US bank Goldman Sachs duly reported record earnings for the second quarter, but instead of racing away once again, Wall Street was far more circumspect. Share prices edged higher but Goldman’s went nowhere after the big run on Monday.

It was a well-timed ‘update’ from analyst Meredith Whitney that actually left a lot unsaid from reports. It missed much of the downside for ordinary Americans of having a culpable bank and its management doing well after it was saved by the US Government late last year.

Goldman’s management showed no humility or recognition of being given a second chance by Government and taxpayer (more like tax pauper) support in announcing second-quarter profits of $US3.44 billion, 65% higher than last year’s second quarter. Goldman was given $US10 billion in Federal funds in the December quarter and the implicit support of the US taxpayer as it and its peers went close to failure after Lehman Brothers failed, Merrill Lynch was bailed out and Washington Mutual collapsed in September.

No, instead of being humble and thankful for the second life, a close look at the results in fact shows us that Goldman is back to its old pre-crunch trading tricks.

The detail in the Goldman results tells us why there’s no clear answer from the report about whether the US banking system is returning to health.

As the Financial Times Lex column warned:

Do not be deceived…Trading in fixed income, currency and commodities generated half the bank’s record net revenues, almost tripling from last year’s second quarter. This client-driven trading is part of Goldman’s DNA but cannot last.

Trading margins remained at the historically wide levels of the first quarter (helped by competitors’ demise), while a broad-based recovery in markets induced clients to resume trading. Meanwhile, another stand-out area — underwriting equity and debt sales — owed much to capital raisings by beleaguered peers.

And ratings agency Standard & Poor’s was short and to the point, saying its ratings on Goldman Sachs Group Inc. “was not affected by the bank’s ‘very strong’ second-quarter earnings report.”

“Although Goldman Sachs may well continue outperforming its close peers, we don’t consider its first-half results to be sustainable,” S&P said. “Moreover, we continue to have concerns about the confidence and sensitivity of securities firms with sizable trading operations and high reliance on wholesale funding, despite this strong recent showing.”

So while it can fool some in the markets, including analysts and fevered fund managers, the hard heads are still sceptical. But no sign of that among the managers at Goldman; there was lip service to the fragile markets, but that was all.

Half of Goldman’s revenues came from trading and principal investment: that is, Goldman risking its own money in betting against and with markets in fixed interest, commodities, etc. In other words it was engaging in risk taking and speculation. That paid off because at the moment the Fed is funding these banks (as are the Bank of England and the European central Bank) with cheap money to try and keep lending alive.

When you can borrow your money at cheap rates of less than 1% and then invest it up the yield curve in terms of returns, making money is easy. When you gear up and use leverage, which is what Goldman is doing, more money rolls in, especially if everyone in the markets know believe you are too big to fail. It was what Goldman and its mates were doing with gay abandon before the credit crunch hit and almost killed them off, but without that implicit Government backing.

Total revenue in the June quarter was $US13.8 billion, compared with $US9.43 billion in the first quarter and $US9.42 billion in the second quarter a year earlier. The company’s second quarter ended in May until Goldman Sachs changed its fiscal year last quarter.

Half that: $US6.8 billion, came from those trading activities of fixed-income, currencies and commodities, the company’s biggest business. That was up from the first quarter figure of $US6.3 billion and around $US2.3 billion in the first quarter of 2008 (to May). Equities trading revenue hit $US3.18 billion in the quarter compared with $US2 billion in the first quarter and $US2.49 billion in last year’s second quarter.

Revenue from equity underwriting jumped to $US736 million from $US48 million in the first quarter and compared with $US616 million a year ago. And guess where much of that increase came from? Underwriting and managing share issues by rival banks told to raise capital by regulators. That’s easy money.

Now taxpayers and US banking regulators are actively supporting this in a desperate attempt to keep the banks alive. If the Fed was to put up the cost of money or cut back on its availability, some of the banks would head straight towards the cliff once again, with rivals Citigroup and Bank of America in the lead.

Goldman Sachs is just an investment bank masquerading as a “commercial bank” so as to be able to access cheap money from the Fed and all the support that goes with being overseen by banking regulators and not an investment bank whose overseer is the Securities and Exchange Commission. If Goldman Sachs was an investment bank its cost of funds would soar, making much of the profit making trading much harder to achieve.

The support of the Fed now carries with the implicit guarantee of the US Government: having done it once, people dealing with Goldman Sachs now assume that it will happen again if Goldman Sachs stuffs things up, as it did last year, along with its peers.

So Goldman Sachs and its traders can dust off their risky computerised trading schemes and make hay, with the full knowledge that they are too big to fail and the poor benighted American tax pauper will help them once again if they get into trouble. That’s called “moral hazard” and there was no recognition of that in the comments from Goldman’s senior managers after the results were released.

It’s also paying its employees more money. The company set aside $6.65 billion for compensation and benefits in the period, or 48% of revenue, compared with $4.71 billion in the first quarter. The number of employees fell 1% to 29,400 from 29,800 at the end of March.

But that could hit a huge $US22 billion for the 2009 year if it manages to keep up the pace of earnings growth. It has already allocated $US11.3 billion for compensation for the six months to June.

No wonder that Rolling Stone article hurt at Goldman Sachs: the description of the bank as a “great vampire squid” is going to stick in people’s minds from now on after the trading profits in the first half of 2009. There’s a feeling among many in the markets that Goldman Sachs are a bunch of ungrateful chancers.