Goldman Sachs' trading problem is even worse than what has befallen the rest of Wall Street — so bad that the company recorded its worst commodities quarter on record.
The trading issue has gotten so pronounced that even a quarter when the investment banking behemoth surprised analysts with a stronger profit than the year-ago period, it wasn't enough to keep the stock from falling.
That's primarily because a core of Goldman's existence — trading, particularly in the fixed income, currencies and commodities area — is falling at a rate greater than any of its peers. Trading revenue in general declined 18 percent in the second quarter, and FICC specifically fell a jaw-dropping 40 percent.
Commodity weakness helped drive the decline, registering an unprecedentedly poor performance.
"We are a market leader in commodities, but it was a challenging environment on multiple fronts," Martin Chavez, Goldman's chief financial officer, said on a conference call with analysts.
"We can have a great asset manager franchise and a great corporate franchise and [we're] working on both," he added later. "This is something that all of us are evaluating and making changes and working on, and we're committed to it. We know we need to do better."
'We didn't navigate the market as well'
Chavez confirmed that it was the "worst quarter ever in commodities" in the 73 quarters since Goldman has gone public, placing part of the blame on market conditions and others on shortcomings in Goldman's operations. He declined to provide a specific value on what the company lost on commodity trading.
"Not surprisingly given the results, it was a difficult quarter on all fronts," he added. "The market backdrop was challenged, client activity remained light and we didn't navigate the market as well as we aspired to and as well as we have in the past."
Trading weakness is nothing new on Wall Street as volatility has remained low in financial markets and competition has increased.
However, the problem has gotten more acute for Goldman. The commodities weakness has intensified, coincidentally or not, since the departure of Gary Cohn, who left his position as president and chief operating officer at Goldman to become President Donald Trump's chief economic advisor.
The operation will receive sharp focus as the second half evolves.
"GS has a lot of explaining to do and the FICC business looks set for a detailed review during the summer," analysts at Atlantic Equities said in a note.
Analysts overall were not bailing on Goldman, though the Street will be expecting results.
"We maintain our Market Perform rating as we feel the risk/reward remains relatively fairly balanced," JMP analysts said in a note. "We will continue to look for more detail around specific policy changes that could spark a break-out in return potential or stimulate the economy more broadly, which we believe would be more supportive of many of the company's businesses."
Chavez called the firm's focus "blocking and tackling," which he said will include an evaluation of client services as well as how it is directing resources to multiple parts of the business.
"Historically, we've had strength in derivatives," he said. "While the core of our business in FICC has been ... providing liquidity to asset managers, it isn't a matter of just focusing on active asset managers. And having a leading active manager franchise, it's also a question of how we can deepen our impact with the clients. ... So it isn't one or the other, it's a question of doing both."
Goldman reported quarterly profit of $3.95 a share, compared with analyst estimates for $3.39.