Profit Sinks: Has Goldman Lost It’s Magic?

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Goldman’s CEO Lloyd Blankfein’s best profits may be behind him (Larry Downing/REUTERS)

Goldman Sachs, it appears, is no longer the finely honed money-making machine that is has long been. On Wednesday, the most envied, and hated, firm on Wall Street confirmed that its profits fell 52% in the fourth quarter of 2010, from a year ago. The firm’s earnings trouble came in an already bad week for Goldman. On Monday, Goldman told its US clients that they would no longer be able to participate in Facebook’s $2 billion private stock offering. The move was seen as a public admission that Goldman had blundered one of Wall Street’s most high profile deals since the beginning of the recession.

To top it all off, on Tuesday, a new report said that despite Goldman’s recent troubles, which included that $550 million fine it had to pay the Securities and Exchange Commission, Goldman’s partners are still raking in the bucks. CEO Lloyd Blankfein alone has cashed in nearly $100 million in Goldman shares since 1999. Even the average Goldman partner’s take was $24 million.

The big problem for Goldman, and indeed, the rest of the banking sector, is that Wall Street seems far less profitable than it used to be. Here’s why:

While most people focused on the drop in Goldman’s profits, the real worry for the firm was the drop in its profitability. Goldman’s revenue in the last three months of 2010 was down 10%. But the firm’s profits were down far more than that. That means that Goldman is making considerable less money than it used to on the nearly the same amount of revenue.

And Goldman was not alone in that trend. Both Citigroup and JP Morgan also saw a jump in costs. This is in part because of Dodd-Frank and other new regulations, but not only. Most of the new rules have not started yet. And it is still not clear how others will affect the banks. Still, Dodd-Frank is forcing the firms to be less dependent on proprietary trading. And that was a very profitable business. So it is likely that Goldman’s less profitable quarter is a sign of things to come.

The good news here is that proprietary trading is also a very risky and volatile business. So even if Goldman and the others make less money, the money they make will be more consistent.