Well, this will add to the debate on Goldman’s post-Abacus reputation — a negative outlook from Fitch, on Wednesday.

From the agency’s press release (emphasis ours):

Fitch Ratings has affirmed the ‘A+/F1+’ long- and short-term Issuer Default Ratings (IDRs) for The Goldman Sachs Group, Inc. (Goldman). Fitch has also revised Goldman’s Rating Outlook to Negative from Stable. A complete list of ratings follows this release.

The rating affirmation is indicative of Goldman’s de-levered balance sheet, proven earnings power, and its prominence and demonstrated success in global capital markets and sales & trading. Additionally, Goldman continues to exhibit strong liquidity management, maintaining significant global core excess balances. Since the economic crisis began, Goldman has consistently outperformed its global banking peers; those favorable trends have continued through first-quarter 2010 (1Q’10).

Reputation was a key concern for Fitch’s rating:

The Rating Outlook revision to Negative incorporates recent legal developments and ongoing regulatory challenges that could adversely impact Goldman’s reputation and revenue generating capacity. Goldman’s franchise and market position are potentially vulnerable to scrutiny by stakeholders, and like peers, may be affected by the industry’s regulatory evolution.

Subsequent to civil fraud charges filed by the Securities and Exchange Commission (SEC) last month, it appears that the U.S. Attorney’s Office in Manhattan is initiating a criminal probe in connection with Goldman’s mortgage trading activity. Given the level of recent public scrutiny, it is not surprising that other authorities outside of the U.S. have also expressed intentions to investigate select mortgage-related transactions conducted by Goldman. At a minimum, Fitch believes the civil charges to date and the pending criminal investigation, coupled with a highly public hearing by the U.S. Senate’s Permanent Subcommittee on Investigations, generate adverse publicity that tarnishes Goldman’s reputation. And for financial services companies, particularly those dependent on the capital markets, reputation is critically important. Moreover, expected follow-on shareholder and investor claims are likely to invariably consume management time and financial resources as well.

As was US financial reform:

Additionally, regulatory reform currently under consideration may curtail some of Goldman’s core business activities. Higher capital requirements, central clearing of derivatives, restricted proprietary trading and investment activity are key legislative items currently being contemplated that would challenge Goldman’s current business model. These reforms may favorably influence the risk profile, but potentially reduce revenues, increase costs or reduce profitability in select businesses. It is not certain at this time how extensive final legislation will ultimately be in the government’s efforts to contain systemic risk. Fitch believes the probability is high, though some limitation on Goldman’s current business activities, along with those of the company’s peers, will occur. Despite any necessary business adaptations, Fitch expects Goldman will position itself to compete successfully in its key business segments.

Fitch believes there are a variety of outcomes that may materialize with respect to Goldman’s future ratings. The most pessimistic downgrade scenarios entail adverse decisions in the pending suits and investigations, coupled with highly restrictive financial reform. The extent of any downgrade would depend on the ultimate legal decisions and financial outlays, with adverse conclusions in the criminal investigation resulting in more severe downgrades of both the IDRs and Individual rating. Absent serious negative legal results, Fitch does not envision any adverse outcome that would precipitate a downgrade to Goldman’s IDR below the ‘A’ rating category.

Fitch continues to have regular dialogue with management with regard to the aforementioned circumstances, as well as pending regulatory reforms. If the legal issues and regulatory reforms turn out to be minor events for Goldman, Fitch would view these as positive credit developments with corresponding implications for our perspective on risk, and the Outlook would likely be revised to Stable.

As at pixel time, this doesn’t seem to have much affected Goldman’s share price — which stood at about 50 cents lower, according to Bloomberg.

This entry was posted by Joseph Cotterill on Wednesday, May 5th, 2010 at 16:24 and is filed under Capital markets. Tagged with fitch, goldman sachs, ratings agencies. Edit this entry.