About That Goldman Sachs Downgrade Watch

Moody's assigned a negative outlook to the 'Aa3' long-term ratings of Goldman Sachs and its subsidiaries, reflecting expectations of an extended downturn in capital market activity, which will reduce the investment banking firm's revenue and profit potential in 2009.

The negative outlook also reflects the challenges presented by the vulnerabilities to the investment banking business model exposed in the current market environment, Moody's said. (My emphasis)

This should come as no surprise to long-term EPJ readers, as I wrote in August:

Given that the mismatched short liabilities/long assets balance sheets of the entire financial industry could result in a liquidity crisis for nearly any financial institution in the United States, isn't it quite curious that the financial institutions that seem to have had, or are having, the most liquidity troubles are those that Treasury Secretary Paulson always wanted to see taken out, i.e. Bear Stearns, Freddie and Fannie?

Goldman has always had the same kind of balance sheet as the rest of the industry.

According to Goldman's last 10Q, for the period ended August 2008, Goldman had $1.081 trillion in assets BUT $1.036 trillion in liabilities. That is an incredibly leveraged balance sheet, in the current financial climate.

Further, it has cash and cash equivalents of roughly $100 billion. They also have billions in receivables due from customers, counterparties and other brokers. But who really knows what part of those receivables are sound in this market?

On the short term liability side, Goldman appears to owe roughly $400 billion. So who really knows if they can meet all their obligations, if their financing sources dried up like they did for Lehman and Bear Stearns. (Note: These are all very rough approximations given to the lack of detail in the page filed at the SEC that I am reviewing, I could dig through footnotes and perhaps get a more detailed analysis, but I am trying to just get a rough idea and not make a career out of analyzing Goldman's trillion dollar balance sheet.)

But somehow, Goldman missed having rumors spread about it. As one trader put it, "I'd short Goldman, but they are too connected." Meanwhile, the rumors on Bear Stearns and Lehman, rumors that many believe were spread by Goldman, have buried those two firms.

Moody's put Goldman on downgrade watch for CYA reasons. They are scared because they don't know how low this market will drop. But Paulson, Kashkari and Wilson will make sure they have Goldman's back. Goldman isn't going bankrupt.