Goldman Starts Getting Smaller

Thanks to the tactical leak to the WSJ a couple of weeks ago, today's Goldman Sachs results are not particularly surprising, even if they are genuinely atrocious. And it's also not news that all of the losses came from the fixed income, currencies, and commodities group. But there are still some surprises:

Moody's Investors Service lowered its long-term credit rating on Goldman Sachs to A1 from Aa3 after earnings were released, citing the "ongoing credit-market crisis" and a "persistent difficult operating environment."...
Compensation and benefits, the biggest expense, fell to a negative $490 million in the quarter, bringing the full-year cost to $10.9 billion, down 46 percent from a record $20.2 billion in 2007.

One might expect that a bank holding company would be considered a better credit than a wild-west investment bank: one would be wrong. And one might also expect that earnings would be stickier than this: bringing payroll down 46% in one year is no mean feat, even when the CEO and six of his deputies all forego bonuses.

All in all, the fact that Goldman made any profit at all this year, even if it only made $4.46 per share, is reasonably impressive given the financial and economic environment: it's clearly one of our healthier banks, not that that's saying much. But whether it can continue to operate at anywhere near its size of the past few years remains to be seen. Total assets are at $885 billion; that's down 18% quarter-on-quarter, but it's still hard to see why that number needs to be remotely that big. And it seems inevitable that as assets fall in size, book value will too.

Goldman's executives have shown that they can manage boom years well, and also that they can outperform during this spectacular bust. But can they manage a long and slow downsizing? That's the question all shareholders have to be asking right now.