Goldman’s fall from grace continues

July 12, 2012, 8:49 PM UTC

Goldman CEO Lloyd Blankfein

FORTUNE — It’s still hard out there for an I-banker.

Starting tomorrow banks will begin to tell investors how they did in the second three months of 2012. Overall, the indications are that the quarter will be a disappointment. But, surprisingly, Goldman Sachs (GS) may emerge as the biggest loser. Expectations for the once-vaunted investment bank have fallen more than rivals.

In the past month, analysts have cut their earnings expectations by 35% for Goldman. It’s been a tough time for investment bankers in general. The IPO window shut after the bungled Facebook deal. And M&A is down 21% so far this year.

MORE: M&A Cliff: Deal Volume is down

But something worse might be going on at Goldman. Analysts expect the company will earn $1.37 a share in the quarter. The current estimate translates into $700 million less in profits than analysts were expecting when the quarter began. On Wednesday, Mike Mayo said he believes Goldman’s trading business may have recently dropped by as much as a third. Recently the firm has been losing market share to rivals, some of which it picked up during the financial crisis and hasn’t been able to hold onto. All that talk of Muppets probably hasn’t helped.

Goldman has a lot of cash on hand and one of the best balance sheets on Wall Street. The assumption has long been that Goldman will find a place to put that cash to work, and earnings will rebound. And that may be why analysts continue to start each quarter with outsized expectations. And yet, they’re still waiting for that magically switch to flip.

MORE: Goldman says it can profit from Europe’s bust

The good news for Goldman recently has been that it has managed to stay out of the headlines. And unlike some of its rivals it’s unlikely to have to fork over a big settlement in the Libor scandal. Goldman is not among the banks that help set (fix) the key lending rate. Nonetheless, Goldman did sell some of the interest rate swaps tied to Libor, which many municipalities are now complaining about. Oakland officials, for one, recently said the city would no longer do business with the bank.

Goldman executives have said that they expect the big opportunity for the firm is in Europe. And indeed, the bank might be able to steal business from weaker overseas rivals. But in the next year or so, Europe could be a treacherous place to earn a buck, especially for a bank. And Goldman’s exposure to Europe might be more of a concern than a positive for now. The bank recently upped its exposure in Italy.

Goldman’s shares have fallen nearly 30% in the past three months. Recently, former FORTUNE writer Bethany McLean made the case that Goldman’s shares might not turnaround until the firm either breaks itself up or becomes much more transparent to shareholders about how it makes its money and how it plans to make more in the future. The problem is Goldman is unlikely to do either of these. Compensation is tied to size. And transparency is not in Goldman’s culture.

Eventually, though, the firm might not have a choice. To McLean’s point, the answer for Goldman might be that in a post-Dodd-Frank world, with all the restrictions on trading, Goldman, in its current form as a large global bank, might not have a lot of room for growth. Perhaps the firm should think about giving up its banking business, and fully morphing into the hedge fund that most have assumed it was all along. It least that way Goldman’s lack of transparency would be more transparent.