Pay attention to the signs.

Good Friday? Not for Lehman and Goldman.

Standard & Poor's analysts tested the tree-falling-in-an-empty-forest scenario, as it lowered the outlooks for Goldman Sachs and Lehman Brothers to negative while markets were closed.

Please be advised that S & P do not exactly have clean hands in this whole affair. (Kind of like the Sharia Finance deals we've been hearing so much about.)

And just so you know, the Captain has asked me to remind you to remain in your seats when the fasten seat belt sign is illuminated. Your cooperation is appreciated.


More details beneath the fold

Lancing the boil:

Profits at Goldman Sachs and Lehman Brothers could deteriorate significantly this year if the turmoil sweeping the capital markets persists, a leading research agency said yesterday.

Standard & Poor's (S&P) gave warning that it might cut the credit ratings on both investment banks, lowering the outlook on Goldman and Lehman from “stable” to “negative”. That comment, which coincided with reports of looming job losses at Goldman, could result in higher borrowing costs and a fall in the banks' shares.

S&P praised Goldman Sachs for producing a string of record profits in recent years and said that it had a solid capital base. However, it noted that much of Goldman's recent success was based on a significant rise in trading, and S&P said that the group's “aggressive” appetite for risk left open the potential for “major mis-steps”.

S&P said that it expected independent securities firms, such as Goldman and Lehman, to report profit declines of between 20 per cent and 30 per cent for the year. “Nonetheless, we see some possibility, were there to be persisting capital markets turmoil and sharply weakening economic conditions, that financial performance could deteriorate significantly more than we now assume, which would call the current ratings into question,” the S&P report read.

Goldman Sachs has a rating of AA- on its long-term senior debt, the fourth-highest level, and Lehman is one notch below, at A+. The S&P report comes in a week in which Goldman and Lehman reported significant first-quarter profit declines that, nonetheless, were considerably ahead of consensus analyst forecasts.

This week Goldman reported a 53 per cent decline in first-quarter profits to $1.51 billion (£762 million), as the group announced about $2.5billion of writedowns relating to so-called leveraged loans that finance private equity deals, mortgages and direct investments. Meanwhile, Lehman recorded a 57 per cent decline, to $489 million, after taking a $2 billion hit from the credit crunch.

S&P's potential ratings downgrade emerged only hours after reports that Goldman Sachs would impose significant job cuts in its investment banking, debt and equity underwriting and merger advisory units. It is understood that Goldman, which employs about 32,000 worldwide and typically cuts the bottom 5 per cent of its workforce annually, will eliminate additional jobs in its worst-performing departments this year. However, David Viniar, the chief financial officer, said that the group's headcount for the year would grow slightly, and it is understood that this is still the plan, even with the extra job cuts. Goldman declined to comment on the possible additional redundancies.

The cuts would follow the elimination of a further 1,800 jobs at Citigroup worldwide, which is expected to result in hundreds of positions disappearing in the City. The cuts, which will affect investment banking and trading as well as hedge fund and private equity services, come on top of about 21,200 redundancies in the past year.

Wall Street and the City face huge redundancies as the credit crunch continues to spread. This week the Centre for Economic Business Research increased its estimate for the number of job losses in the City this year from 6,500 three months ago to 10,000.