Goldman $3.2bn profit masks $600m subprime writedown

Goldman Sachs has posted impressive returns for the last quarter of 2007, but has confirmed losses of around $600 million in its mortgage business.

The bank saw profits swell to $3.22 billion from September through November, building upon the $2.88 billion earnings recorded amid the turbulence of the third quarter. The bank’s performance was particularly strong in its fixed-income, cash and commodities arm, posting earnings of $3.3 billion.

The fourth-quarter results bring Goldman’s annual profits to $11.6 billion in a difficult year that has seen banks worldwide suffer large losses due to exposures to depreciating subprime loan debt. In the midst of the good news, however, Goldman revealed it too suffered mortgage-related losses.

On a conference call announcing the results, Goldman’s chief financial officer, David Viniar, at first refused to go into specifics on any subprime-related losses the bank had suffered. “We took some writedowns on our long mortgage inventory but our short positions were up over the course of the year more than our long positions were down. It’s not a number we disclose,” he said.

When pushed further for details pertaining to Goldman’s third-quarter 10-Q filing to the US Securities Exchange Commission, in which the bank declared a $1.82 billion exposure "to non-prime residential mortgage whole loans and mortgage-backed securities", Viniar was more forthcoming.

“That [$1.82 billion] number included collateralised debt obligations, collateralised loan obligations, residuals and a couple of other things. In terms of a truly comparable [writedown] number, the fall was from a little under $1 billion to a little under $400 million. More of that drop was from writedowns than from sales [of CDO debt],” Viniar said.

In other areas of the business, Goldman recorded gains of about $500 million related to its leveraged finance business in the fourth quarter - mostly as part of recoveries on some of the $1.48 billion in leveraged finance writedowns the firm sustained in the third quarter.

Leveraged loan commitments also fell over the last three months, from $42 billion to $27 billion, as $16 billion was sold or cancelled, $9 billion was funded and a further $10 billion of new unfunded commitments were taken on.

Goldman is the only member of the five big Wall Street banks to have escaped this year’s mortgage crisis relatively unscathed. Media reports last week said two traders in the firm’s structured products trading group were largely responsible for convincing Goldman to short the subprime market, a decision that earned the bank over $4 billion this year.

See also: Bear profits tumble by 61% as Goldman's rise 79%
Credit and liquidity risk hammer earnings