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Goldman Sachs $1.45bn for Regulatory Matters

by: (Research & Development Manager) on

It’s been a busy week for US banks this week, with the top 3 (JPMorgan Chase, Bank of America and Citigroup) all publishing their second quarter results. From a purely regulatory perspective, the results posted did not produce any earth-shattering talking points, and generally speaking their results have led to a pretty positive reaction to their respective share prices.

Goldman Sachs, a leading US investment banking firm, also produced their second quarter results this week and some of these results took analysts by surprise. Instead of the expected profit of $3.89 per share, they instead reported a profit of $1.98 per share ($1.05bn).

Goldman SachsMuch of the blame for this was due to “mortgage-related litigation and regulatory matters” to the tune of a $1.45bn net provision that the bank had put aside. To put this increase in context, net provision for litigation and regulatory proceedings for the second quarter of 2014 was $284m. Does this suggest GS are experiencing some regulatory problems?
In a word, not really (ok, two words then). The point is I don’t think GS are experiencing any more problems than their peers in the US banking sector. The money has been put aside amid “active discussions” with the Residential Mortgage-Backed Securities (RMBS) Working Group. RMBS are a US government organisation, backed by the Justice Department, who investigate misconduct that contributed to the financial crisis, so the implication is that GS are anticipating some enforcement action in this area, but probably no more so than their contemporaries.

For example, a year ago Citigroup reported a $3.8bn charge in their results linked to a Justice Department mortgage settlement. This year saw no such charge, so their profits have jumped.

Back to Goldman though, and the $1.45bn bump in the road that has seen their profits almost halve in the last year. The GS chief executive, Lloyd Blankfein, insists that their trading business has not been permanently affected by the increase in regulation since the financial crisis. In fact, excluding the $1.45bn put aside for litigation and regulatory matters, GS posted stronger than expected revenues and profits.

The fact that Goldman have now accounted for these potential “litigation and regulatory matters” suggests that their next reporting cycle should reflect a more favourable profit figure. In other words it’s all relative. It could be somebody else’s turn next time, although I hope we eventually get to the point where regulatory costs of this sort of level are eradicated from the banking sector in general. That will perhaps signal a turning point whereby customers will begin to trust banking organisations again, we’ll wait and see.
It’s been an interesting peek into the unpredictable finances of such a large, and influential, organisation, and more interesting still to find out that the regulatory fallout from the financial crisis is still having an effect.

(This is a follow up to earlier blogs where we looked at company results, see RBS, HSBC and Standard Chartered).


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