The Credit Crisis Claims Goldman Sachs as an Earnings Victim

Once upon a time, Goldman Sachs Group Inc. was thought of as the premier investment bank on Wall Street. Even so, like so many other banks, it fell victim to the global credit crisis in its fourth quarter earnings report.

On Tuesday, Goldman (NYSE: GS) reported its first quarterly loss since 1999; – the year it went public -- $2 billion in its fourth quarter, ended November 28.

Goldman Sachs lost $4.97 per share – less than analysts expected – compared to earning $7.01 per share in the same quarter last year.

Much of the blame was placed on the fall of Lehman Brothers, which turned the investment banking sector upside down. Lehman’s collapse forced Goldman Sachs and rival Morgan Stanley to become bank holding companies to qualify for the government’s Troubled Asset Relief Program (TARP).

Because of the administrative switch, Goldman’s core investment units suffered, leading the firm to report negative revenue of $4.36 billion in its trading and principal investments unit, which includes its fixed income, equities and principal investments divisions.

Overall, Goldman reported negative revenue of $1.58 billion for the fourth quarter due to writedowns, compared with revenue of $10.74 billion a year ago, while revenue for its fiscal year dropped to $22.2 billion or 52 percent from $46 billion in 2007. For the full year, Goldman earned $2.04 billion, or $4.47 per share.

According to Bloomberg, the company booked $1.3 billion in writedowns on leveraged loans and a $700 million loss on commercial-mortgage loans and securities.

Moody's Investors Service said the quarterly loss is just a further indication of how susceptible banks are to the credit crisis. Moody’s lowered Goldman’s long term credit rating to A1 from Aa3.

Goldman was among the first banks to receive bailout money from TARP. The government gave the bank $10 billion in fresh capital in return for preferred stock and warrants to purchase common shares.

On a conference call, Goldman’s Chief Financial Officer David Viniar said the firm does not plan major changes to its business strategy, though “we're going to be extremely cautious about what we do in the near term.”

Goldman said it would layoff about 10 percent of its employees to cut costs. In early November the company began to notify its workforce that roughly 3,200 jobs were being downsized. The firm has cut 2,500 jobs during the quarter and cut average pay per employee by 45 percent to $363,654.

Rival investment bank Morgan Stanley (NYSE: MS) reported a $2.36 billion loss for its fiscal fourth quarter on Wednesday.

Morgan was hurt by the bank’s asset management unit, where revenue was negative $386 million, down 160 percent from the third quarter. The unit was stung by a $187 million loss related to structured investment vehicles on its balance sheet and write-downs on real estate and private equity in its merchant bank. It also took a $243 million impairment charge on its Crescent real estate subsidiary. Customers also withdrew $76.5 billion of assets from the unit, which left Morgan with much lower fee revenue.

Overall, losses included: $1.2 billion on mortgage assets, $1.1 billion of write-downs on loans related to buyout commitments and $1.8 billion in loses in real estate and other investment funds.

The New York Times said that Morgan’s quarterly loss was the first loss for the company this year.  

Moody’s Rating Services downgraded the company’s long term senior debt rating to A2 from A1.