Capital Markets

Goldman Warning Prevents Fifth Wall Street Gain

Banks may need to raise $65 billion more because of credit crisis, it says as analysts lower targets for 14 institutions.
Stephen TaubJune 17, 2008

A Goldman Sachs warning that U.S. banks were in even-deeper-than-expected trouble kept Wall Street from recording its fifth straight gain.

After the market again started on an uptrend in the morning, Goldman said it was lowering its price targets for 14 banking companies while cutting its 2008 earnings-per-share forecasts for 11, according to Reuters. At the same time, the investment bank proclaimed that American banks may need to raise another $65 billion of capital to deal with their losses from the credit crisis.

“Banks will not turn until a peak in credit costs is in sight,” wrote Goldman analysts, as quoted by the wire service. “Moreover, weaker banks are unlikely to benefit from consolidation as bank deals always slow when credit is deteriorating and larger banks are hamstrung by their own problem assets as well as accounting requirements.”

The market’s reaction to the Goldman warnings underscored how jittery investors are, and how thin the veneer is on top of the overall market’s rebound since March.

The additional capital that Goldman’s analysts expect banks to raise would come on top of $120 billion already raised by the industry, according to their report. The wire service noted that Goldman also estimated that banks and thrifts have set aside $86 billion for loan losses in the three quarters since the credit crisis began.

Goldman now expects credit losses related to the deterioration of the housing market to peak in the first quarter of 2009.

The investment bank also warned that in the future, capital raising may become more costly for shareholders, who suffered a fair amount of dilution in their holdings from the recent rash of common stock and convertible preferred offerings.

“Capital raising becomes harder,” the analysts wrote in their report. “Only four out of 42 deals we track are in-the-money so far. This will make the next round of deals harder and more expensive.”

According to Bloomberg’s calculation, the S&P 400 lost 9.21 points to 1,350.93, while the Dow Jones Industrial Averaged slipped 1080.78 to 12,160.3 &#8212l both less than 1 percent, but reversing the string of gains that started in the middle of last week.