Goldman wants to go back, but can it?

NEW YORK - Meet the new Goldman Sachs, trying to be the same as the old Goldman Sachs.

The fifth-largest U.S. bank said late Monday that it earned $1.66 billion in the first quarter, as it boosted its risk and assets.

It also raised extra capital to repay the government, in a move widely seen as an effort to avoid extra regulatory scrutiny, particularly when it comes to compensation.

These are unusual steps in an environment where most Wall Street banks are slimming down their balance sheets, taking risk only reluctantly and slashing compensation.

Goldman wants to go back to the way things were before the crisis, where they do what they do best, which is taking risk, and the government leaves them alone, said Bill Fitzpatrick, an analyst covering financial stocks at Optique Capital Management in Milwaukee.

It may seem like a surprising tack for Goldman, just weeks after the bank's chief executive, Lloyd Blankfein, admitted that the financial services industry has made many mistakes.

He said in a Washington speech that decisions made at many banks during the crisis, particularly regarding pay, look self-serving and greedy in hindsight.

Goldman for its part denies it is making outsized bets to boost earnings. Spokesman Lucas van Praag said that the vast majority of the bank's risk taking in the first quarter was to facilitate client trades rather than bet the bank's own money.

Some analysts believe that argument and say that Goldman is playing an important role in buying and selling client assets now even as competitors are not. Spokesman van Praag notes that banks are under enormous pressure to keep financing markets open and liquid, which Goldman is doing.

But to many investors, the combination of a 5 percent increase in assets during the quarter and the jump in value-at-risk, a measure of risk, signal that Goldman is likely trading more of its own funds.

I've never seen such high value-at-risk figures out of Goldman before, even in 2006. I would be astonished if they weren't taking more risk, said one hedge fund manager who requested anonymity because he is not authorized to speak to the media.

Goldman is maintaining a $164 billion pool of available funds that it said could be used to buy assets, signaling to many investors that the bank is still willing to snatch up assets with its own funds.

CATCHING UP

If so, regulators may balk. The bank has nearly $1 trillion of assets and it became a bank holding company rather than an investment bank in September, meaning it should face much more government supervision, particularly when it comes to risk taking.

As long as their bets are paying off, and regulators are still figuring them out, they won't have to change, said Karen Shaw Petrou, managing partner at regulatory consulting and research firm Federal Financial Analytics in Washington. But the regulators will eventually catch up with them, Petrou added.

Goldman has historically been an incredibly effective risk- taker even in turbulent times. In the moments after two planes crashed into the World Trade Center on September 11 2001, the bank's London trading floor began shedding riskier assets and buying government bond options, steps that generated fat profits.

In late 2006 and early 2007, Goldman trading desks across the entire company began preparing for a U.S. housing crisis, making it one of the few banks to consistently turn in profits in 2007 and the first three quarters of 2008.

But this crisis has proven treacherous for even smart risk-takers. Goldman Sachs posted its first quarterly loss as a public company in November, and recorded some big writedowns in December, including an $850 million charge from loans made to units of chemicals company LyondellBasell that filed for bankruptcy in January.

And much more is at stake now if Goldman's risk taking goes awry. In late November 2001, Goldman had $312.2 billion of assets on its balance sheet. In March 2009, it had $925 billion. And as of September, Goldman became part of the U.S. banking system, meaning that questions about Goldman's stability may shake faith in the safety of depository institutions.

Treasury Secretary Timothy Geithner signaled in congressional testimony last month that systemically important companies require extra scrutiny now. He proposed setting up a single regulator to look at companies crucial to the financial system that will ... need to impose liquidity, counterparty, and credit risk management requirements that are more stringent than for other financial firms.

Said Federal Financial's Petrou, Proprietary trading does not fit well into that kind of a framework.

(Reporting by Dan Wilchins; Editing by Steve Orlofsky)