Wall Street’s beleaguered brokerages

Amy Scott Jun 13, 2006

KAI RYSSDAL: Treasury secretary nominee Henry Paulson might soon help run the most powerful economy in the world. But for now he’s got a day job. As the Chairman and CEO of Goldman Sachs. And he’s probably feeling a bit powerless today. Goldman Sachs reported gangbuster earnings for last quarter this morning. Only to see its share price fall 3 percent. Yesterday something similar happened to Lehman Brothers. Its stock dropped more than 5 percent despite its second-highest quarterly profit . . . ever. From New York, Marketplace’s Amy Scott has the story of Wall Street’s beleaguered brokerages.

AMY SCOTT: Goldman Sachs more than doubled its profits last quarter to $2.3 billion. As with Lehman Brothers, that was Goldman’s second-best showing ever. But shareholders weren’t impressed.

BRAD HINTZ: It certainly seemed unfair because the performance has been so good.

Analyst Brad Hintz with Sanford Bernstein says the recent market slowdown and fears of rising interest rates have investors worrying the good times won’t last.

HINTZ: You know it’s a stock not for the faint of heart. And if you start getting concerned about inflation or a potential recession or an equity market that’s getting a little choppy, the first thing you do is you throw over the riskier stocks.

Hintz says Goldman Sachs is well insulated against a decline in trading, partly thanks to a recent surge in its mergers and acquisitions business. Even if the stock market tanks here, he says 40 percent of Goldman’s revenues come from abroad. Harrell Smith with the research firm Celent says today’s sell-off spells more trouble for the non-Goldmans of the world, who don’t have a finger in every pie.

HARRELL SMITH: They really are the gold standard. If we see this kind of reaction from the market with Goldman’s earnings almost doubling, then I don’t think that really bodes well for the rest of the industry.

Investors will hear from Bear Stearns in a few days. Morgan Stanley reports second quarter earnings early next week. As they enter a new quarter, Wall Street firms are up against another hurdle: summer. People spend more time at the beach. That’s why for brokerage firms the third quarter is typically the worst.

In New York, I’m Amy Scott for Marketplace.

RYSSDAL: Goldman helped drag Wall Street down. Overseas investors took a drubbing as well. Driven by what is . . . or better yet, is not happening here. David Kelly, chief economist at Putnam Investments, explains:

DAVID KELLY: Well I think it’s really the blind leading the blind. I think the world markets are scared of what’s going to happen in the US market, and the US market is worried about what the Fed’s going to do. And the Fed’s scared about inflation.

RYSSDAL: Today’s report on wholesale inflation probably put another fright into the Fed. The core producer price index jumped more than expected — three-tenths percent last month.

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