Goldman Sachs was among 31 U.S.-based holding companies undergoing the annual Federal Reserve stress test. Analysts say that as a result of Goldman’s relatively poor performance, on Wednesday regulators might limit one of Goldman Sach’s big financial strategies: buying its own shares.
Buybacks pump up earnings per share by reducing the number of shares. “When you take a look at Goldman as compared to a lot of financial institutions, Goldman has relied on buybacks,” says Allen Michel, finance professor at Boston University.
Last year, Goldman Sachs spent $5.5 billion buying its own stock. Shareholders love it because they’re getting cash. But regulators want to see more capital assets, says Stephen Hoopes an analyst with IBISWorld.
“So the Fed’s mostly just looking at if a recession were to happen, if a big change in the market were to occur, how would these big banks handle that,” Hoopes says.
If the Federal Reserve says Goldman can’t use its capital to buy its own stock, it’s estimated the bank could earn almost $2 less per share next year. That, Michel says, even for a powerhouse like Goldman, would be a big deal.