Moody’s Investors Service downgraded the long-term senior debt ratings of Goldman Sachs Group Inc. (“Goldman Sachs”) to A1 from Aa3, excluding FDIC-guaranteed debt. The Aa3 deposit ratings of Goldman Sachs’ banking subsidiaries and all of its Prime-1short-term ratings were affirmed. The outlook remains negative.
The downgrade of Goldman Sachs’ senior debt to A1 reflects (1) the increased vulnerabilities that the ongoing credit market crisis has exposed in the model of Goldman Sachs and other wholesale-funded investment, commercial, and universal banks (see “Impact of the Credit Crisis on Moody’s Rating Methodology and the Credit Profiles of Investment Banks” dated October 2008); (2) the likelihood of increased structural subordination for Goldman Sachs creditors relative to its bank-level creditors; and (3) a persistent difficult operating environment that will continue to challenge the firm. Tempering these issues, Moody’s is now incorporating one notch of benefit to the firm’s ratings for potential systemic support. Finally, though Goldman Sachs’ 4Q2008 results announced today were consistent with Moody’s xpectations, they were a factor in this rating action in that they reflect the business model issues the firm faces.
The risks in Goldman Sachs’ and other wholesale-funded banks’ business model has been highlighted by the market stresses of the past 18 months. These risks include opaque exposures, risk control failures, high leverage, and confidence-sensitivity. “This crisis has demonstrated that the business model of wholesale investment banks is not as resilient as it appeared,” says Peter Nerby, a senior vice-president at Moody’s.
Goldman Sach’s fourth quarter loss was within Moody’s expectations and is not indicative of a risk control failure at the firm. However, these results do highlight risks faced by the firm. Moody’s said that Goldman Sachs remains profitable for 2008 and the firm has outperformed many of its peers during the ongoing credit crisis. Additionally, the firm has reduced leverage and raised substantial capital. This supports its current rating level, though the negative outlook considers the likelihood of an extended downturn in capital market activity, which will reduce Goldman Sachs’ revenue and profit potential in 2009 and beyond.
The decision by Goldman Sachs to register as a bank holding company and submit to regulation and oversight by the Federal Reserve could benefit creditors by placing some additional limits on the firm’s ability to aggressively increase its risk profile in the future. However, Moody’s also believes that as Goldman’s organizational and funding structure evolves under its new regulatory regime it will likely lead over time to increased structural subordination for holding company creditors relative to bank-level depositors and counterparties. Therefore, Moody’s introduced a one notch differential between the Aa3 bank deposit rating and the A1 senior debt rating of the holding company.
Positively, Moody’s views Goldman Sachs as a systemically important institution and its ratings benefit from Moody’s assumption of a high likelihood of external support. The incorporation of this level of support has resulted in a one-notch lift for both Goldman Sachs and its banking subsidiaries relative to the ratings level that would exist in the absence of support.
In affirming all Prime-1 ratings, Moody’s noted that Goldman Sachs has a solid liquidity profile. “Goldman Sachs is conservative and comprehensive in its approach to managing liquidity risk,” says Nerby. Goldman Sachs and other systemically important financial institutions also benefit from comprehensive liquidity support. As a result, Moody’s thinks that Goldman Sachs liquidity profile remains strong. In addition to other support programs, Goldman Sachs has access to the Temporary Liquidity Guarantee Program and Moody’s rates qualifying issuance Aaa, based on the FDIC guarantee.
D.C.