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Goldman Expects Legal Losses to Exceed Reserves by $1.9B

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Recently, The Goldman Sachs Group (GS - Free Report) stated that expenses made on ongoing legal matters might be $1.9 billion above the aggregate reserves the company has kept for such purpose.

Per its latest annual filing, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely.”

As of Dec 31, 2018, the company had $844 million as net provisions for litigation and regulatory proceedings, considerably above $188 million for 2017.

At present, the major lawsuit that Goldman is dealing with relates to its role and involvement in arranging bond sales for a sovereign wealth fund in Malaysia — 1Malaysia Development Berhad.

The company said that it is cooperating in investigations conducted by the U.S. Department of Justice and other regulatory bodies, which can lead to imposition of fines, penalties and other sanctions, including restrictions on activities.

Apart from this, Goldman faces probe over mortgage loans in two residential mortgage-backed securitization trusts that are alleged of not complying with applicable representations and warranties.

Further, Goldman is involved in a currencies-related litigation, whereby it is charged of conspiring to manipulate the foreign currency exchange markets under federal and state antitrust laws as well as state consumer protection laws.

The firm’s investment management and financial advisory services, system of risk management and controls, transactions involving government-related financings and other matters, municipal securities are some of the other areas being investigated and reviewed by the governmental and regulatory bodies.

Goldman’s involvement in a horde of litigations has likely kept investors worried, as reflected in the 17% drop in share price over the past six months. Also, it is expected to keep legal expenses elevated, which may partially impede its bottom-line growth in the near term.

However, the company’s efforts to tap on new growth opportunities through several strategic investments, including the digital consumer lending platform, will likely bolster overall business growth.

Goldman currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Evercore Inc (EVR - Free Report) has long-term earnings growth rate of 15.6%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stifel Financial Corporation (SF - Free Report) has long-term earnings growth rate of 8% and a Zacks Rank #1.

JMP Group LLC (JMP - Free Report) has long-term earnings growth rate of 10% and a Zacks Rank #2.

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