Goldman Sachs CEO Lloyd Blankfein
FORTUNE - All of a sudden, the vampire squid appears to be hurting for blood.
Goldman Sachs (GS) reported on Tuesday that its bottom line profits more than doubled in the first quarter from a year ago to $2.1 billion. On a per share basis, the company had $3.96 in earnings. That was more than double a year ago, and far better than analyst expectations. But sink a little deeper into Goldman's results and it's clear what once seemed like an open supply of profits for the firm is scabbing over. Indeed, following the seemingly strong profit release, shares of Goldman were only up slightly to $118.
First of all, a good deal of the improvement in Goldman's results were the result of a one-time $1.64 billion payout Goldman made to preferred shareholders a year ago. Exclude that and Goldman's earnings, in one of the best quarter for Wall Street in at least a year, actually dropped 23% from a year ago. And while the firm retained its top position in mergers and acquisition advisory, in other businesses Goldman seems to be falling behind rivals.
On Facebook, it was beaten out by Morgan Stanley and JPMorgan for the top slots in what is likely to be the hottest IPO of the year. Private equity firm Carlyle has eight investment banks working on its IPO, none of them are Goldman. In all, Goldman's fees from leading stock offerings plunged 40% from a year ago. Goldman's debt underwriting business dropped as well, down 16% from a year ago.
But the real driver of profits on Wall Street in the first quarter has been bond trading, an area where Goldman has long been a leader. Institutional investors are getting out of government bonds and shifting into corporate bonds and other investments with higher yields. That created huge commissions and trading profits for investment banks in the first quarter. But there, too, Goldman seems to be losing its footing. Goldman got $3.5 billion in revenue from debt and commodity trading. That was nearly triple what the firm had in the last three months of 2011. But it was less than the revenue that rivals Citigroup and JPMorgan Chase got from the same line of business, suggesting it is losing clients and market share to rivals. A year ago, Goldman's sales in its so-called fixed income group topped Citi's by $534 million. In this year's first quarter, Goldman trailed Citi, long considered a Wall Street laggard, by nearly $200 million.
Worse, one of the biggest boosts to earnings in the quarter compared to the last three months of 2011 came from Goldman's principal transactions unit, which includes its private equity division and other ways in which the firm invests its own money. Revenue in that unit jumped 133% versus the quarter before. But that's a business, due to new banking regulations, that Goldman may be soon forced to exit.
Analysts say the larger question is that in post-Dodd-Frank world, where banking regulations could largely change the business of Wall Street, it's unclear where Goldman will get its profits from. Goldman has always been a firm built on trading. Dodd-Frank makes that harder to do. The amount of cash on hand at Goldman rose to 14% of its outstanding loans and investments. That's one of the highest ratios of capital on Wall Street. One way to read that is that Goldman remains one of the strongest financial firms in the country. Another way to read that is that Goldman has no idea where to deploy its cash. The firm's executives may be struggling to find businesses to invest in that will produce growth. Analyst Brad Hintz, who follows investment banks for Sanford Bernstein, says among Wall Street firms, the future is the cloudiest for Goldman. "The big question is Mr. Goldman what are you going to do with all that capital," says Hintz. "What comes next? The company hasn't been able to frankly discuss this with investors."
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