Investment Banking

Goldman Sachs Profit Falls on Legal Costs

The $5.1 billion settlement of charges related to the sale of mortgage-backed securities contributed to a 65% drop in fourth-quarter profit.
Katie Kuehner-HebertJanuary 20, 2016

Goldman Sachs’ fourth-quarter profit plummeted 65% as the Wall Street firm took a hit from the $5.1 billion settlement of a U.S. investigation of its handling of mortgage-backed securities.

Goldman said Wednesday its net income fell to $765 million, or $1.27 a share, from $2.17 billion, or $4.38, a year earlier, as the regulatory settlement reduced its earnings by $1.54 billion. Revenue dropped to $7.27 billion from $7.69 billion.

Analysts polled by Thomson Reuters on average estimated that Goldman Sachs would earn $3.53 per share on revenue of $7.07 billion, according to the Wall Street Journal. Many analysts didn’t update their estimates following news of the settlement earlier this month, which Goldman said reduced its per-share earnings by $3.41.

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The quarterly profit is the lowest since Goldman posted a rare loss in the third quarter of 2011.

Goldman Sachs was the latest banking firm to be hit with large regulatory penalties tied to the mortgage meltdown, Bloomberg said. Authorities have penalized three other large U.S. banks  JPMorgan Chase, Bank of America, and Citigroup  more than $37 billion for their role in selling faulty mortgage-backed securities before the financial crisis.

Goldman Sachs’ stock has dropped 13% this year, compared with a 10% decline for the Standard & Poor’s 500 Financials Index. On Wednesday, it was trading at $152.85, down more than 2.5%.

The firm’s fourth-quarter revenue from trading in fixed-income, currencies and commodities markets rose 1.2% to $1.18 billion, excluding accounting adjustments. Equity-trading revenue fell 7.1% to $1.77 billion.

Goldman’s results “cap a fourth-quarter earnings season for banks that was dominated by weak trading results and worries about whether the sharp fall in energy prices and a slowdown in China’s economic growth would sting the financial industry,” the WSJ said.

“Clearly, it’s been a challenging environment for the entire industry,” Goldman CFO Harvey Schwartz said on a conference call with analysts.

The firm may cut more than 5% of bond traders and salesmen this quarter, a person with knowledge of the matter told Bloomberg last week.