Survivors of crisis find a silver lining

From The TimesApril 15, 2009

Survivors of crisis find a silver lining

David Wighton: Business editor's commentary

For a moment, it looked just like the good old days. Goldman Sachs' profits soar way above forecasts to $1.8billion in the first quarter as it plans for a 20 per cent pay rise for staff. Crisis, what crisis?

Except, of course, the crisis has had a big impact on Goldman. It is just that the impact on Goldman - and rivals such as Barclays Capital - has not been all bad.

The reason that Goldman's huge fixed income, currency and commodities arm generated record revenues of $6.56 billion was not that its customers did record business, although volumes were healthy enough.

It was because half of its competitors have blown themselves up and many of the others are wandering around in a daze. As a result, customers are having to pay up to get trades done.

The spread between the buying and selling prices for everything from sterling to silver has widened dramatically, fattening up Goldman's margins a treat.

These trading profits absorbed continued losses in credit products, including about $800 million before hedges on commercial mortgage loans and securities.

Elsewhere things were not so pretty. Equities trading, the advisory businesses and asset management were all down and there were further losses from property and other investments.

The returns to shareholders have been diluted by the big increase in Goldman's capital, which is now being expanded by another $5billion, which may be used to pay off the $10 billion owed to the US Government.

But Goldman still managed to generate a return on equity of 14 per cent.

The speed with which the underlying business of the surviving investment banks seems to be bouncing back must make companies in other stricken sectors look on with incredulity.

Boston Consulting Group has constructed a “bull” case that has global investment banking net revenues before writedowns reaching $374billion next year.

That is 15 per cent higher than the record level of 2007. Even its “bear” case of $258billion is not far off the level of 2006. Returns will not be as high, because of lower leverage, but then the cake will be shared out between fewer mouths.

The Goldman figures looked particularly encouraging for Barclays.

Thanks partly to its rescue of Lehman Brothers' US business last year, Barclays Capital is strong in all those areas where Goldman reported good results - particularly debt, currencies and commodities - and smaller in those areas that struggled.

London investors took note and Barclays shares jumped another 10per cent to 195.5p yesterday, four times their low in January.

A lot could still go wrong. But the history of previous banking crises shows that the survivors not only live but live well. Those that double up at the bottom, like Barclays, can live very well indeed.

http://www.timesonline.co.uk/tol/comment/columnists/article6094574.ece


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