Goldman Sachs posted only its second loss as a public company, and its shares promptly rallied--and significantly. So what's going on?

According to Bloomberg, the market was apparently heartened by news that Goldman Sachs revenue from trading stocks and bonds rallied 16 percent sequentially, which was much better than expected. Rumors abounded that the firm suffered mightily in Treasuries, but those rumors apparently didn't pan out. At the same time, the company's backlog of deals seems strong and may pay dividends once the deal economy picks up.

The bank's losses reflected write downs of various assets. About $1.05 billion of last quarter's negative revenue came from a drop in the value of ICBC. Another $1 billion was caused by losses on other stocks. The big mystery of the earnings results was the muted gains from debit valuation adjustments. The gain for Goldman Sachs amounted to $450 million, which was much smaller that the gain for Citigroup and JPMorgan reported. Both banks reported gains from netted valuation adjustments of nearly $2 billion.

Goldman Sachs explained that it hedges against potential gains on losses from debit and credit valuation adjustments in an effort to minimize earnings volatility. One might think that banks would only hedge potential losses, but apparently not always. Obviously, the gain would have been larger had it not been for the hedges, and the overall report would've have been enhanced. But you can't fault a bank for wanting to reduce earnings volatility, if that's what's really going on.             

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