Monday, December 15, 2008

Goldman Sachs Expected To Post Massive Losses

Posted on UK Independent: Goldman faces $2bn loss – its first since 1929

  • As the banking giant prepares to unveil shock figures, Morgan Stanley braces itself to add its own bad news

    By Simon Evans
    Sunday, 14 December 2008

    Goldman Sachs, the US investment bank, is this week expected to post its first loss since the Wall Street crash of 1929 when it unveils full-year results on Tuesday.

    In the week when many Square Mile bank staff find out if they have scooped a bonus this year, Morgan Stanley is expected to complete a miserable Christmas picture when it also reports a loss, one day later.

    Alex Potter, banking analyst at stockbroker Collins Stewart, said: "For these two remaining November year-end reporters, the past three months will have been pivotal to their year as well as to the 2009 outlook.
    This period encompassed the Lehman failure, as well as the nationalisations of Fannie Mae, Freddie Mac and AIG."

    Analysts expect Goldman to say that it lost close to $2bn (£1.4bn) in the last quarter of 2008, compared to a $3.18bn profit during the same period last year.

    Big losses are expected at the bank's proprietary property arm, Whitehall, which owns, among other investments, New York's Rockefeller Center. Sources suggest that Goldman will reveal writedowns of more than $2bn on the fund.

    Big losses are also believed to have been recorded in its key principal investments portfolio,
    with some estimates suggesting they could come in as high as $3.5bn.

    Goldman laid off 250 staff in Europe last week, the majority of the cuts coming at its London offices in Fleet Street, as part of a drive to slash the group's headcount by 10 per cent.

    Morgan Stanley is expected to post only its second loss since it went public in 1986 – around $300m for the fourth quarter is forecast – although some estimates suggest that figure could be as high as $900m.

    The ratings agency Standard and Poor's has estimated that Morgan Stanley owns $7.7bn of commercial real estate loan assets – none of which has been written down.

    Morgan Stanley's numbers will come days after Bank of America's chief executive, Ken Lewis, revealed that the bank, which snapped up ailing rival Merrill Lynch earlier in the year, is looking to lay off as many as 35,000 jobs in the next three years. It is anticipated that the move will save as much as $7bn.

    Last week Spanish bank Santander said it was laying off 1,900 jobs in the UK. Around 250,000 posts have gone so far this year in financial services, including at Citigroup, which is cutting 75,000 jobs, and JP Morgan, which is shedding around 7,000 staff – around 10 per cent of its workforce.

    *Ed Annunziato, the former head of European investment banking at Merrill Lynch, is to head a new financial institutions arm at Tricorn Partners, the corporate finance boutique run by Square Mile veterans Guy Dawson and Justin Dowley.

On New York Times: Goldman Is Expected to Report an End to a Profitable Run

Some of the comments made:

  • “I think if there is one message to be taken away from what is likely to be the worst quarter in Goldman Sachs’s history, it is that no one is immune,” said Michael Mayo, an analyst at Deutsche Bank.

  • “I have a more important issue than the loss in the quarter. And that is, how do you fund the balance sheet going forward?” said Glenn Schorr, an analyst at UBS. “Who is going to give you unsecured debt and at what price? I think they might need to either continue to shrink the balance sheet or buy a bank or an asset manager. Or else they are just hoping the respirators the government has them on are good enough and will be around long enough to help them make it through.”

On the UK Guardian: Shaken Goldman Sachs anticipates first loss in years

  • Lloyd Blankfein, chief executive of Goldman Sachs, was defiant at an investor meeting last month. The US banking giant was, he said, 'uniquely placed' to survive the current financial crisis. 'We have emerged from every... transformational event stronger and with our core franchise, culture and values intact. The other side of this crisis will be no different,' he insisted.

    Not everyone shares his conviction, however, and the detractors will be given extra ammunition on Tuesday, when Goldman is expected to announce the first quarterly loss since it went public in 1999 caused by further huge write-offs on the value of its investments and a fall in revenues as investment banking, sales and trading activity all take a further downturn. Among the most pessimistic is Richard Staite, US banking analyst with Atlantic Equities, who forecasts that it will make a net loss of $2.3bn, compared with $3.2bn profit last time. That is still a far more resilient performance than rivals such as the failed Lehman Brothers, Merrill Lynch, which was swallowed by Bank of America, or Citigroup, which has had to be bailed out by the government. But it still undermines Blankfein's conviction that its integrated banking strategy, providing a range of services from advice to investing in partnership with its clients, can survive the worst financial crisis since the 1929 crash.

    'We believe the Goldman franchise remains intact and there is little evidence of a loss of market share,' wrote Staite in a research note. 'However, the current trading environment is exceptionally challenging and there remains uncertainty over the business model, in particular access to funding.'

    Goldman's problem is that it is dependent on the wholesale banking market, under which banks raise finance by borrowing from each other or from institutional investors. Since the financial crisis took hold last year, that market has in effect died and many commentators believe it will not recover to anywhere near its previous size. Blankfein accepts that the dearth of wholesale funding is an issue but says it is a problem for the market as a whole 'not [our] business model'. But Goldman's decision to become a bank holding company, with all the extra regulation that involves, indicates he accepts the need for access to a wider range of funding sources.

    Already, the bank has transferred $130-$150bn of deposits from elsewhere in the organisation and there has been speculation that it will launch internet accounts, or credit cards, in a bid to build the deposits further. Blankfein told the Merrill Lynch conference that it was looking at three sources for deposit expansion: organic growth, through its private wealth management operation, by distributing its products through third parties, such as brokers or through acquisitions.

    But Staite warns that expanding the deposit base 'will be a slow process if done in an organic manner and the acquisition of a retail bank still seems unlikely'. The bank is also building its asset management business, where the fees are much more predictable than acting as broker for hedge funds, or advising on mergers and acquisitions. But that strategy has been undermined by dismal results from some of the hedge funds such as its Goldman Sachs Liquidity Partners 2007, which fell by 55.3 per cent in the year to the end of October.

    Blankfein makes much of its record: its asset management business has grown funds under management from $258bn in 1999 to $863bn at the end of October, while it has expanded its overseas operations. And he boasts that it has signed up 100 new clients in the past year, half of them previously advised by rivals.

    But, with activity in financial markets likely to remain subdued and funding scarce, the pressure is on Blankfein to come up with a strategy for the new era - and investors will be hoping for some hints at Tuesday's results briefing.

    Most analysts have ruled out the prospect of it acquiring a retail bank: that would not only fundamentally change Goldman's advisory ethos, it would also expose it to rules for offering universal banking services that its high-flying executives would rather not contemplate. Those high-flying executives are suffering like other bankers - Blankfein and his board colleagues have said they will forgo their bonuses this year. The proportion of revenues being put aside for bonuses elsewhere is higher than last year - Morgan Stanley estimates that salaries and bonuses will take up 49 per cent of its revenues, up from 44 per cent last year. But the plunge in profits means total pay will still be 43 per cent down on last year.

    There will be fewer people around to share it: Goldman has already said it is cutting 10 per cent of its workforce and there could be more to come. Lauren Smith, banking analyst at Keefe Bruyette and Woods, wrote in a research note: 'The only relief on an operating basis for Goldman... will be felt from headcount reductions and the resizing of businesses. Asset repricing continues, liquidity remains tight and the delevering of balance sheets will continue. The combination of these factors does not paint a particularly pretty picture for the near term.'