Riskier bets pay off for Goldman

Goldman Sach's value-at-risk in 2009 was more than twice what it was in 2008. The result? A $13B profit for the year — mostly from trading and investing.

Every day the Goldman Sachs Group Inc. trading desk opened for business last year, the odds were even that would it make more than $100 million.

The firm’s traders coined at least that much revenue no less than 131 days last year, out of the 263 days they came to work. That was a big reason why Goldman was able to generate more than $13 billion in profits on $45 billion in revenues, about two-thirds of which came from trading and investing.

The data, contained in the firm’s annual report released Monday, underscores just how many tailwinds were at the fortunate firm’s back last year. Not only did it thrive after competitors like Lehman Brothers and Bear Stearns collapsed in 2008, but the Federal Reserve’s decision to cut interest rates to near zero enabled Goldman to slash its costs of funding — the biggest expense after compensation — by nearly 80%. Goldman also benefited greatly, of course, from policymakers electing to keep so many of its rivals and trading partners afloat.

Operating with essentially free money courtesy of the Fed and so many competitors in the financial equivalent of intensive care, Goldman bet more aggressively than ever on everything from the direction of stock prices, interest rates, and other asset prices.

The firm’s “value-at-risk,” the most it was likely to lose in any given day, jumped to $285 million by the end of 2009. That was nearly double the amount of risk it was taking in late 2008, when Goldman and the rest of the financial system had just been bailed out by taxpayers.

The firm repaid its bailout money last year and also set aside $6.4 billion to pay taxes at an effective income tax rate of 32.5%. In 2008, it paid just $14 million in taxes.

[This story first appeared in Crain’s New York Business, a sister publication of InvestmentNews.]