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Goldman Sachs Can Fall Off the Fiscal Cliff


Since Goldman Sachs (NYSE:GS) chief executive Lloyd Blankfein is openly talking about why US lawmakers need to get their act together and avoid the so-called "fiscal cliff," investors might do well to consider its impact on the bank's shares if the US falls into the abyss.

Blankfein and Jamie Dimon of JPMorgan Chase (NYSE:JPM) have recently taken to the public to sound the alarm bell on the cliff and investors should listen.

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"We sure know what the consequence will be and it will be awful," said Blankfein in a CNBC interview Thursday. It's "one of the major ways in which the slow recovery that we have could be completely derailed," he added.

In the case of Dimon, the JPMorgan CEO made two pressing points after the bank's third-quarter earnings on Friday. First, he's ready to call housing rebound. Second, Dimon is quietly sounding the alarm bell on the fiscal cliff's impact on banking sector earnings.

"If the fiscal cliff actually happens, you have to be prepared for various scenarios, including the worst possible one even if you don't predict it," said Dimon on the JPMorgan's Friday earnings call. While the CEO was confident a cliff wouldn't impact the positive momentum at JPMorgan's commercial bank, he noted risks for its investment bank.

It's the latter that should concern bank stock investors -- and especially Goldman Sachs investors -- who benefited from a near 20% surge in the company's shares during the third quarter and are bracing for what's likely to be a strong earnings report due on Tuesday morning.

Heading into earnings, Goldman Sachs has faced a steady drumbeat on optimism on the company's profitability and its industry position as competitors like Morgan Stanley (NYSE:MS) scale back in some trading, underwriting and private equity activities where competition was fierce prior to the crisis. Meanwhile a rising stock market tide is expected to lift Goldman's boat.

"Despite a sluggish seasonal quarter, we expect Goldman to put up pretty solid results given the improvement in market values, relatively stable volatility and market share gains in its merger and acquisition business," writes KBW bank analyst David Konrad, in a preview of earnings. KBW identifies Goldman, Morgan Stanley and Citigroup as sector out performers through year-end, as traditional lenders like Wells Fargo face a profit margin squeeze from the Federal Reserve.

Still, in spite of an improving earnings outlook and signs in recent M&A and trading activity that augur well for investors headed into 2012, a do nothing Congress can still hurl the US economy over a cliff of sharp budget cuts and wreck a financial sector rally.

Consider that the last time Congress posed a risk to the US economy -- namely in a last minute negotiation of an increase to the US debt ceiling that staved off default and was punctuated by a downgrade of the US government's debt rating by Standard & Poor's in August 2011 -- the deal sharply cut at overall confidence and economic growth. The summer 2011 debt ceiling standoff also destroyed bank earnings.

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