Regulation

Goldman Tarnished by First Loss

Premier Wall Street firm suffers a $2.12b Q4 deficit — its first in nearly a decade of public trading — though it pull out a $2.32b full-year profi...
Stephen TaubDecember 16, 2008

Goldman Sachs, widely deemed to be Wall Street’s best managed firm, took its own giant hit from the global financial implosion, reporting a $2.12-billion net loss in its Nov. 28 fourth quarter versus a year-earlier profit of $3.22 billion. It was the company’s first loss since going public nearly a decade ago.

Despite the quarterly damage, however, Goldman did report net earnings of $2.32 billion for the full year.

“Our results for the fourth quarter reflect extraordinarily difficult operating conditions, including a sharp decline in values across virtually every asset class,” said Lloyd C. Blankfein, chairman and CEO. “While our quarterly performance obviously didn’t meet our expectations, Goldman Sachs remained profitable during one of the most challenging years in our industry’s history. Our deep and global client franchise, experienced and talented people and strong balance sheet position our firm well for the year ahead.”

In response to the earnings report, Moody’s Investors Service downgraded the long-term senior debt ratings of Goldman to A1 from Aa3, excluding FDIC-guaranteed debt. The Aa3 deposit ratings of Goldman Sachs’ banking subsidiaries and all of its Prime-1 short-term ratings were affirmed. Moody’s also said the outlook remains negative.

Moody’s said the downgrade reflects the increased vulnerabilities that the ongoing credit market crisis has exposed in the model of Goldman Sachs and other wholesale-funded investment, commercial, and universal banks, the likelihood of increased structural subordination for Goldman Sachs creditors relative to its bank-level creditors, and a “persistent difficult” operating environment that will continue to challenge the firm.

Moody’s also said that Goldman’s fourth-quarter results, while consistent with the credit rating agency’s expectations, “were a factor in this rating action in that they reflect the business model issues the firm faces.” It added that the risks in Goldman’s and other wholesale-funded banks’ business models have been highlighted by the market stresses of the past 18 months. These risks include opaque exposures, risk control failures, high leverage, and confidence-sensitivity.

“This crisis has demonstrated that the business model of wholesale investment banks is not as resilient as it appeared,” said Peter Nerby, a Moody’s senior vice president.