Global crisis heralds loss for Goldman Sachs

Goldman Sachs is expected to make its first quarterly loss since the depths of the financial crisis, underlying how the current market turmoil is hurting Wall Street's biggest banks.

the Telegraph

8 October, 2011

The losses – estimated to run into several hundred millions of dollars – are expected to spark a $1.45bn (£930m) cost-cutting programme at the bank.

A number of highly paid bankers are expected to lose their jobs and be replaced by graduates. The bank wants to maintain headcount but cut some of the costly employees.

Goldman's results will be one of several third quarter updates from Wall Street's major banks. They are expected to reveal difficult trading conditions for the sector buffeted by volatile markets, anaemic US economic growth and lack of mergers and acquisitions activity.

Companies begin reporting their respective figures for what is expected to be a torrid third quarter from the end of this week.

The reporting season kicks off with JP Morgan on Thursday with Goldman set to post its numbers a week later, on October 18.

Analysts at Credit Suisse expect Goldman to have lost $392m in the three months to the end of September, while analysts at Barclays predict losses in the region of $180m.

The trading revenues at Wall Street banks have been damaged over the summer by the sharp decline in global stock markets, the volatility across many asset classes and shaken confidence among chief executives to do deals.

The third quarter saw the FTSE 100 drop 13.7pc, the Dow Jones Industrial Average fall 12.1pc and the S&P 500 sink 14.3pc. Analysts at Credit Suisse expect that to have reduced revenues at Goldman's Fixed Income, Currency and Commodities division – a key driver of profits for the bank over the last decade.

Revenues are expected to drop to $1.8bn, a 37pc fall on last year. "We expect overall fixed-income sales and trading activity to be very weak during the quarter," said Howard Chen, an analyst at Credit Suisse.

Goldman's investment banking division, which has been hit by macro-fears about the European debt crisis and an economic slowdown in the United States, will see revenues nose-dive 29pc to $825m, compared with the same quarter last year, according to Credit Suisse.

The prospect of Goldman's first loss since 2008 underlines the pressure facing what is historically one of the industry's top performers. The bank has already announced a $1.2bn cost-cutting programme to be cut from its operations by mid-2012. But the new plan will increase cuts by as much as $250m. This could equal up to 5pc of the firm's expenses based on its 2010 spending.

Wall Street recruiters say that Goldman, alongside other banks, may choose to make deeper cuts to jobs to be able to pay its best staff bigger bonuses.

"They want to have bonuses for people who really deserve it," said Jeanne Branthover, a managing director in New York at Boyden Global Executive Search. "If Goldman still pays well beyond anyone else then Goldman is still Goldman."

Data suggests that during the first six months of the year Goldman – along with Citigroup, JPMorgan, Morgan Stanley and Bank of America – set aside $65.7bn to cover compensation and benefits.

One Goldman insider said the firm was battening down the hatches for between three and five years of reduced pay. "Some people will have to adjust their standard of living, but we are still the number one bank, and when markets get better and life gets better, we'll make money again."

Across its investment portfolio, Goldman will also write down the value of its stake in China's biggest bank, Industrial & Commercial Bank of China, which is expected to fall to $1bn, given its falling share price.

The ICBC stake sits in Goldman's investing and lending division, which also houses the bank's private equity arm, real estate funds, and infrastructure groups.

These businesses – which invest both Goldman's own capital and money from outside investors – are under attack from "Volcker rule" regulatory changes which ban "proprietary trading" and also seek to limit banks investing and owning private equity funds and hedge funds. A draft of the new rules will be published this week for consultation