Goldman Sachs (NYSE: GS) is likely to report a bad quarter. Much of this will be due to LBO debt which it has on its books and cannot syndicate to other institutions. It took on the paper for its private equity clients. As the credit markets tightened, the market largely disappeared. Most of the bonds are unlikely to default, but much of it is from high-leveraged buy-outs which have more risk than most corporate debt.
According to The Wall Street Journal "One of the biggest worries is Goldman’s large exposure to leveraged loans, which totaled $42 billion at the end of the firm’s last quarter, based on analyst calculations." It would not be outlandish to think that Goldman would have to write 10% of this off over some relatively brief period of time."
But, if Goldman has caught a cold, the rest of Wall St. may get pneumonia. Goldman has a balance sheet which can absorb $3 billion or $4 billion in losses. Firms like Citigroup (NYSE: C), Wachovia (NYSE: WB), and Lehman Brothers (NYSE: LEH) may have a much harder time posting losses from LBO debt because of what they have already absorbed in subprime write-downs and what they may face if bond insurance companies lose their "AAA" ratings.
The banks are in trouble again, or, they many never have been out of trouble. Goldman is showing the market that. More capital is going to have to be raised and that means banking executives will have to go begging in the desert again.
Douglas A. McIntyre
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