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This is a follow up to the post that I made early this morning, "Shock and Awe, 2.0!" (I consider it a must read). I was one of those hedgie-type guys who were shorting the Goldman stock. Why was I doing it? Was it because I was unpatriotic? Was I a shark out for blood? Out to destroy the very financial fabric of America? I'll tell you why I did it (and quite profitably, may I add, see the notes and links at the bottom of this article). I did it becaue Goldman takes a lot of excessive risk in relation to their profits (see Risk vs. Reward vs. Reputations on the Street), in an environment that is fraught with peril, while carrying a lot of immovable trash on their balance sheet, as they sport the highest price and valuation on all of Wall Street, despite hiring the same people as their competitors (what's left of 'em) who went to the same schools to learn the same trading methods to move the same products. If you click the link above, they are so correlated to their fallen brethren that their stock even moves in the same patterns. In a nutshell, I saw disequilibrium in the market, and I saw an opportunity to capitalize on the markets fixing this problem. Alas, I digress...

Henry Paulson just asked for a revolving $700 billion credit line to fix the mess that he literally, and I do mean literally, created. Take a look at this graph or inflation adjusted real estate prices (courtesy of Professor Shiller's irrational exuberance data), and take note that Paulson ran the biggest investment bank during the years between 1998 and 2006 (the exact years of the real estate boom).

 image001.png

 Let's take a close look at the stuff that Paulson's company hid off balance sheet while he was CEP (these are recent numbers, but the categories are the same).

 

Unconsolidated VIE's  ($ mn)

31-May-08

 

VIE Assets

Maximum Exposure to Loss in Nonconsolidated VIEs

 

 

Purchased and retained interests

Commitments and Guarantees

Derivatives

Loans and investments

Total

Mortgage CDOs

18,569

516

0

8,144

0

8,660

Corporate CDOs and CLOs

10,891

402

0

1,398

0

1,800

Real estate, credit-related and other investing

28,216

0

8

0

3,977

3,985

Municipal bond securitizations

254

0

254

0

0

254

Other mortgage-backed

 

0

0

0

0

0

Other asset-backed

4,200

0

0

1,793

0

1,793

Power-related

438

2

37

0

16

55

Principal-protected notes

5,948

0

0

5,683

0

5,683

 Total

68,516

920

299

17,018

3,993

22,230

 

 Three guesses as to the type of assets he and Bernanke will want to pay "above firesale prices" for if they get the $700 billion they desire. Color rhymes with Fed???

 Why is it that I'm the only one who finds it rather silly that the man who created much of the problem will ask me and my family to pay taxes to dig his old firm and the "crew" out of the whole. Care to hazard what he made during thehot bubble era generating these assets that we now are being asked to bailout? From Forbes via Wikipedia:

 

His compensation package, according to reports, was US$37 million in 2005, and US$16.4 million projected for 2006.[9] (and this is just for two years out of the 8). His net worth has been estimated at over US$700 million.[9]  Do you think this bailout play will incude his giving some of that money back? And you wonder whey exec comp limitations are being bandied about as part of the package????

 

Let's take a look at the risk that his alma mata is taking to make those monies...

 image014.gif

We have looked at company’s recent quarterly filings and 10K to have a closer view of Goldman Sachs’ (GS) exposure. Following are some of our observations: 

Value at Risk (VAR) and Risk Adjusted Return on Risk Adjusted Capital (RARORAC)

Goldman has the highest VAR among its peer group of $184 mn, followed by Lehman at distant $123 mn (we all know how well LEH is currently faring). Notably, GS also the highest range (difference of highest and lowest daily VAR during a quarter) of daily trading VAR of $92 million, reflecting significant (read risky) volatility in its trading portfolio. This is higher than $61 mn and $67 mn (for 1Q2008) for Lehman and JPM, respectively. This is also being reflected in the lowest risk adjusted return on risk adjusted capital (RARORAC - a much more grounded measure of risk adjusted return) of 14.8% for GS among its peer group. Just so this doesn't escape anybody, GS has the lowest risk adjusted return on the Street. Simply analyzing earnings (or looking at CNBC) would lead one to believe that Goldman has the highest return on investment, but unfortunately, the world is a bit more complex than an earnings statement or a cable news channel.

 

Average Daily Trading VAR (in million dollars)

 

Q208

Q108

Q407

Q307

Goldman Sachs

184

157

138

139

Morgan Stanley

99

97

89

87

Merrill Lynch

NA

65

65

76

Lehman Brothers

123

130

124

96

JPM

NA

122

107

112

         

Range of Daily Trading VAR (Difference between highs and lows) (in million dollars)

Q208

Q108

Q407

Q307

Goldman Sachs

NA

92

77

68

Morgan Stanley

NA

34

46

36

Merrill Lynch

NA

39

51

32

Lehman Brothers

37

61

107

66

JPM

NA

67

138

64


image002.gif

 

  • Risk Adjusted return on risk adjusted capital (RARORAC)

 

Q208

Q108

Q407

Q307

Goldman Sachs

12.9%

14.8%

16.1%

15.3%

Morgan Stanley

19.7%

19.1%

21.5%

23.3%

Merrill Lynch

NA

31.6%

32.5%

30.5%

Lehman Brothers

14.0%

12.3%

12.0%

15.3%

JPM

NA

54.1%

60.2%

56.8%

 

Goldman also has the highest adjusted leverage ratio (adjusted asset divided by adjusted equity) of 18.6x (for 1Q2008) among its peer group, reflecting lower equity cushion against any valuation write-down or loss. This highest leverage portends much greater volatility in economic earnigns. In other words, when the win chooses not to blow in their direction, the sh1t will hit the fan that much harder than the rest of the Street

 

Adjusted leverage ratio

Q208

Q108

Q407

Q307

Goldman Sachs

NA

18.6x

17.5x

18.0x

Morgan Stanley

14.1x

16.0x

17.6x

18.8x

Merrill Lynch

NA

18.2x

20.3x

17.9x

Lehman Brothers

12.0x

15.4x

16.1x

16.1x

JPM

NA

13.1x

12.7x

12.3x

 

Click here for a worksheet that illustrates the VaR exposure for all ofthe big US brokers in detail: icon Broker VaR Worksheet (634.49 kB 2008-07-05 09:25:24).

Goldman Sachs’ exposure

 

OTC Derivative Credit Exposure ($ mn)

 

 

 

 

 

Feb-08

% of total

Nov-07

% of total

AAA/Aaa

$15,387

15.6%

$14,596

20.7%

AA/Aa2

$33,820

34.2%

$24,419

34.7%

A/A2

$25,291

25.6%

$16,189

23.0%

BBB/Baa2

$9,724

9.8%

$6,558

9.3%

BB/Ba2 or lower

$13,354

13.5%

$7,478

10.6%

Unrated

$1,236

1.3%

$1,169

1.7%

Total

$98,812

100.0%

$70,409

100.0%

 

Paulson to the rescue!
1. Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
Here is my detailed opinion on Goldman Sachs. Be sure to review my precursor to this report: Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street. Anybody who is interested in how I
Thursday, 24 July 2008

2. Reggie Middleton on Goldman Sachs Q3 2008
(Reggie Middleton's Boom Bust Blog/MyBlog)
...rish view on Bear Stearns in a bear market and Is this the Breaking of the Bear's Back?), I am bearish on Goldman as well (Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street and Re...
Wednesday, 17 September 2008

3. Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
...t shared by most of the analyst community and those that follow them. This brings me to the issue of Goldman Sachs. I have been bearish on commercial, mortgage and investment banks for over a y...
Saturday, 05 July 2008