Goldman Sachs Group Inc. on Tuesday reported its first quarterly loss since it went public in 1999, losing $2.29 billion during its fiscal fourth quarter.
The loss proves the turmoil in the financial markets has tripped up even the best-run financial institutions. The New York-based bank has long been considered the premier investment bank on Wall Street, and in recent quarters, the sturdiest bank amid the market turmoil.
The Wall Street firm lost $4.97 per share in the quarter ended Nov. 30. In the year-ago quarter, Goldman earned $3.17 billion, or $7.01 per share.
Analysts polled by Thomson Reuters, on average, forecast a loss of $3.73 per share for the latest quarter. Over the past several weeks, analysts sharply slashed their estimates amid ongoing concern about investment losses. Just a month ago, analysts predicted Goldman would lose just 28 cents per share, with some analysts still predicting a quarterly profit.
Investors shook off the disappointing news, sending shares higher by $3.53, or 5.3 percent, to $69.99 in early morning trading.
The investment banking sector was turned on its head in September when Lehman Brothers filed for bankruptcy and Goldman and Morgan Stanley became bank holding companies. Like most banks, Goldman was tripped up by the plunging value of its investments, especially at its principal trading desk.
Goldman reported negative revenue of $4.36 billion in its trading and principal investments unit, which includes its fixed income, equities and principal investments divisions. Negative revenue occurs when a company must reverse some previously recognized revenue because its value has declined.
Overall, Goldman reported negative revenue of $1.58 billion, compared with revenue of $10.74 billion during the year-ago quarter. Analysts were expected quarterly revenue of $662.8 million.
The principal investments division recorded a net loss of $3.6 billion during the quarter. The division lost $2 billion on corporate investments, $961 million from real estate investments and $631 million tied to the firm's investment in Industrial and Commercial Bank of China. Goldman purchased a minority stake in the Chinese bank in 2006. The loss tied to that investment was due to a decline in ICBC's share price.
Negative revenue in the fixed income division totaled $3.4 billion. The weakness was attributed to losses on investments including corporate debt, private and public equities and trading in credit products. The division's losses included $1.3 billion from non-investment-grade credit origination activities and $700 million on commercial mortgage loans and securities.
Goldman's quarterly loss was in line with Moody's Investors Service's expectations, but that did not stop the ratings agency from cutting its view of the bank Tuesday. Moody's cut its long-term senior debt rating for Goldman to "A1" — still investment-grade — from "Aa3." The ratings agency said the quarterly loss is just a further indication of vulnerabilities banks have to the ongoing credit crisis.
Goldman's quarterly loss came during a three-month period that brought sweeping changes to the bank and the investment banking sector — a sector that is essentially being rebuilt after the September collapse of Lehman Brothers Holdings Inc. and the sale of Merrill Lynch & Co. to Bank of America Corp.
The changes to those two independent investment banks ushered in a period of uncertainty where investors no longer were confident in the stand-alone banking model. Both Goldman and Morgan Stanley quickly gained federal regulatory approval to become bank holding companies in an effort to remain independent.
Morgan Stanley is scheduled to report fiscal fourth-quarter results Wednesday. Analysts widely predict the bank will post a loss, though not as severe as Goldman.
The banking structure change allows the pair to build large deposit bases to help fund operations, which is considered vital amid the market uncertainty that has all but shut down the credit markets. Also with the regulatory change, the banks now have wider and permanent access to a slew of funding options from the federal government, first and foremost the government's bank investment program that was launched in October.
Goldman was among the first banks to receive funds as part of the $700 billion government program. The government gave Goldman $10 billion in fresh capital in return for preferred stock and warrants to purchase common shares. The goal of the government program is to spur the credit markets and get banks lending to each other and customers again.
Goldman also received a boost when billionaire investor Warren Buffett invested $5 billion in capital and it raised an additional $5.75 billion through a public stock offering.
The security that comes with becoming a bank holding company — the structure that traditional commercial banks take — also could hinder future growth for Goldman as it looks to return to profitability. Goldman will come under closer regulatory scrutiny from the Federal Reserve and will have to ratchet down its leverage, which it parleyed into billions of dollars in quarterly profits amid the market boom earlier this decade.
For the full year, Goldman earned $2.04 billion, or $4.47 per share. Goldman had remained profitable through the beginning of the year, while other financial firms posted huge losses tied to the troubled housing and credit markets.
Amid the tumult, Goldman moved to cut costs like many other banks as well. Even those moves, though, were unable to keep it from the fourth-quarter loss. During the period, Goldman said it would be cutting about 10 percent of its work force as it looks to save on expenses. Goldman began notifying in early November roughly 3,200 employees they were being laid off.
Seven top executives at the firm, including Chief Executive Lloyd Blankfein, also agreed to forego their annual cash and stock bonuses. Blankfein received total compensation of $54 million in 2007, according to calculations by The Associated Press, making him the sixth-highest-paid CEO of a Standard & Poor's 500 company in 2007.