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Goldman Earnings Killed by Investment Writedowns

Stocks in this article: GS

NEW YORK ( TheStreet) -- Goldman Sachs' (GS) rare third-quarter loss stemmed from a steep decline in the value of its own investment portfolio as equity markets plunged and credit spreads widened during the period.

The investment bank said it made a loss applicable to common shareholders of $428 million or 84 cents per share in the third quarter, compared to $1.74 billion profit or $3.19 per share in the year ago quarter and $1.05 billion or $1.96 per share in the second quarter of 2011.

>>Goldman Sachs Posts Big Loss

Revenues came in at $3.58 billion, 51% lower than the second quarter of 2011 and 60% below the year-ago quarter. Trading and investment banking revenues came in expectedly weak on a year-on-year basis, after JPMorgan Chase (JPM) and Citigroup (C) reported disappointing numbers on that front.

But Goldman's loss was mainly caused by a significant writedown in its "Investing and lending" segment, which includes investments the firm makes with its own capital in securities, private equity and real estate. The bank is required to "mark-to-market" the securities in its portfolio every quarter, so the segments results are vulnerable to market movements.

Investing & Lending recorded negative net revenues of $2.48 billion for the third quarter. A 35% decline in the stock price of Chinese bank ICBC, in which Goldman holds about 3.8 billion shares, led to a loss of $1.05 billion. With the MSCI Index declining 18% during the quarter, the equities portfolio (excluding ICBC) was written down by $1 billion. The debt portfolio generated a negative mark of $907 million.

The losses were partially offset by revenues related to the firm's consolidated entities held for investment purposes, the company said.

Goldman shut down its "prop" trading desk in preparation for the Volcker rules that restrict firms from taking too much risk with their own capital. It will also have to roll down its private equity and hedge funds to comply with new rules restricting bank investment in such businesses to 3%.

The investing and lending division contributed less than 20% of revenues in the first half of 2011 but more than 35% of pre-tax profits.

Goldman discloses every quarter what its sensitivity would be to a 10% move in markets. As of June 30, Goldman had estimated that a 10% change in the shares of ICBC will drive a $292 million mark. A 10% move in both the MSCI and the LCDX was estimated to drive a $2.55 billion and $1.48 billion mark respectively.

--Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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