Goldman Sachs Group Inc. (NYSE:GS) reported earnings this morning, and the results were nothing short of amazing. Lehman Brothers (NYSE:LEH) reported a pretty good quarter considering all the problems of the fixed-income markets. Morgan Stanley (NYSE:MS) reported a poor quarter because of the credit crisis. Bear Stearns (NYSE:BSC) just this morning reported earnings that were very weak, but that was expected to some degree. Then you have Goldman Sachs, who reported an 81% rise over its earnings in the same quarter last year. The n
umbers completely blew away analysts estimates. Analysts were calling for $4.35 per share, and Goldman earned $6.13 a share. Analysts were looking for revenue of $9.6 billion and GS reported earning $12.3 billion.
How exactly did Goldman provide such a large earnings beat given the terrible industry conditions? First of all, the company has the least exposure to the subprime market of any of the investment banks. Merger and acquisition activity remained strong in the quarter for the company. Most importantly though, the company was able to make huge profits in the quarter by shorting mortgage securities. Basically, the company was more than able to offset its losses in the subprime market by shorting mortgage securities that it knew were overpriced and ripe for a fall. While other market participants, including other investment banks, were holding mortgage securities and losing money from them Goldman was making money hand over fist while they fell.
It's also important to note that during this quarter Goldman took a loss of $1.71 billion due to losses on leveraged buyout loans. So even as the company took a huge loss they were able to blow their numbers away.
Goldman Sachs has established itself as the clear market leader in the investment banking industry. Even in the worst of times the company has shown the ability to make money hand over fist. I believe Goldman has set themselves up nicely for both the near and long-term.
Diversified revenue really helped Lehman's and Goldman Sachs. But what about company connections or inside knowledge? How important was this? I found two maps from NewsVisual http://www.newsvisual.com/newsvisual/2007/09/click-here-fo-1.html, http://www.newsvisual.com/newsvisual/2007/09/goldman-sachs-b.html showing the Directors at both of these companies and the connections seemed pretty impressive. How important are these connections?
Posted by: Seth | September 20, 2007 1:23 PM | Permalink to Comment