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Inside Goldman: Earnings beat, but an ugly quarter

In its first earnings report as a member of the Dow 30, Goldman Sachs beat the Street, but only by taking a chainsaw to expenses.

The investment bank reported third-quarter earnings of $2.88 a share on revenue of $6.72 billion. While the firm's earnings per share were well above FactSet estimates of $2.44 a share, revenue missed by a wide margin as analysts had forecast a top-line figure of $7.41 billion

Goldman Sachs CEO Lloyd Blankfein
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Goldman Sachs CEO Lloyd Blankfein

Plagued by what CEO Lloyd Blankfein said in a statement was a "period of slow client activity", Goldman slashed operating expenses 25 percent from levels in last year's third quarter, cutting compensation and benefit expenses by 35 percent.

The cost cuts, along with a 5 percent reduction in outstanding shares, helped to offset a 44 percent decline in revenue at Goldman fixed income, commodities and currencies—the FICC unit.

The trading unit's revenue of $2.86 billion was far less than analysts' expectations of $4.11 billion, while the year-over-year decline was much steeper than those at rivals Citigroup,Bank of America and JPMorgan Chase. Equity trading fell 18 percent in the quarter.

Underwriting was a bright spot thanks to Goldman's role in a large number of initial public offerings. In the last quarter, though, overall investment banking revenue declined to $1.17 billion from $1.16 billion last year.

This is not likely a sign Goldman is in trouble, but is reflective of the difficult operating environment.

Bond trading was hurt by uncertainty about the Federal Reserve's actions on winding down its quantitative easing bond buying program known as QE3, and the —budget impasse in Washington. Meanwhile, corporate executives are only talking about doing deals—but not following through as they are reluctant to commit capital with the political winds continuing to blow crosswise.

"As longer-term U.S. budget issues are resolved, we could see an improvement in corporate and investor sentiment that would help lay the basis for a more sustained recovery," Blankfein said in a statement.

Goldman is obviously banking on that recovery.

The confidence reflected in its decision to raise its quarterly dividend by five cents a share to 55 cents.

—By CNBC's Mary Thompson. Follow her on Twitter @MThompsonCNBC.

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