Unlike other regional banks which have substantial exposures to the commercial real estate market, Goldman Sachs Group has been able to cut down its exposure to commercial mortgage loans and commercial property mortgage-backed securities.
In the last months of 2007, Goldman had around $16.27 billion in commercial mortgage loans. In the second quarter of 2009, total commercial loans have been cut down to $6.4 billion.
In 2007, it had accumulated $15.1 billion in CMBS and it was seventh in a chart showing the top financial firms investing in CMBS. At the end of 2008, Goldman was able to reduce its commercial portfolio to $10.9 billion. In the second quarter, its CMBS was down to $1.6 billion.
Goldman said it cut down its exposure to commercial securities by selling mortgage securities to other financial institutions and to investors.
Nevertheless, Goldman has made substantial write-downs on its commercial mortgage portfolio, writing down more than $3.5 billion since the start of the foreclosure crisis. Its commercial real estate losses had been higher than its residential real estate losses.
Analysts expect the commercial real estate to suffer more loan defaults and declines in property values. For several quarters already, banks have been posting losses in the commercial lending market.
To enhance its preparation for a meltdown in the commercial real estate sector, Goldman wrote down its commercial mortgage portfolio by almost 50 percent in the second quarter.
In the second quarter, it reported a loss of $700 million on commercial mortgage loans within its commodities, currencies and fixed income group. It also posted $500 million in losses in equity investments in commercial real estate that had dropped in value.
In contrast, banks which have larger percentages of exposure to the commercial mortgage sector made lower levels of markdowns.
Financial analysts said Goldman can afford to make bigger write downs on its commercial mortgage portfolio because of its less exposure to the commercial mortgage market. Besides, its $950 billion balance sheet and its gains in stocks, bonds and commodities are providing Goldman with the power to absorb write-downs and related losses.
All in all, Goldman Sachs is poised to survive further declines in the commercial mortgage market. It would also gain a lot if the market does not decline as steeply as it predicted as it would mark up the mortgages it had written down.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.
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