Growing concerns about the weakness of economic growth around the world are increasingly dimming prospects for American financial institutions, amplifying risks of spiraling troubles.
Even Goldman Sachs, the well-known investment bank, now could be headed toward recording its second quarterly loss in a dozen years -- its first quarterly loss since the financial crisis -- according to a report in The Wall Street Journal. The bank's lower earnings prospects have been taken by experts as a sign that Goldman is pulling back from taking risks. In the immediate term, a cutback in financial activity by Goldman and other banks is likely to drag on the struggling American economy, as more businesses and consumers find it harder to secure credit needed to make purchases.
Even if Goldman does not post a quarterly loss, lower earnings would be indicative of the onslaught of challenges assailing Goldman since the financial crisis, as the bank struggles to respond to lawsuits and fewer profit-making opportunities in a dismal economy. Diminished earnings would contribute to further dimming Goldman's reputation as a profit-making powerhouse.
Barclays Capital analyst Roger Freeman predicted that Goldman will lose 35 cents per share in the third quarter, according to the WSJ. The average analyst's estimate of Goldman's quarterly earnings has been slashed in half in three weeks to just $1.25 per share, according to the WSJ.
Analysts have been cutting earnings estimates for Wall Street banks including Goldman Sachs, as they have become increasingly concerned about sharp swings in the stock market and fewer mergers and stock and bond offerings.
While trading traditionally produced 35 to 48 percent percent of Goldman's revenue in recent years, trading reaped just half that share in the second quarter, as economic activity slowed, markets became more volatile, and traders pulled back on speculating on areas of the economy that seemed headed downward.
In response to lower earnings as the economy slows, Goldman has decided to lay off 1,000 employees, including 230 in New York City alone, trimming three percent of its staff in part of its effort to cut $1.2 billion in costs.
Goldman also has had to spend more on fending off a variety of lawsuits, estimating in March that it would have to pay as much as $3.4 billion on litigation, according to The Guardian.
Since March, even more lawsuits have beset the bank, costing more time and money. The federal government recently filed a lawsuit against Goldman Sachs and 16 other financial institutions, claiming that the banks had defrauded them while packaging and selling them $200 billion in mortgage-backed securities. A U.S. regulator recently sued Goldman for more than $491 million in damages from losses on mortgage-backed securities sold to five credit unions that subsequently failed. The New York attorney general's office also has widened its investigation into Goldman's marketing of mortgage-backed securities.