Goldman Prepares for Worst-Case Outcome in Europe

Gary D. Cohn, president and chief operating officer of Goldman Sachs. Simon Dawson/Bloomberg NewsGary D. Cohn, president of Goldman Sachs.

Goldman Sachs has intensified its efforts to prepare for an extreme deterioration in Europe, including a possible dissolution of the euro.

Gary D. Cohn, the bank’s president, told a group of investors at a conference sponsored by Sanford C. Bernstein that Goldman, like other banks, had reduced its exposure to Europe and was currently examining all euro-denominated contracts to understand what the ability to pay in a different currency would be if the euro disappeared.

“We have gone through contract by contract and position by position to understand what any permutation could be,” he told the audience, responding to a question about how Goldman might manage through a breakup of the European Monetary Union.

Mr. Cohn’s remarks come as Europe’s troubles continue to mount, a situation which has heightened speculation that Greece may leave the euro.

He fielded questions on array of topics, including whether Goldman would consider selling itself off in parts and the possible rating downgrade by Moody’s Investors Service of a number of big financial companies, including Goldman.

Brad Hintz, the Bernstein analyst who was host of the conference, said Goldman was a “relative winner” when it came to a possible Moody’s downgrade because its rating were not expected to fall as far as many of its rivals.

“It’s hard to say winner and downgrade in the same sentence,” Mr. Cohn responded, eliciting laughter from the audience.

A number of senior Wall Street executives have questioned the wisdom of Moody’s threat to cut the ratings of the financial institutions, given the efforts most banks have made to reduce the amount of borrowed money they use to run their operations and increase their capital positions.

“The financial services industry is more creditworthy and sound today than it has been in a long period of time,” Mr. Cohn said. Moody’s is expected to announce its decision on the downgrades by the end of June.

The executive also threw cold water on a question from an audience member who suggested that Goldman, which is trading well below its book, or breakup, value, should sell off parts of itself to unlock some value for shareholders.

“I would say the vast, vast, vast majority of our businesses at Goldman are enhanced by being part of the global firm,” he told attendees.

Part of the reason Goldman’s stock price is depressed is that since the financial crisis, banks have been required by regulators to discontinue high-profit businesses like proprietary trading, reduce borrowing and hold more capital. Before the financial crisis, Goldman often said that over the long haul, its target return on equity, the amount of money that a company delivers on each share, should come in at around 20 percent. The firm no longer has a target return on equity.

“While we are not in a position to offer a new R.O.E. target today given the significant regulatory uncertainty, our organization remains intensely focused on maximizing risk-adjusted R.O.E.’s through the cycle for the benefit of our shareholders,” he said.

Goldman in recent years has been accused of putting its own interests ahead of its clients. While Mr. Cohn did not field a question on that issue, his opening remarks focused on the importance of clients to Goldman’s operations. He mentioned the word 53 times in his comments.

“Over the past year, I have met with over 400 clients in 12 countries,” he said. “These interactions reinforce the importance and value of our client franchise.”