampire squid wrapped around the face of humanity".