Goldman, Lehman Spell Relief for Financial System
Financial markets blew a collective sigh of relief today as earnings reports from Goldman Sachs (NYSE: GS) and Lehman Bros (NYSE: LEH) indicated the end of the financial world may not be nigh.
It’s rare for stocks to soar on poor earnings, but these, as they say, are exceptional times, and as ever, it is beating expectations that counts.
Goldman’s writedowns were substantial, but well short of the $3 billion anticipated by London’s Daily Telegraph. And Lehman’s results showed that contrary to rumor, the firm was not running out of cash.
CreditSights was impressed by Goldman’s performance:
Net-net, while quarterly earnings dropped to the lowest level since 2Q05, positive traction across the client franchise speaks to the broker’s ability to still generate profits in down markets.
While Bear Stearns fell prey to a crisis of confidence in which worsening perception fueled a dire reality of the “run on the bank” the relatively robust results from Goldman (as well as Lehman Brothers) should help to allay concerns that other brokers could become subject to similar counterparty fears.
Goldman recognized losses in residential mortgage loans/securities (about $1 billion) and also experienced write-downs related to non-investment grade loan origination activities (about $1 billion, net of $1.4 billion gross before hedges).
“Goldman indicated that it began the 1Q08 with about $43 billion total exposure, split between unfunded ($26 billion) and funded ($17 billion) commitments, ” according to CreditSights. “Over the course of the quarter, Goldman pointed-out that it sold or reduced through cancellations about $20 billion of committments, while putting on roughly $4 billion of new commitments, which it stressed reflected current pricing levels. So, the company ended the 1Q08 with about $27 billion of total exposure, of which about $9 billion remains unfunded and about $18 billion is funded.”
In a separate report CreditSights examined Lehman’s liquidity position as the broker has been the frequently named “who’s next” following Bear’s fire sale.
Looking at the Lehman Brothers’ contingent liquidity, we would highlight that its overall liquidity increased to $197 billion, up from $193.6 billion at YE07, however the increase was predominantly at regulated financial entities at $99 billion, up $3.5 billion (+4%), while the amount available at unregulated entities held steady at about $98 billion.
Still, CreditSights said “We would still like to see better disclosure surrounding potential at-risk asset exposures (leveraged loans, residential mortgages/residuals, ABS CDOs, CMBS, commercial real estate) as Goldman’s 1Q08 results indicate that write-downs remain an ongoing overhang for the sector. Lehman did provide a more thorough schedule on these hot stove exposures for the first time.”
Moody’s lowered Lehman’s outlook to stable from positive, but in the circumstances this amounted to a vote of confidence in the company.
Lehman’s liquidity management and position remain robust and are underpinned by a funding framework that is scaled to the firm’s expectations for, and vetting of, reliable secured funding, it considers stress-level valuation haircuts, and it anticipates a substantial reduction in the availability of secured funding in a stress scenario.
Moody’s also affirmed its A1 rating on the senior long-term debt of Lehman Brothers Holdings Inc. and lowered to stable from positive its outlook on the ratings of the firm.
Moody’s said “Lehman has navigated quite well to date through persistently volatile and challenging financial markets, the sharp market-wide decline in valuations across numerous asset classes, tight global liquidity conditions, and the strong head winds facing Lehman’s (and other securities firms’) core-earnings drivers. However, these conditions have decreased the upward pressure on Lehman’s rating, and therefore a positive outlook is no longer warranted.”
Goldman’s conference call summary.
Lehman’s conference call summary.
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