Goldman thriving in recession

NEW YORK (AP) — It’s hard to imagine that any bank could emerge victorious from the credit crisis and recession. But Goldman Sachs & Co. is thriving while many rivals still struggle.

As weaker banks failed or dialed down their trading over the past year, Goldman picked up the slack and turned it into profits. It could be a long time before the investment banking business is truly healthy again, but economic downturns often lead to industry shake-outs, and Goldman is positioning itself to come out on top.

“You just saw a huge shift in the competitive environment,” said Mark Lane, bank analyst at investment firm William Blair, after Goldman posted better-than-expected earnings late Monday of $1.66 billion for the first quarter. The unit that trades bonds, currencies and commodities pulled in $6.6 billion, its highest revenue ever.

The shift could become even greater if Goldman is successful with plans to quickly pay back the $10 billion in bailout money it received from the government. That could free the bank from restrictions imposed by the government — including limits on executive compensation — and help it to increase its lead over rivals that cannot repay their federal debt yet.

Last year, investment banking was turned upside down. Lehman Brothers went bankrupt, while Bear Stearns and Merrill Lynch were bought by JPMorgan Chase & Co. and Bank of America Corp., respectively. Goldman and Morgan Stanley were the last two big, independent investment banks, and they applied to become commercial banks — meaning that they must follow the same capital restrictions that other banks do.

But it’s not just that Goldman now has fewer competitors. Many of its remaining rivals have turned more cautious and ratcheted down their trading activity.

Goldman became more conservative in its own way, boosting the amount of extra cash it has on hand by 47 percent to $164 billion in a single quarter. While it increased cash levels, though, it simultaneously ramped up trading — which is why its “Value at Risk,” which measures potential losses on a given portfolio, was at its highest level ever at the end of the first quarter, noted Rochdale Securities analyst Richard Bove.

“The company has not backed off in any way from taking risk in the markets,” Bove wrote.

As Goldman traded more, it was able to take better advantage of historically low interest rates and high volatility. Lower rates make money cheaper, and Goldman was able to put that money in more lucrative investments like bonds and commodities, thereby turning a profit.

“Goldman is back, and it is looking quite strong,” Bove wrote.