Despite stagnant equity markets and a Federal Reserve committed to raising interest rates, a glimpse at Goldman Sachs’s 10-K annual report shows that the firm continues to put its money where its mouth is, in the form of more and larger bets on bonds, derivatives, and currencies with its own capital. Moreover, given its profitability – it earned $4.55 billion with a 15.26% net profit last year, among the highest on Wall Street – many competitors and investors look to the firm’s financial filings to understand how money is really being made on Wall Street.

Goldman Sachs has been described by former employees as a hedge fund trapped inside an advisory firm. A careful reading of its annual 10-K filing, according to CreditSights research analyst David Hendler, indicates that that while Goldman’s profit-generation capabilities remain “truly impressive,” there was nearly enough disclosure. The firm did not provide a profit figure, but another Goldman observer, who owns stock in the firm, ventured that the firm’s bond-proprietary trading profits approached $1 billion alone.

Mr. Hendler said that a sharp interestrate move could easily cost the firm over $300 million, potentially lowering 2005 consensus earnings per share by 7%.Moreover, risk analysis is made harder by the fact that the lines between proprietary trading and client trading often blur. An example of this is seen in Goldman’s unique relationship with Bank of America – envied across Wall Street – specifically, with the portfolio managers of the Charlotte based bank’s multi-billion-dollar portfolio of bonds. On at least three occasions since 2002, Goldman has purchased between $15 billion-$20 billion dollars worth of mortgage-backed securities from the bank in single trades. As one rival noted, “trading $15 billion is a good day at some shops – in one trade it is unheard of.” The strategy certainly has paid off though, as Goldman’s MBS department regularly ranks within the top two or three positions in most trading and issuance categories.