The Wall Street Journal lead in this morning's Money & Investing section features yesterday's better-than-expected quarterly profits by Goldman Sachs.
According to the article,
"Driving the earnings was record performance in the fixed-income, currency and commodities division, where the trading of products tied to interest rates and strength in commodities helped generate $6.56 billion in net revenue, a 34% rise from the comparable period last year. Those results offset a downturn in investment banking and money management."
I don't presume to be a CFA, but I can read financial statements, and have fairly extensive experience in the financial and banking sectors.
The activities in which Goldman made most of its money last quarter are essentially trading, not lending in nature. That is, they are somewhat transitory, probably heavily proprietary, and do not reflect the bulk of what is supposed to be the 'new' commercial bank Goldman Sachs.
Yes, even old-line commercial banks make money from trading interest-rate products. But to rely on such businesses for most of their profit is to basically function as a hedge fund and/or brokerage, with some loan businesses bolted on. And it's riskier, in terms of consistent results, than most people realize.
On currently-available balance sheet data, Goldman's debt/market capitalization is roughly $323B/$57B, or 5.7x leverage. Using shares outstanding and equity share price, a rough figure of $51.2B in book equity would boost that leverage ratio to 6.3x.
Comparable ratios for Chase are debt/market cap of 5.4x, debt/equity of 4.7x, implying a market/book ratio of less than one.
So Goldman apparently is no longer leveraged much higher than one of the two remaining, large, comparatively healthy "real" commercial banks.
What puzzles me is how Goldman can be generating lower-risk profits without its prior leverage. I don't happen to know what its leverage ratios were a year ago, but one would think they must have been higher. Yet they clearly are neither taking consumer deposits, nor making garden-variety commercial loans.
Just how is this recent profit sustainable in the manner of a true commercial bank, without excessive leverage or risk?
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