Goldman adds caution to risk appetite Goldman Sachs" daily value at risk - a measure of the trading risk assumed by the Wall Street bank - fell to the lowest level since before the financial crisis, surprising analysts and prompting questions over whether the bank is quietly tweaking the way it does business ahead of new rules and regulation. "Your gut wouldn't have told you that VaR had dropped that much," said Glenn Schorr, banking analyst at Nomura, while noting the rebound in markets in the first three months of the year. The Wall Street bank reported first-quarter earnings of $3.92 a share on Tuesday, after net revenues fell 16 per cent to $9.95bn. Despite handily beating analysts" earnings forecasts of $3.55 a share, the lower VaR suggests Goldman appears to have partially missed out on the recent rally in "risky" assets. Net revenues at one of Goldman's biggest traditional moneymakers - fixed income, currencies and commodities trading - also slipped 20 per cent to $3.46bn during the period. JPMorgan Chase and Citigroup - which have similar FICC operations - reported modest growth in these businesses. VaR attempts to gauge how much the bank could stand to lose from its vast inventory of assets over a certain time period and at a certain confidence level. The measure reached notoriety during the financial crisis when it proved disastrously poor at forecasting extreme losses at big banks. Goldman's daily VaR fell to $95m in the first quarter of 2012, from the $135m reported at the end of last year - when markets were roiled by the eurozone crisis - and the $113m posted in the first quarter of 2011. The bank's daily VaR averaged $158m in 2007 and 2008, before surging to $218m in 2009. The lower VaR "points to less risk-taking in the first quarter, which we believe reflects both the impact of much lower volatility . . . plus no significant increase in risk-taking," said Citi's Keith Horowitz. One of the "key questions" is "whether the weakness we are seeing at Goldman Sachs reflects any changes to their business model," he added. The bank is expected to be hit harder than its peers by new regulation, such as the Volcker rule which prevents the company from trading for its own account, as well as new Basel III requirements that will force it to hold more capital against certain parts of its balance sheet. To counter the new rules, the bank has been slashing expenses, including cutting staff and using more trading technology. "The firm will operate with a more limited balance sheet and altered trading business models," said AllianceBernstein analysts, including Brad Hintz, in a recent research piece sent to their clients. That too, could push down the bank's VaR as it retrenches from riskier, more capital-consuming activities. However, Goldman's chief financial officer, David Viniar, said the reduction in VaR reflected customers" activity. "The biggest thing that drives our risk appetite is our client flow," he said on Tuesday's conference call with analysts. Obviously when they do more we're likely to end up with more risk. While markets recovered in the first quarter of the year, he said, the bank's clients took it slow. The Vix, a measure of market expectations of volatility, fell by about 30 per cent in the period, he noted. "There was big asset price improvement but we have been cautious on this and we may remain cautious on risk given the environment," he told analysts. We think that's also reflective of the fact that our clients have been cautious on risk and remain cautious on risk. Still, some speculate that the lower VaR could indicate that Goldman is positioning for another rough year in markets. In the third quarter of last year - just before the eurozone debt crisis went into overdrive - the bank suggested to investors and analysts that it was already "de-risking." "When I see Goldman Sachs pull back risk that much that quickly, I get a little anxious about what could be around the corner because they're typically pretty good at predicting that," said Mr Schorr of Nomura.