Goldman's Gold

Floyd Norris blogged the Goldman Sachs conference call this morning. For those that don't know, Goldman is in the news this week for making a reported $1.8 billion profit in the first quarter of 2009. This has been interpreted as a sign that the ailing financial sector might be ready to leap from its sickbed. But some suspicious smells still hover over the patient. For one, Goldman switched its reporting schedule from a fiscal year ending Nov. 30 to a calendar year ending Dec. 31. The first quarter of the reporting year, which normally would have been Dec.-Feb., became Jan.-Mar., in other words. That left December as an "orphan month," and it was a terrible month indeed -- Goldman suffered a $0.8 billion loss in December. Some suspected foul play, surmising that Goldman squeezed its writedowns and losses into December, making January, February and March look better than they actually were.

In addition, Goldman was the beneficiary of $12.9 billion of government money funneled through AIG, which the insurer used to pay off banks (such as Goldman) with which it had derivatives contracts. Analysts wondered: Was Q1 so healthy-seeming because of these one-time cash injections?

The answer was a cautious no. "Most of the impact was in December," according to Norris. "For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero."

And what effect did the calendar change have? Little to none, says the company. They wrote down the value of some toxic assets in December, and they did further writedowns in Q1. Which leads us to a good question. In Norris's words:

So how did they make money? One answer is that this is a great time to be in the banking business — if you ignore what we politely call legacy assets. Customers are desperate for cash, and will pay for it. Fees are up. If underwriting volumes continue to rise, this could be a great, great year. Assuming, of course, that the write-offs are over.

From a year of cataclysm to a year of plenty in just a month? This is one reason I don't believe the talk that the financial sector is going to shrink tremendously, at least not absent significant government reform.