Goldman Sachs Group, Inc. (GS) to Return Capital to Shareholders … Probably

One week after the Federal Reserve released the initial results of its bank stress tests — revealing how 18 of the country’s biggest bank holding companies held up under a simulated, severe economic downturn — the nation’s central bank has just released the final results: detailing which bank’s proposed capital plans would be approved, and which would not.

For Goldman Sachs Group, Inc. (NYSE:GS) shareholders, the news isn’t ideal, but could have been worse.

Goldman Sachs (GS)Back to the drawing board

“The Federal Reserve did not object to the capital plans for The Goldman Sachs Group … but required [it] to submit new capital plans by the end of the third quarter to address weaknesses in [its] capital planning processes.” So said the Fed in its official report released today.

Essentially, the central bank is sending Goldman back to the drawing board, but only in part. Whatever capital plan the bank had in mind will likely stand, but as Goldman Sachs Group, Inc. (NYSE:GS) itself put it in a statement released last night: “The company will resubmit its capital plan by the end of the third quarter, incorporating certain enhancements to its stress test processes.”

In the same statement, CEO Lloyd Blankfein himself added: “We are pleased to continue to have the flexibility to return capital to shareholders.” So hurray that Goldman will be returning capital to shareholders, but details on exactly what those capital return actions will be are scant.

“The results exclude requested capital actions that are incorporated into our Comprehensive Capital Analysis and Review,” the bank wrote in a press release published last week, “including the repurchase of outstanding common stock, a potential increase in our quarterly common stock dividend and the possible issuance, redemption and modification of other capital securities.”

Foolish bottom line
Goldman Sachs Group, Inc. (NYSE:GS) is being cagey about its proposed capital actions, like it was last year. But the good news is, whatever exactly Goldman is planning at least seems to be moving forward, which is more than can be said for the capital actions of Ally Financial, which have been rejected outright. Of course, Ally also outright failed its stress test, coming in with a Tier 1 common ratio of just 1.8%.

Coming in at 5.8% versus a Fed minimum of 5%, Goldman Sachs Group, Inc. (NYSE:GS) didn’t exactly pass with flying colors, but it did significantly better than Ally.

The bad news is, if the Fed doesn’t like the reworked plan Goldman comes back with, it could potentially modify the bank’s plans (again, whatever those plans actually are).

But I take heart in the fact that — being the seasoned, smart bunch of cookies they are — Goldman’s top managers will calmly and coolly adjust whatever it is the Fed wants them to adjust and present a capital-return plan and attendant process that will please not only the Fed, but investors as well.

The Comprehensive Capital Analysis and Review isn’t perfect — no testing process is — but it’s nonetheless an important part of keeping our banking system healthy. I’m a Goldman Sachs Group, Inc. (NYSE:GS) investor, and while this isn’t the best news I could have possibly heard today — as it leaves me a bit on edge regarding what will become of any proposed dividends and share buybacks — it’s probably the right news.

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Fool contributor John Grgurich owns shares of Goldman Sachs, but please don’t hold that against him. Follow John’s dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.The Motley Fool recommends Goldman Sachs.

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