SEC fine, bonus tax, volatile markets dent Goldman Sachs profits

Hundred dollar bills, fanned out and on fire.

Goldman Sachs said goodbye to a few bucks this fiscal quarter. Image from Flickr.

Goldman Sachs profits fell 86 percent in the second quarter compared to the first — the richest securities firm on Wall Street took a beating. The biggest reasons for the precipitous drop in revenue, most analysts say, are a big fat SEC fine and an even fatter British bonus tax. However, historically volatile markets also hurt the bank’s earnings.

Goldman Sachs profits withstand SEC fines and British bonus taxes

Tuesday Goldman Sachs announced that the bank’s profits were $613 million in the second quarter. Those numbers are down 86 percent from the first quarter and 84 percent from the second quarter of 2009. The Los Angeles Times reports the Goldman Sachs profits announcement came just a few days after it settled a lawsuit with the Securities and Exchange Commission. In a deal during the financial crisis, the SEC accused Goldman Sachs of fraud as it made money at its clients’ expense. In the Goldman Sachs fraud case, the bank escaped having to admit to a crime, but it coughed up a $550 million fine to sweep the case under the rug. The total amount was subtracted from the bank’s earnings for the second quarter. A $600 million British bonus tax levied on Goldman Sachs for its executives working in Britain also hit the bottom line.

Goldman Sachs went wrong direction in volatile market

Bloomberg reports that Goldman Sachs lost money because it bet on stock market volatility to ease just as it was surging. To illustrate, Bloomberg used the Chicago Board Choices Exchange Volatility Index, known as the VIX. The VIX is probably the most widely used measure of stock market volatility. The VIX, which started the second quarter at 17.47, rose as high as 45.79 on May 20 before ending the quarter at 34.54. The index, which methods the cost of using opportunities as insurance against declines within the Standard and Poor’s 500 Index, has averaged 20.38 over 20 years.

Goldman Sachs nevertheless pays out billions in bonuses

Even though Goldman Sachs profits fell in the second quarter, the bank nevertheless made tons of money. The Los Angeles times article said that though Goldman Sachs has come under fire before because of its massive employee bonuses, it didn’t let up in that department. In the second quarter, the bank dedicated $ 3.8 billion, or 43 percent of total revenues, to Goldman Sachs bonuses — the exact same percentage of revenue used for bonuses during the first quarter. And even as second quarter profits plunged, the bank hired 1,000 new employees.

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