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Goldman Sachs Turns to Private-Equity Cookie Jar as Trading Slumps

Goldman Sachs Group Inc. managed to beat analysts' earnings estimates last quarter despite an unexpectedly large drop in revenue from its juggernaut fixed-income and commodities-trading division.

Now, at least one analyst thinks he knows how -- after reviewing the firm's latest quarterly report, filed with regulators on Friday, Aug. 4.

Goldman Sachs recorded $554 million of gains during the second quarter by writing up the value of a $16 billion book of rarely-traded, hard-to-value assets such as stakes in private companies, corporate loans and commercial real estate, according to David Hendler, principal at investment consultancy Viola Risk Advisors in Montebello, New York. The gains were "unrealized," indicating they came from accounting adjustments rather than actual asset sales.

When Goldman Sachs posted second-quarter results on July 18, the New York-based firm reported that its profit per share was $3.95, or 17% higher than the figure projected by analysts in a FactSet survey. The earnings beat happened even as revenue from the fixed-income division declined by nearly $800 million year-over-year, or roughly $400 million more than some analysts were expecting.

The concern, according to Hendler, is that the unrealized gains on rarely-traded assets might not be sustainable...