Goldman's golden egg turns leaden; bank plans cuts

Tue Jul 17, 2012 4:38pm EDT
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By Lauren Tara LaCapra

(Reuters) - Goldman Sachs Group Inc's quarterly profit fell 12 percent as investment income plunged, reflecting the pressure the bank faces as demand for its services remains tepid and regulators clamp down on bank risk-taking.

In an environment the investment bank characterized as "tough," Goldman said it was embarking on a new round of cost-cutting, which will include laying off some senior employees.

Goldman has long been known for making savvy bets on markets, and last decade it earned billions of dollars from those trades. But in the second quarter it lost $194 million on its investment in Industrial and Commercial Bank of China Ltd (ICBC) and $112 million on its investment in other stocks, the bank reported on Tuesday. Overall revenue in the group that invests the bank's money plunged 81 percent.

In the current environment, with the European debt crisis still not fully resolved, and China's growth slowing, Goldman has scaled back its risk-taking, even before new U.S. regulations take effect limiting its investments.

Goldman's average daily value at risk, a measure of the most money it could lose on 95 percent of trading days, was $92 million during the second quarter, the lowest it has been in nearly six years.

Goldman announced new cost cuts, but it was already reducing expenditures. The bank previously planned to cut annual costs by $1.4 billion, a figure it has now increased to $1.9 billion. Operating expenses fell 8 percent in the second quarter.

But the bank's net revenue dropped 9 percent in the quarter, faster than the bank cut costs. Goldman's return on equity - a measure of how effective it is at wringing profit from its balance sheet - was just 5.4 percent. Before the financial crisis, its return on equity was routinely above 30 percent.

"We are not going to have an acceptable return on equity in this environment," Goldman's chief financial officer, David Viniar, said on a conference call with investors.   Continued...

Traders work on the floor of the New York Stock Exchange near the Goldman Sachs stall July 16, 2010. REUTERS/Brendan McDermid