Goldman Sachs loss signals a bad omen for Wall Street

[alok agarwal]

\NEW YORK: Goldman Sachs, once Wall Street's highest flier, has been grounded, and it does not bode well for the rest of the financial industry or the New York City economy that depends on it. The bank, both envied and loathed for its ability to churn out huge profits year after year, reported a quarterly loss on Tuesday - it's first since the financial crisis and only its second since going public in 1999. The misstep by the financial leader speaks to what could be a more lasting shift on Wall Street, which has been retrenching over the last 12 months.

While protesters a few blocks away were denouncing greed and "too big to fail" banks, the institutions themselves were coming to grips with the current diminished reality. Although Wall Street has not changed in some significant ways - top executives are still receiving huge pay packages and its lobbyists continue to have sway in Washington - the industry is facing forces of change unlike anything since the Great Depression. Trading operations are muted. Risk-taking is tempered. And boring businesses are back in vogue.

Wall Street is feeling the pinch. Last week, JPMorgan Chase reported that earnings dropped by 4 percent in the latest period. Both Bank of America and Citigroup booked banner profits. But much of those results were attributed to one-time accounting gains, rather than improved fundamentals.

Goldman, which has been known for its prowess in trading, has found itself buffeted by the choppy markets and economic turmoil. While the firm posted decent results in equity trading and investment management, it lost nearly $3 billion on its investments in stocks and bonds, more than offsetting the po-ckets of strength.

New York, the nation's financial hub, is bracing for the fallout. Investors have been anticipating the weakness for months.

Since the beginning of the year, shares of financial companies have plummeted. While shares of Goldman jumped 5.5% on Tuesday, reflecting investor expectations and favourable developments in Europe, it was still down almost 40% for the year. Bank of America, which rose more than 10% the same day, stands at $6 a share, compared with $14 at the start of 2011.

To improve their profitability, banks have three main options: increase revenues, cut expenses and reduce the shareholder base. But the first method is not working at a time when earnings have been crimped by regulatory uncertainty and economic woes.

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