Banks Lost Their Magic
News today that Goldman Sachs is going to shed US$1.33 billion from its stock holdings for the quarter ending Feb 29, 2008. Goldman Sachs, the crown jewel of the Wall Street has successfully foreseen the subprime debt debacle and handsomely profited from the debt crisis. The only investment bank that has not been hit by the credit market crunch, nonetheless, was not able to get away from the latest stock market plunge. I am not surprised about the news—as I pointed out in the previous piece (New York, New York) – the Wall Street is relying more and more on the financial markets to quench its thirst for profit. Every financial institution becomes a giant trading house. So when the markets, around the globe, started the prolonged downward trajectory, Goldman Sachs, this time, was not nimble enough to adjust its stock positions. Maybe it is too big to turn the boat.
Right now, the best thing that Goldman Sachs, and anybody else, for this matter, could just hope for is a revival of the stock markets around the world in February to lift the values of its stock holdings. Or, at least, keep finger crossed that the markets will not go down further.
It basically tells two things about the current affair of the financial institutions and of the financial market:
- Banks have difficulties of regaining their earnings momentum and will be more cautious toward risks. This will not change in the next six months.
- There are a lot of overhead pressures for the stock market. The big institutions have a lot of supplies of the stocks when their prices rebound. That is a headwind for the stock market, at least in the short-term of two to three months.
When banks are having problems, it is very hard for the economy as a whole to perform well—not because their well being is more critical to our economic lives than anybody else’, but because they had higher abilities than anybody else’s to make our life more difficult.
From Bloomberg:
Goldman Revenue Exposed to Stock Market Declines (Update1)
By Christine Harper
Jan. 29 (Bloomberg) — Goldman Sachs Group Inc., the Wall Street firm whose proprietary investments helped generate record profits, said it stands to lose three times as much from a drop in its stock holdings compared with a year ago.
A 10 percent decline in equities held by the firm on Nov. 30 would shave $1.33 billion from revenue, compared with $377 million a year earlier, New York-based Goldman said in a filing with the U.S. Securities and Exchange Commission today. The firm didn’t list specific stocks it holds.
Goldman, after reporting five straight quarters of profit gains, is expected to show a 22 percent earnings decline in the first quarter, which ends in February, according to the average estimate of 13 analysts surveyed by Bloomberg. The S&P 500 Index is down 8.3 percent since Nov. 30, while Hong Kong’s Hang Seng Index has tumbled 15 percent.
Goldman has “taken a more aggressive posture on the equity market, and I don’t know that a lot of components of the equity market have done very well since Nov. 30,” said Douglas Ciocca, who helps manage $1.7 billion, including Goldman shares, at Renaissance Financial Corp. in Leawood, Kansas. “What have they done in the interim to cap that exposure?”
If Goldman hasn’t reduced potential losses since Nov. 30, the holdings could jeopardize earnings per share, Ciocca said.
The increase in the firm’s so-called 10 percent sensitivity measures during 2007 “was primarily due to new investments,” the firm said in the filing, without elaborating. Lucas van Praag, a spokesman for Goldman in London, declined to elaborate.
Value-at-Risk
Goldman’s regulatory filings have included information on the revenue effect of a 10 percent decline in its portfolio of trading assets since 2006. The data are presented as a supplement to value-at-risk, the more widely used measure of potential market losses.
Morgan Stanley, which also released its annual regulatory filing today, only includes value-at-risk data in its market risk disclosures.
Goldman’s revenue is expected to fall 13 percent to $11.1 billion in the first quarter, according to the average estimate of analysts surveyed by Bloomberg.
Other areas of the business, such as trading commissions and investment banking fees, could help offset the revenue lost from the market declines, Ciocca said.
Goldman’s stake in Industrial & Commercial Bank of China Ltd., that nation’s biggest lender, may damp revenue this quarter. A 10 percent drop in ICBC’s share price would reduce revenue by $250 million, the filing showed. ICBC shares are down 17 percent since Nov. 30.
Debt Trading
Today’s filing also shows that Goldman’s debt-trading revenue would drop $1.02 billion, up from $725 million a year earlier, if there’s a 10 percent decline in the value of the underlying assets.
Real estate holdings, including purchase commitments and interests in real estate investment funds, would strip $1.1 billion from revenue, up from $341 million, if the underlying assets fall by 10 percent.
