Goldman takes less risk, executives strike cautious tone

Tue Oct 16, 2012 2:15pm EDT
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By Lauren Tara LaCapra

(Reuters) - Goldman Sachs Group Inc (GS.N: Quote) took less risk and earned less money from customers' trading last quarter, even as the Wall Street bank reaped big gains from the rising values of its stock and bond investments.

The bank's executives struck a cautious tone on a conference call with analysts, saying that events such as the U.S. presidential election and the European debt crisis will continue to weigh on earnings in the coming quarters.

"There is still so much political uncertainty out there that is driving markets, both for our clients and for us," said outgoing Chief Financial Officer David Viniar. "And in that environment, it is very hard to have conviction and very hard to take risk, both for our clients and for us."

Goldman's average daily value at risk - which represents how much money the investment bank could potentially lose in a day - dropped to $81 million, the lowest level in roughly six years.

Its return-on-equity, a key measure of how much profit a company can wring from its balance sheet, also remained low at 8.6 percent. That's below the 15 percent level that shareholders generally expect investment banks to earn in better times and far below the 30 percent or more Goldman posted just before the financial crisis.

"ROE's kind of skimpy, but that goes along with high capital and some softness in the business," said Regency Wealth Management portfolio manager Andrew Aran, who owns Goldman shares for clients. "It's going to be impossible to go back to 15 percent in this environment."

All told, Goldman earned $1.5 billion, or $2.85 per share, in the third quarter, compared with a year-earlier loss of $428 million, or 84 cents per share.

Last quarter included a charge to reflect the rising value of Goldman's own debt, which reduced earnings by $370 million. The third quarter of 2011 included the cost of buying back preferred stock from Warren Buffett, as well as losses on Goldman's stock and bond holdings.   Continued...

Traders work at the Goldman Sachs kiosk before the opening bell on the floor of the New York Stock Exchange, October 16, 2012. REUTERS/Brendan McDermid