Goldman Sachs Group Inc. (GS) has revealed that 25% to 35% of its total revenue is gained from derivatives businesses, according to a report in The Wall Street Journal. The disclosure came in response to a request by the Financial Crisis Inquiry Commission (FCIC) related to its probe into the recent financial crisis.
In July 2009, a 10-member FCIC panel was appointed by the United States government to investigate the causes of the worst US financial and economic crisis since the Great Depression. The panel, led by chairman Phil Angelides and vice chairman Bill Thomas, is also examining the role of derivatives in aggravating the financial crisis. The FCIC has been asked to submit the report to the Congress by December 15.
Derivatives are contracts whose value is derived from assets such as stocks, bonds, currencies or commodities, or events such as changes in interest rates or the weather. Derivatives have been considered a major offender in intensifying the credit crisis, leading to the scrutiny of several other banks besides Goldman Sachs.
Goldman has already come under the FCIC scanner during the financial crisis for its derivatives contracts with American International Group Inc. (AIG), the insurer that was being bailed out by the US government.
On being requested by the panel, Goldman submitted information related to its derivatives holdings and operations from 2006 through 2009.
Statistics provided by Goldman indicates that its derivatives businesses produced $11.3 billion to $15.9 billion of the company’s $45.17 billion in net revenue for 2009. Additionally, according to a June report from the Office of the Comptroller of the Currency (OCC), the company held a gross amount of $49.1 trillion of derivatives contracts as of March 31, 2010.
For the first half of 2010, Goldman reported $11.8 billion in revenues from trading fixed- income, currencies and commodities and $3.57 billion from trading equities, which together accounted for 71% of the company’s net revenues of $21.6 billion.
Goldman’s results reflected a difficult market environment. Further, the new regulatory reform which restricted banks from proprietary trading and investing more than 3% of their capital in private equity or hedge fund investments in the long term will continue to pressure trading revenues, which will hurt the profitability of Goldman Sachs in the upcoming quarters.
Goldman’s shares are maintaining a Zacks #5 Rank, which translates into a short-term Strong Sell recommendation. Considering the company’s business model and fundamentals, we have a long-term Underperform recommendation on the stock as well.