As of the end of the fourth quarter of 2008, Goldman Sachs GS had Tier 1 capital of $62.6 billion and risk-weighted assets of $400 billion for a Tier 1 ratio of 15.6%. Goldman also had tangible common equity (TCE) of $42.7 billion and tangible assets of $880 billion for a TCE ratio of 4.8%. We are comfortable with a Tier 1 ratio of at least 8%, though the regulatory well-capitalized ratio is 6%, and a TCE ratio of at least 3% from banks in this environment. This would mean that Goldman currently has $30.5 billion of buffer Tier 1 and $16.3 billion of buffer TCE. Let's take a look at these buffers with respect to the company's balance sheet. Goldman had an $885 billion balance sheet at the end of its recent quarter. The portion that is somewhat concerning is the company's $338 billion of trading assets. However, using the full $338 billion would probably be overstating the potential exposure. First it would be reasonable to think of the company's net long exposure by subtracting the company's $176 billion of trading liabilities, because they're like an offsetting hedge. Next we can take out Goldman's money market instruments and net government and agency securities as they're not likely subject to write-downs. This brings us to $121 billion.This $121 billion is composed of $22 billion of mortgage and other asset-backed loans, $18.7 billion of bank and bridge loans, $22.1 billion of corporate and other debt, $44.9 billion of equities and convertible debentures, $0.5 billion of physical commodities, and $12.6 billion of derivative contracts. A 10% write-down ($12 billion) on this estimated net long exposure would still leave a buffer of $18.4 billion Tier 1 and $4.2 billion TCE. A 10% write-down looks optimistic compared with stock indexes down over 50%. However, considering that we calculate that the company took less than $12 billion of net write-downs in its trading and principal investments business in 2008 when it generally had greater market risk from higher net exposures, $12 billion of write-downs for 2009 is well in the ballpark. Another way to look at Goldman's exposures would be to just look at the approximately $60 billion that Goldman has in principal investments, loans, and asset-backed securities. The company's capital buffer would be able to absorb an over 20% hit using this exposure measurement.
These are just two frameworks to attempt to quantify possible exposures and write-downs. There are factors that could make losses worse, such as off-balance-sheet variable interest entities or the inherent leverage in derivative contracts, but there are also positive factors such as further deleveraging of the balance sheet or new accounting guidance on valuing illiquid instruments. Overall, we think the buffer of $30.5 billion of Tier 1 and $16.3 billion of tangible common equity look sufficient barring two to three more years like 2008.
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Analyst Notes
10-16-09 | 2:59PM Goldman Sachs under Review
10-15-09 | 9:11AM Goldman's Core Earnings Lower Sequentially
07-22-09 | 3:25PM Goldman Buys Back TARP Warrants
07-15-09 | 1:33PM Decreasing Uncertainty for GS and MS
07-14-09 | 9:18AM First Impression of Goldman Sachs' 2Q
05-08-09 | 7:47AM Stress Test Results for Investment Banks
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