Goldman Starts Getting Smaller

Thanks to the tactical leak to the WSJ a couple of weeks ago, today's Goldman Sachs results (GS) are not particularly surprising, even if they are genuinely atrocious. And it's also not news that all of the losses came from the fixed income, currencies, and commodities group. But there are still some surprises:

Moody's Investors Service lowered its long-term credit rating on Goldman Sachs to A1 from Aa3 after earnings were released, citing the "ongoing credit-market crisis" and a "persistent difficult operating environment."...

Compensation and benefits, the biggest expense, fell to a negative $490 million in the quarter, bringing the full-year cost to $10.9 billion, down 46 percent from a record $20.2 billion in 2007.

One might expect that a bank holding company would be considered a better credit than a wild-west investment bank: One would be wrong. And one might also expect that earnings would be stickier than this: Bringing payroll down 46% in one year is no mean feat, even when the CEO and six of his deputies all forgo bonuses.

All in all, the fact that Goldman made any profit at all this year, even if it only made $4.46 per share, is reasonably impressive given the financial and economic environment: It's clearly one of our healthier banks, not that that's saying much. But whether it can continue to operate at anywhere near its size of the past few years remains to be seen. Total assets are at $885 billion; that's down 18% quarter-on-quarter, but it's still hard to see why that number needs to be remotely that big. And it seems inevitable that as assets fall in size, book value will too.

Goldman's executives have shown that they can manage boom years well, and also that they can outperform during this spectacular bust. But can they manage a long and slow downsizing? That's the question all shareholders have to be asking right now.

Comments

[Jackson Cash:]

This is a tremendous shorting opportunity.

Hmmm, I wonder how much honesty is reflected on their balance sheet... no TIER 3 no you or me.

Disclosure: NONE

2008 Dec 16 10:57 AM

[Kevin Walmsley:]

We can put aside the idea that "compensation and benefits fell to a negative $490 million". Unless Goldman managed to force people to work, not only for free, but to pay GS for the privilege of showing up there every day, it's not possible for an expense to be a negative number. Perhaps they meant to say the expense GROWTH was negative, but I suppose that's what passes for research at Moody's these days. Quelle surprise.

And there is absolutely zero chance that Goldman made a profit this year. We can fully expect that future quarters will wipe away whatever phantom profits GS claimed to have earned in 2008. One of the great short sell candidates of 2009, considering it's one of the few with some meat still on the bone.

2008 Dec 16 11:48 AM

[Income Tax:]

I agree with bodysurf, they do pay very high, extremely high salary for Goldman people www.salarylist.com/all...

2008 Dec 16 11:51 AM

[User 283977:]

Their numbers are bad.. but more to the point, should anyone trust Goldman's anymore? Their recent rating actions don't pass the smell test. I used to want to know what they were doing... Now I am afraid of what they are doing.

Jackson Cash is asking the same question... "...how much honesty is reflected on their balance sheet?" Do they deserve our trust?

2008 Dec 16 11:57 AM

[jt77:]

Let's see...
1. No Tier 3 capital loss writedowns reported. This will probably come in the January Stub Report.
2. Big time pay cuts. Without them, losses would have EXCEEDED Meridith Whitney's estimate.
3. M&A business expanding? REALLY?
4. Usually, when a stock blows estimates like this, it's price goes down. Here, it skyrockets. Bloomberg reports the reason is that the losses beat the most pessimistic estimate. Would they say that for anybody else?
5. Just a hunch, but GS is probably abusing its rating's arm - taking short or long positions just before announcing downgrades or upgrades to the lemmings.

2008 Dec 16 12:17 PM

[jt77:]

Maybe these are clawbacks?


On Dec 16 11:48 AM bodysurf wrote:

> We can put aside the idea that "compensation and benefits fell to
> a negative $490 million". Unless Goldman managed to force people
> to work, not only for free, but to pay GS for the privilege of showing
> up there every day, it's not possible for an expense to be a negative
> number. Perhaps they meant to say the expense GROWTH was negative,
> but I suppose that's what passes for research at Moody's these days.
> Quelle surprise.
>
> And there is absolutely zero chance that Goldman made a profit this
> year. We can fully expect that future quarters will wipe away whatever
> phantom profits GS claimed to have earned in 2008. One of the great
> short sell candidates of 2009, considering it's one of the few with
> some meat still on the bone.

2008 Dec 16 12:54 PM

[Pat C:]

I am outraged at the salary levels even though it is reduced (See Bloomberg today). GS and their brethren's irresponsibility is directly reponsible for bringing this country down. There pay should have come down even further. Where they going to go? If they want to leave - let them.

2008 Dec 16 12:56 PM

[Cesar Valencia:]

The Ibanks accrue bonuses all year. Once they decided to cut bonuses they had a credit rather than an expense. That's why the number is negative.

2008 Dec 16 02:39 PM

[Urbane Gori...:]

They need a gimmick! I'm going to suggest they go for a J-Lo type of thing to add some pizazz! I'm all for renaming them G-Sax! That should work!

Anyway... Good call on Pete Najarian's side.. Buy for the inevitable bounce... Nice call..

jegan

2008 Dec 16 04:23 PM

[Alex Sebastian:]

For the record, the expense was a negative number because Goldman had put away money for bonuses in preceding quarters which will no longer be paid out. The regular salary payments to these employees are less than the bonuses which are no longer being paid out (and were accrued in earlier quarters), hence the negative figure. Go do some homework of your own sir, before you make an ass of yourself again.

On Dec 16 11:48 AM bodysurf wrote:

> We can put aside the idea that "compensation and benefits fell to
> a negative $490 million". Unless Goldman managed to force people
> to work, not only for free, but to pay GS for the privilege of showing
> up there every day, it's not possible for an expense to be a negative
> number. Perhaps they meant to say the expense GROWTH was negative,
> but I suppose that's what passes for research at Moody's these days.
> Quelle surprise.
>
> And there is absolutely zero chance that Goldman made a profit this
> year. We can fully expect that future quarters will wipe away whatever
> phantom profits GS claimed to have earned in 2008. One of the great
> short sell candidates of 2009, considering it's one of the few with
> some meat still on the bone.

2008 Dec 16 06:14 PM

[Robert Nabloid:]

With a long history of GS employees ending up running the Fed and getting behind the scenes help (where did all the 7.8 T go?), I just don't think we can trust them. I don't think they will go down the drain like they should - I really think they will be held up by the Fed no matter what.


On Dec 16 11:48 AM bodysurf wrote:

> We can put aside the idea that "compensation and benefits fell to
> a negative $490 million". Unless Goldman managed to force people
> to work, not only for free, but to pay GS for the privilege of showing
> up there every day, it's not possible for an expense to be a negative
> number. Perhaps they meant to say the expense GROWTH was negative,
> but I suppose that's what passes for research at Moody's these days.
> Quelle surprise.
>
> And there is absolutely zero chance that Goldman made a profit this
> year. We can fully expect that future quarters will wipe away whatever
> phantom profits GS claimed to have earned in 2008. One of the great
> short sell candidates of 2009, considering it's one of the few with
> some meat still on the bone.

2008 Dec 16 06:53 PM

[Kevin Walmsley:]

Fair enough. Then again, somehow Goldman recorded a negative revenue number, of $1.58 billion. Didn't know that was possible either. Of course, I was just the CFO of a manufacturing company, not a Wall Street firm. So I guess if all the investment banks take back money they set aside for payroll, and give back billions of dollars worth of sales they made in prior quarters, they'll be profitable again in no time flat.

Or, maybe it's another example of the Enron syndrome: if you don't understand the accounting, there's a reason, and you should sell.

2008 Dec 16 06:55 PM