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Goldman Sachs: the Dreadnought Shudders

Among investment banks, Goldman Sachs has been the Dreadnought, ploughing forward through troubled financial seas, stopping only to take a prize here and there, and deposit executives in key political postions throughout federal and state governments.

Can even the mighty Goldman shake and tremble in the face of troubled markets? We will have to wait and see when they report earnings. We are not betting against or for them. We'll prefer to watch for additional developments, including the NY Attorney General's probe noted below.

Goldman Profit Estimate Cut 45% by Morgan Stanley
By Poppy Trowbridge and Christine Harper

Aug. 27 (Bloomberg) -- Goldman Sachs Group Inc. had its third-quarter earnings estimate cut almost in half by Morgan Stanley analyst Patrick Pinschmidt, who said stock market declines will force the bank to revalue investments.

Pinschmidt said Goldman's third-quarter earnings will probably be $1.65 a share, down from his earlier prediction of $3. The New York-based bank may record a loss of $525 million on so-called principal investments, compared with a gain of $211 million a year earlier, he said in a note to clients today.

Goldman, the biggest and most-profitable U.S. securities firm, had its estimates reduced an average of $1.33 per share by 13 analysts this month because of decreased trading volume and a drop in stock prices. Pinschmidt's estimate is the second-lowest of 19 compiled by Bloomberg behind Atlantic Equities analyst Richard Staite, who lowered his per-share estimate today to $1.60 from $3. The average is $2.44.

``Goldman Sachs is not immune to difficult market conditions,'' Pinschmidt wrote. ``Significant declines in equity markets will take a toll on principal investment marks and principal trading strategies.''

Goldman has declined 28 percent in New York Stock Exchange composite trading this year. The shares fell $1.46, or 0.9 percent, to $153.73 at 9:53 a.m.

Principal investments at Goldman include private equity and real estate holdings, as well as stock in the Industrial and Commercial Bank of China Ltd., the nation's biggest lender. ICBC's shares have declined 18 percent since the end of May in Shanghai trading.

Record Decline

Pinschmidt's estimate for Goldman's third quarter, which ends Aug. 29, would represent a 73 percent drop in earnings per share compared with the firm's income of $6.13 a year earlier. That would be the steepest year-over-year earnings decline since Goldman went public in 1999. Pinschmidt rates Goldman stock ``over-weight.''

Lower values for residential and commercial mortgages are likely to require Goldman to take a $1 billion writedown, Pinschmidt said...

NY AG confirms probe into Goldman, Fidelity
Wednesday August 27, 1:10 pm ET
By Joe Bel Bruno

NEW YORK (AP) -- The New York attorney general's office said Wednesday it is investigating whether Fidelity Investments was given incentives by Goldman Sachs Group Inc. to sell auction-rate securities to investors.

Investigators are examining if Fidelity pitched auction-rate securities that were underwritten by Goldman Sachs because it received other services from the investment bank. A spokesman for New York Attorney General Andrew Cuomo confirmed the investigation, but declined to provide further details.

Higher Levels of 'Troubled Banks' as Financial Earnings Plummet

The worst is yet to come despite the soothing words coming from public officials. The US financial system is on a knife's edge, and the Treasury and Fed are on watch to intervene in the event that a domino-like collapse is ignited by a failed institution. We are entering the moment of maximum stress, wherein any significant external shock might ignite a string of failures and set off a plunge that will test the circuit breakers on the NYSE. Let's see what happens and hope for the best and a bit of luck.

Credit crisis: 117 troubled banks in US, highest level since 2003
27 Aug, 2008, 0330 hrs IST
The Economic Times of India

WASHINGTON: The number of troubled US banks leaped to the highest level in about five years and bank profits plunged by 86 percent in the second quarter, as slumps in the housing and credit markets continued.

Federal Deposit Insurance Corp data released on Tuesday show 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.

The FDIC also said that federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts also set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the second quarter.

"Quite frankly, the results were pretty dismal," FDIC Chairman Sheila Bair said at a news conference, but they were not surprising given the housing slump, a worsening economy, and disruptions in financial and credit markets.

The majority of US banks "will be able to weather" the economic and housing storms, with 98 percent of them still holding adequate capital by the regulators' standards, Bair said.

Total assets of troubled banks jumped from $26 billion to $78 billion in the second quarter, the FDIC said, with $32 billion of the increase coming from IndyMac Bank, which failed in July - the biggest regulated thrift to fail in the United States.

"More banks will come on the (troubled) list as credit problems worsen," Bair said. "Assets of problem institutions also will continue to rise."

Nine FDIC-insured banks have failed so far this year, compared with three in all of 2007. More banks are in danger of collapsing this year, Bair and other FDIC officials said, and they expect turbulence in the banking industry to continue well into next year.

IndyMac's failure and others in the quarter reduced the federal deposit insurance fund from $53 billion to $45 billion. Bair said the agency will raise insurance premiums paid by banks and thrifts to replenish its reserve fund and bolster depositors' confidence.

The $50.2 billion set aside to cover loan losses in the April-June period was four times the $11.4 billion the banking industry salted away a year earlier. Nearly a third of the industry's net operating revenue went into building up reserves against losses in the latest quarter, according to the FDIC.

Except for the fourth quarter of 2007, the earnings reported Tuesday were the lowest for the banking industry since the final quarter of 1991, the agency said.

Concern has been growing over the solvency of some banks amid the housing slump and the steep slide in the mortgage market. The pressures of tighter credit, tumbling home prices and rising foreclosures have been battering banks of all sizes nationwide.

The FDIC has been keeping an especially close eye on banks and thrifts with high levels of exposure to the riskiest borrowers and markets, agency officials say, including subprime mortgages and construction loans in overbuilt areas.

Another area of potential concern: banks' holdings of preferred stock of troubled mortgage giants Fannie Mae and Freddie Mac. A government rescue of the companies, whose share prices have rebounded a bit this week after plummeting recently as they struggle with billions of dollars in losses from bad mortgages, could be costly for scores of banks that hold billions in their preferred shares.

"We're closely monitoring that situation," Bair said.

The FDIC said troubled assets - loans that are 90 or more days past due - continued to rise in the second quarter, jumping by $26.7 billion, or 19.6 percent, over the first quarter. It was the first time since 1993 that the percentage of total loans that were troubled broke 2 percent, at 2.04 percent.

The agency doesn't disclose the names of institutions on its internal list of troubled banks. On average, 13 percent of banks that make the list fail.

Pasadena, Calif.-based IndyMac was taken over by the FDIC on July 11 with about $32 billion in assets and deposits of $19 billion. It was the second-largest financial institution to close in US history, after Continental Illinois National Bank in 1984.

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