If downgraded, Goldman could be on hook for $2.2B

NEW YORK (AP) — Goldman Sachs could owe up to $2.21 billion on its derivatives deals if its credit rating is downgraded by two notches, the company said in a regulatory filing Thursday.

The global investment bank, based in New York, said a change to its credit rating would trigger provisions in derivatives contracts, forcing it to post extra cash collateral or pay to terminate the contracts.

Derivatives are financial contracts whose value is based on the value of another, underlying investment. Corn futures and stock options are common examples. Derivatives are used by many companies to protect against the potential costs of fluctuating interest rates or prices for raw materials.

The costs to Goldman of a possible rating downgrade are important because it is under review for a two-notch downgrade by Moody's, one of the big three rating agencies. Moody's currently rates Goldman as "A1."

Goldman would owe up to $1.33 billion if its rating was reduced by one notch, it said. That figure is way up from a year earlier. As of March 2011, Goldman would have owed $925 million in the case of a one-notch downgrade, according to an earlier filing with regulators.

Goldman said it would owe up to $2.21 billion if its rating were cut two notches, unchanged from a year earlier.

Goldman is one of a handful of banks that dominate the multitrillion-dollar derivatives industry. If Goldman sold a company projection against higher interest rates in Europe, that company would pay Goldman a fixed amount. In exchange, Goldman would guarantee to limit the company's costs if interest rates there rose.

If Goldman were downgraded, it would appear slightly less likely to other companies that Goldman was able to repay. Under their contracts, they can force Goldman to set aside part of the value of the contract as an assurance that the money will be available.

Goldman's total net liability under the derivatives contracts with credit rating provisions was $27.37 billion as of March 31, up from $21.50 billion a year earlier. It already has posted collateral against $22.74 billion of this year's total liability.

Moody's also is reviewing the ratings of 16 other global banks with capital markets operations. The rating agency Standard & Poor's took a similar action last year, according to research from Credit Suisse analysts.

Long-term ratings, the type under review, are important to bond investors and affect a bank's ability to borrow and borrowing costs. Moody's is scheduled to release the results of its review this month, Credit Suisse said.

If Goldman's rating is cut by two notches, to 'A3' from 'A1,' that could reduce its earnings per share in 2012 by 29 cents, or 2 percent, Credit Suisse said. Wall Street analysts expect Goldman to earn $12.33 per share in 2012, according to a survey by data provider FactSet.

Goldman shares rose 2 cents to $107.31 in afternoon trading. Its shares have traded in a 52-week range of $84.27 to $150.74.