Goldman Sachs Sees $5 Billion Earnings Hit Ahead of New Tax Law

Goldman Sachs Sees $5 Billion Earnings Hit Ahead of New Tax Law

2017-12-29 22:43:56

Public companies are required to account for changes to tax laws during the quarter in which they are enacted, so even though the banks will not be sending checks to the Internal Revenue Service yet, their balance sheets must be adjusted to reflect what they will eventually owe.

Even as it made the necessary accounting adjustments resulting in the charge, however, Goldman was working to maximize the benefits it can still access before the new tax law takes effect on Jan. 1. It disclosed in filings with the Securities and Exchange Commission on Thursday that it had delivered shares to Goldman’s chief executive, Lloyd C. Blankfein, and other top executives, completing the transfers earlier than in previous years. It typically delivers shares as part of its executive compensation packages in January.

According to a source familiar with the matter, the move let the bank access a tax credit that will disappear under the new law, worth $140 million this year. A “couple hundred” people in high-tax areas received their stock early, said the source, who spoke on condition of anonymity because the information was not public.

The shares Mr. Blankfein and others received on Thursday cannot be sold for five years. They are not part of the executives’ 2017 pay packages; rather, they are portions of deferred compensation packages from the three previous years, the source said.

In recent weeks, some of Goldman’s competitors have also estimated one-time hits to their earnings because of the tax law. During a Dec. 5 conference, JPMorgan Chase’s chief financial officer, Marianne Lake, said moving overseas funds back to the United States could cost the bank up to $2 billion. On Dec. 6, the Citigroup chief financial officer, John Gerspach, said the bank could be facing a $20 billion charge. Bank of America said in a Dec. 22 filing it could book a $3 billion charge in its fourth-quarter earnings.

The charge from the tax bill will push Goldman from an estimated $1.9 billion in earnings for the quarter to a likely loss of around $3 billion. But its future is bright, along with that of other banks.

Goldman’s own bank analysts estimated on Dec. 18 that in the long run, big banks’ per-share earnings would increase by 13 percent, on average, under the new system.

Investors took the news in stride. Goldman’s shares were down about 1 percent in recent trading, while broader stock market indexes were essentially flat.

Goldman cautioned in its filing late Thursday that the actual earnings charge could differ significantly from its $5 billion estimate if the government issued new guidance on the applications of the law or if interpretations of the law’s components changed.

Correction: December 29, 2017

An earlier version of this article misstated how the investment bank Goldman Sachs was recording assets on its balance sheet to comply with the new tax law. It was revaluing assets, not adding them, as a result of the new tax cuts.

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