In light of recent events at Bear Stearns, Lehman Brothers and Merrill Lynch, there was a lot of fear heading into Goldman Sach’s (GS) 3rd quarter earnings report this morning (GS FY 3Q Earnings Release).
But, as far as I can tell, Goldman is okay and they will get through this whole crisis just fine. They might not be minting money like they were during the boom but they don’t appear to be in any danger of going under.
Goldman divides their 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 they receive for advising on mergers and acquisitions and for facillitating 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 okay.
Asset management and securities services revenue, which consists of fees they receive for managing money and the commissions and fees they receive from their “prime brokerage” for hedge funds, was up 4% from the year ago period. Great businesses here. Very solid. Nothing to worry about.
All the worry and fear centers on their Trading and Principal Investments segment. This is where they use their own balance sheet to trade and invest. It’s where all the mortgage backed securities, leveraged loans, Level 3 assets and derivatives exist. Of their $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 up Goldman the way Bear, Lehman and Merrill got blown up. In their 2nd quarter 10Q, they list $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. Their business isn’t going to be as strong as it was in the boom years but they’ll still be profitable or at least breakeven and they will almost certainly survive.
The stock saw panic selling yesterday and this morning but it’s rallied today (GS 1 Year Chart). These represented good buying opportunities. Goldman is okay.
Disclosure: Top Gun is long Goldman Sachs (GS) shares.