Goldman Cuts Costs: Impact on Stock

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Goldman Sachs ( GS) is doing everything it can to mitigate intense market pressure in the midst of expectations that the bank will report a net loss this quarter, which would be only the second time in its history. Goldman is now expected to cut costs by nearly $1.45 billion over the rest of the year -- an increase from the $1.2 billion it announced in July. This means the bank will likely trim more jobs -- over and above the 1,000 it estimated two months ago.

Goldman competes with other global banks including JPMorgan Chase ( JPM), Citigroup ( C), Morgan Stanley ( MS), Bank of America ( BAC), UBS ( UBS), Barclays ( BCS) and Credit Suisse ( CS).
Click here for our full analysis of Goldman Sachs.

With the economy slowing down considerably in recent months, banks across the globe have resorted to job cuts in a bid to scale down costs in response to drastic falls in top-line figures.

Goldman has implemented a series of cost-cutting measures in order to keep staff costs between 35% and 45% of revenues. These include the planned layoffs across all its businesses over the rest of the year, the reversal in pay hikes granted to its London-based employees and the declaration of essentially no bonuses for its employees.

The bank has also made an attempt to reduce costs in other operational areas -- a fact that is evident in the nearly 20% reduction in the bank's lobbying costs last quarter over the numbers for first quarter 2011. The bank spent just over $1 million in lobbying the federal government in second quarter, as compared to the $1.3 million in first quarter. These numbers are expected to be lower for third quarter 2011.

The effect of a reduction in costs on the value of Goldman's stock can be understood by making changes to our estimate for the bank's margins in the graph above.

We have a $137 price estimate for Goldman Sachs, which is more than 40% ahead of the current market price. While we believe the current price reflects the negative market sentiment related to economic uncertainty and the European debt crisis, we are in the process of revisiting our estimates.

Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.