Goldman Sachs: Earnings Bad News for Doomsayers

So, Goldman Sachs (GS) announced results yesterday and it was bad news for the doomsayers.

The Results: (Click here for conference call transcripts.)

GS reported net income of $1.51 billion, or $3.23 a share, for the quarter ended Feb. 29, compared to $3.2 billion, or $6.67 a share last year. Revenue decreased 35% to $8.34 billion. Analysts estimates were for earnings of $2.58 a share on revenue of $7.47 billion.

Other numbers:

• Return on equity was 17%;
• Trading and principal investments segment saw revenue decrease 46% because of credit and investment losses.
• Investment banking revenue dropped 32% because of a decline in debt underwriting;
• Asset management unit recorded a 23% increase on higher fees.

Not great, but, better than expected. When you combine these results with those at Lehman (LEH), they make the Bear Stearns (BSC) situation look more like a management issue rather than a systemic event.

This is not to say that things are going to turn on a dime and begin to rise. It is also not to say there may be other, smaller institutions suffering (Ambac (ABK) ,MBIA (MBI)) and possibly folding. It is to say that a widespread banking run will not happen, and because of that, the system will remain intact. Because of that, we now know there is a light at the end of this tunnel.

Now, where is the light? I think is is closer than it currently looks. Let's not forget, the losses the banks are seeing are unrealized for the most part. This means they are writing down the value of a security because of an assumed market value of it, not because of a tangible deterioration of the assets performance. That is a huge point.

It means that when we can now value these instruments higher, earnings jump, fast.

In every financial "crisis" there is a sacrificial lamb. In this one it was Bear Stearns. Now that the Fed has opened the discount window to not only the banks, but the brokers, the liquidity squeeze that destroyed Bear will not be repeated. Now, poor management may take a smaller institution under, but if that happens, it will not be anywhere near the scale of a Bear Stearns.

Disclosure: Long GS.

Comments

[jayzee:]

First, GS has least subprime exposure.
Second, beating a lower guidance is not so glorious.
Third, the question is whether home price stablize from here on out or continue to deteriate. I don't see any material evidence in your post to suggest the former will happen.

2008 Mar 19 03:26 PM

[Dan Braem:]

I agree with your article - what is your opinion on the VISA IPO - any idea how much GS will profit both from investment banking fees and the sale of its ownership stake?

2008 Mar 19 03:30 PM

[ItsJustMe:]

Have to agree with jayzee on this. As a CPA, I can tell you that financials are very easily manipulated when you have "mark-to-market" on your assets and no one really knows what "market" is.

That is the primary reason that Bernanke was desperate to keep BSC from going belly-up. If BSC sold their assets in a bankruptcy auction, the resulting markdowns would have had devastating consequences for the "mark-to-market" values of all the other banks.

Take it from a CPA - the income from continuing operations of the investment banks is insignificant compared to the potential losses that are sitting on their balance sheets and they don't know - or even want to know - what that amount is.

The only thing they do know is that it's growing worse as the country falls into recession and real estate values continue to decline...

2008 Mar 19 04:10 PM

[mrbama9:]

This sounds like the "news" coming out of CNBC on a daily basis - that everything is great and all will be rosy "soon". There is not one single piece of good news in this market, not in GS, LEH, or anywhere else. The recent economic news has been overlooked thanks to Kommisar Ben and the Socialist Police's horrible decisions this week (and since last fall for that matter). GS and LEH beating "estimates" from analysts who are being prodded to lowball in another attempt to hold 12,000 are useless and meaningless. We need a nice 1000 point plummet to wake everyone up to reality. See you at the pump with $4-5 gas by summer's end. Thanks, Ben. I'll send you an Economics 101 book for Christmas. You might learn something.

2008 Mar 19 04:33 PM

[edhaq$:]

'its just me' has a v/good point but were the markdowns conservative or excessive?and is this exercise finished?Also in this period of uncertainty why is Gold declining like any other commodity?I suggest that some delinking is sure to happen in the near future.Any suggestions as to what will cause this to happen?

2008 Mar 19 04:39 PM

[triznix:]

Bear Stearns is the Jesus Christ of wall street, the sacrificial lamb whose blood shall cleanse all the sinners on the street....

2008 Mar 19 04:52 PM

[Mr kumar:]

I would like to see what earning Bear stearns might have reported this quarter if it had filed.
Would its earnings have been "not as bad as expected" too and its stock would have risen mightily had it not been bought by JPM

2008 Mar 19 05:03 PM

[Todd Sullivan:]

dan,

Visa... not for me... not now

2008 Mar 19 05:16 PM

[Todd Sullivan:]

jay,

i think home prices continue to drop also. that being said, the point of the post was that we are not falling apart which was the tone out there at the time

2008 Mar 19 05:18 PM

[venividivici:]

It's good to see you are reading the letters Todd because they are a damn sight more intelligent than your article.

2008 Mar 19 08:12 PM

[tcsnetwork:]

Kumar is right on the money with his point.

These companies are a black box with fudged balence sheets. Had BSC not been put to task they would have beat there numbers also. How does a $80 BOOK VALUE go to $2 - and that's only with the fed backing it up.

I wonder how CNBC will spin the next trainwreck

2008 Mar 19 09:31 PM

[lowbeyond:]

And then GS HIT THE WINDOW! Ba-ba-ba- Booya !

2008 Mar 20 12:31 AM