Goldman's Doing Just Fine

In light of recent events at Bear Stearns (BSC), Lehman Brothers (LEH) and Merrill Lynch (MER), there was a lot of fear heading into Goldman Sach’s (GS) third quarter earnings report on Tuesday morning (GS FY 3Q Earnings Release). 

However, as far as I can tell, Goldman is okay and the company will get through this whole crisis just fine.  The company might not be minting money like it was during the boom, but it doesn’t appear to be in any danger of going under.

Goldman divides its business up into three segments: Investment Banking, Asset Management and Securities Services, and Trading and Principal Investments. 

Investment banking revenue, which consists of the fees the company receives for advising on mergers and acquisitions and for facilitating the sale of equity and debt to the public markets, was down 40% from the record setting period a year ago.  But it’s fine.  It’s still holding up all right.

Asset management and securities services revenue, which consists of fees it receives for managing money and the commissions and fees the company receives from its “prime brokerage” for hedge funds, was up 4% from the year ago period.  These are great businesses here. They are very solid, so there is no reason to worry.

All the worry and fear centers on its Trading and Principal Investments segment.  This is where the company uses its own balance sheet to trade and invest.  It’s where all the mortgage-backed securities, leveraged loans, Level three assets and derivatives exist.  Of its $1.088 trillion in total assets as of May 30, 2008, $724 billion are held in this segment. 

Revenues in this segment were down 67% from the year ago period and 52% from a quarter ago.

The fear is that there are some toxic assets that are going to blow Goldman up the way Bear, Lehman and Merrill were blown up.  In its second quarter 10Q, the company listed $38 billion in mortgage assets, $36 billion in bank and bridge loan assets and $120 billion in derivative contract assets. 

Nobody really knows for sure how solid this stuff is.  But, my feeling is that Goldman is okay.  Its business isn’t going to be as strong as it was in the boom years but the company will still be profitable or at least break even, and it will almost certainly survive.

The stock saw panic selling on Monday, and again yesterday morning, but it rallied later in the day (GS 1 Year Chart).  These all represented good buying opportunities. 

 Disclosure: Top Gun is long Goldman Sachs shares.