Is Goldman Sachs (NYSE:GS) Too Optimistic for Citigroup (NYSEC), J.P. Morgan (NYSE:JPM) and Bank of America (NYSE:BAC)?

Goldman Sachs (NYSE:GS) upgraded Citigroup (NYSEC) from “neutral” to “buy,” while maintaining buy ratings on J.P. Morgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC). In light of the current economic conditions, which are deteriorating in Europe and China, it does generate the question of whether the assessment of Goldman is far too optimistic.

Much of the positive mood of Goldman is related to the quality of credit at the banks, which could maintain their ratings, resulting in less expensive loans and operating costs. The winding down of debate on regulations, and the assumption lawmakers probably won’t ban derivative trading, which would be devastating to the large banks.

Speaking of that, volatile economic times are back, and in that scenario, the giant banks thrive, as the huge price swings brings them strong revenue and earnings. That has been the primary driver of revenue since the recession began, and it looks like it will be in the future as well, assuming they are able to continue to trade derivatives.

With business largely holding back from borrowing, and lenders not really wanting to lend, it shows that their faith in the sustainability of the recovery is very low, and until that changes from real changes in demand, we’ll continue to see that.

It seems Goldman’s assessment of the situation is primarily based on stronger defensive positions, and the belief derivatives will remain a part of the banking investment arsenal.

If that’s true, Goldman is probably right about the banks, although the question of Europe continues to weigh on those banks with heavy exposure there, and that could become as big as, if not larger than, the banking crisis in America.

To me, Goldman is a little too optimistic in their outlook, and it’s based on some assumptions, which while probably true, aren’t assured yet.

But to not include China and Europe in their outlook for the banking industry seems to leave out a huge, potential negative for the industry that will definitely have an impact, and that impact will have to be looked at from the perspective of individual banks.