Heading into bank-results season, investors figured someone would trip up on uncertainty around interest rates and the Federal Reserve’s mid-September taper turnabout.

They just didn’t figure it would be Goldman Sachs. Or that the result would be so bad.

 

Goldman said Thursday that it saw a year-over-year revenue fall of 20% in the third quarter, due largely to a 44% plunge in the fixed-income, currency and commodities business. That was well in excess of declines posted for similar operations at J.P. Morgan Chase, Citigroup andBank of America.

These results rightly prompt a resumption of questions about how much of the challenges facing Wall Street are structural rather than cyclical and whether firms such as Goldman are doing enough to adapt.

Granted, Goldman’s net income of $1.4 billion was roughly flat with the prior year. But this was due to gains in the investing-and-lending division and a seemingly sharp cut to compensation expense, Goldman’s largest. This was down 36% from the prior year, while the bank’s ratio of compensation to revenue fell to about 35%. It has typically been around 44%.

Even so, this wasn’t enough to keep Goldman’s return on equity above 10%—its theoretical cost of capital—for the quarter. This came in at 8.1%, showing that while Goldman has operational flexibility, it is willing to bend only so far.

Consider that the compensation ratio at J.P. Morgan’s corporate and investment bank dropped to 28% in the third quarter. And, on an absolute-dollar basis, that Goldman’s compensation expense of about $2.38 billion was higher than $2.33 billion at J.P. Morgan’s operation.

Meanwhile, J.P. Morgan reported a return on equity for its investment-bank unit of 16%. Such a difference understandably leads investors to again question whether Goldman is fairly dividing the spoils between employees and shareholders.

In 2012, Goldman acknowledged this tension by cutting its compensation ratio for the year to 38%. Absent a significant pickup in fourth-quarter results, it may have to take even more drastic action in 2013.

The third-quarter results gave investors other reasons for pause. Finance chief Harvey Schwartz said the steep revenue drop in fixed income was due to a variety of factors, including “difficulty managing inventory” in the bank’s currencies business. This suggests Goldman, as a market maker, wasn’t positioned properly for exchange-rate volatility, possibly around emerging-market currencies.

Such missteps can occur. Yet this serves as another reminder that investors have little visibility into how Goldman actually makes its money. Analysts tried repeatedly on Thursday’s call to get Mr. Schwartz to go into more detail on what exactly went wrong, with little success.

Absent a clear sense of what is driving the business, it is hard to justify a valuation for Goldman significantly above its tangible book value. Indeed, the stock has traded at only a slight premium to this for more than two years and is currently at about 1.1 times.

Adding insult to injury, Mr. Schwartz said reduced trading activity during the quarter was the result of “normal client risk management” given interest-rate uncertainty and Washington’s looming budget battle. In that sense, he said, “all the behavior was very predictable.”

All the more reason to wonder why Goldman got it so wrong.

Write to David Reilly at david.reilly@wsj.com