DBRS Places Goldman Sachs Group, Inc. AA (low) Ratings Under Review with Negative Implications

DBRS has today placed its long-term ratings for The Goldman Sachs Group, Inc. (Goldman or the Company) and related entities Under Review with Negative Implications, including the Company’s Issuer & Senior Debt rating of AA (low). At the same time, DBRS has confirmed Goldman’s Short-Term Instruments rating of R-1 (middle). This rating action follows Goldman’s announcement of a net loss of $2.3 billion for its fiscal Q4 2008, which ended in November. The loss was driven primarily by write-downs of approximately $5.4 billion, net of hedges, which mostly reflected mark-to-market declines in principal investments and legacy assets. Goldman remained profitable for the full fiscal year 2008 with a modest ROE of approximately 5%.

This rating action reflects the further deterioration in the Company’s prospects since DBRS changed the trend on its long-term ratings to Negative on September 17, 2008 after weak Q3 2008 earnings due to the sustained disruptions in the financial markets, the rapid deterioration in the U.S. economy, as well as the weakening of economies and financial markets around the world. For financial institutions generally, this deteriorating environment has resulted in diminished investor confidence, increased volatility in asset prices, lower client activity, increased risk aversion and higher funding costs. In weathering the sustained turmoil of the past eighteen months, Goldman had managed to generate positive earnings until this quarter. In DBRS’s opinion, this quarter’s loss, however, absorbs capital, impacts market confidence and elevates the market’s concerns about remaining risk.

The review will assess the extent to which this environment has diminished Goldman’s franchise and earnings power over the intermediate term. While Goldman has converted to a bank holding company (BHC) and is building up its banking businesses, an element in this review will also be to evaluate the prospects for BHCs such as Goldman that remain more focused on capital markets businesses. At the same time, the review will evaluate how increased support from the U.S. government underpins the ratings for large, systemically important U.S. financial institutions. After the unprecedented market events of recent months, the support being provided by the U.S. authorities to U.S. financial institutions has been elevated to a much higher level of both explicit and implicit support.

In this action, DBRS takes into consideration the continuing strength of Goldman’s underlying diversified franchise, the persistence of its client-driven revenues, the adaptability of its businesses, its enhanced liquidity resources, reduced leverage and strengthened capital position. These trends are evident in the Company’s results for Q4 2008. The Company also continues to reduce its exposures to problematic assets through asset sales, not just write-downs. Even though the operating environment remains very difficult, DBRS believes that Goldman has the necessary franchise strengths, funding, liquidity and capital to successfully manage through the very challenging operating environment. As a result of these factors and the increased level of government support, the ratings are very unlikely to be downgraded by more than one notch and could be confirmed at the current level following the review.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Securities Firms Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.