Goldman Sachs posts worst quarter since IPO

Goldman Sachs, the larger of the two remaining major independent US investment banks, reported its worst drop in profits since going public in 1999.

Net income was $US845 million, or $US1.81 a share, in the three months ended August 29, compared with $US2.85 billion, or $US6.13, a year earlier. Goldman dropped 3.3% in New York as credit-rating downgrades of American International Group raised concern strains on the financial system are spreading.

After setting Wall Street profit records in 2006 and 2007, chief executive Lloyd Blankfein is grappling with market convulsions that drove Merrill Lynch and Bear Stearns into emergency sales and Lehman Brothers into bankruptcy. Goldman shares slumped 12% Monday and its senior notes dropped to a record low on concern no investment bank, even the most profitable, was safe.

''The business is just not happening and therefore Goldman can't take advantage of what doesn't exist,'' Ladenburg Thalmann & Co. analyst Richard Bove said in a Bloomberg Television interview. ''This is still 50% to 60% below what the company had been earning a couple years ago. The quarter is really terrible in many respects.''

Goldman's profit drop was the steepest in its nine years as a public company.

While Goldman has suffered a fraction of the writedowns on fixed-income assets that New York-based competitors Citigroup and Merrill have taken, its shares have dropped 40% this year as markets tumbled and fees from securities underwriting and providing merger advice dried up.

Analysts including David Trone at Fox-Pitt Kelton Cochran Caronia Waller have said the credit crisis shows independent securities firms such as Goldman should consider merging with a bank, to provide a more stable source of funding.

Chief financial officer David Viniar said Tuesday the company isn't interested in doing a deal with a bank. He also said he'd never rule out the possibility entirely.

''Right now we think our business model works because our business works,'' Viniar, 53, said in a telephone interview. ''Our performance speaks' for itself and will continue to speak for itself.''

Analysts surveyed by Bloomberg estimated earnings of $US1.71 a share. Goldman has beaten analysts' estimates for 13 straight quarters.

Return on equity, a measure of how effectively the firm reinvests earnings, fell to 7.7% from 20.4% in the second quarter.

Revenue dropped 51% from a year ago to $US6.04 billion. Fixed-income, currencies and commodities, the company's biggest source of revenue, generated $US1.6 billion, down 67%. The firm took $US275 million in writedowns on leveraged loans and related hedges, $US500 million on residential mortgages and securities and $US325 million on commercial mortgages and securities.

Goldman held $US1.7 billion of subprime mortgage assets, $US3.6 billion of so-called Alt-A mortgages, and a bit more than $US7 billion of prime mortgages at the end of the quarter, Viniar said in a conference call with analysts. The firm held the Alt-A mortgages at about 50% of face value at the end of the quarter, he said.

The firm cut its holdings of commercial real estate loans to $US12.4 billion at the end of the quarter from $US15.2 billion three months earlier, mostly through sales, he said.

Viniar said on a conference call with reporters that the firm had reduced its leveraged loan positions to about $US8 billion. He said access to market liquidity remains ''robust.''

Equities trading revenue fell 50% to $US1.56 billion and revenue from investment banking, which includes providing merger advice and underwriting stock and bond sales, dropped 40% to $US1.29 billion.

Bloomberg