Using Veritas to Construct the "Per…

29-04-2017 Hits:82077 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:77716 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:77286 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:82032 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:78623 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:80919 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:47803 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:79624 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:79151 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:79701 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:84667 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:81623 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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First order of the day, news items:

Source: Reuters

A rescue for the U.S. financial system unraveled late Thursday amid accusations Republican presidential candidate John McCain scuppered the deal. Wamu's demise will further devalue mortgage assets. I don't care how much the government buys, we (the tax payer) don't have enough wealth to synthetically support this derivative market (yes, MBS are derivatives).

 

SYDNEY/SINGAPORE (Reuters) - Central banks across Asia scrambled on Friday to meet a desperate demand for cash, both in their own currencies and the U.S. dollar, as the White House's $700 billion bailout plan ran into unexpected roadblocks. The asset securitization crisis is contagious... http://www.reuters.com/article/ousiv/idUSTRE48P11E20080926?sp=true

Fed keeps banks afloat as money market crisis deepens - what banks do you think they are referring to??? Goldman Sachs and Morgan Stanley. The run on the prime brokerage accounts of Morgan Stanley have been confirmed in both London and NY.

Flight from Morgan Stanley brokerage
Financial Times - London,England,UK
By James Mackintosh in London Morgan Stanley lost close to a third of assets in its prime brokerage last week, amounting to hundreds of billions of dollars, ...

Goldman and Morgan Stanley Help Drive Discount Window Lending to a ...
By Jesse(Jesse) Scroll down to the excerpt from American Banker: Discount Window Borrowing Jumps to $262 Billion By Steven Sloan September 26, 2008 WASHINGTON — During another turbulent week on Wall Street, lending through the Federal Reserve Board's discount window skyrocketed to ...

China banks told to halt lending to US banks: (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.

 

The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries. "The decree appears to be Beijing's first attempt to erect defences against the deepening U.S. financial meltdown after the mainland's major lenders reported billions of U.S. dollars in exposure to the credit crisis," the SCMP said. A spokesman for the CBRC had no immediate comment.


 

 

 

As I have been crowing for about a year now, the investment banks are insolvent. Below is an updated analysis of Goldman Sachs after their recent capital infustions... 

Goldman Sachs update following strategic investment by Berkshire Hathaway and public offering

On September 24, 2008 GS announced public offering of 40.65 mn shares at $123 per share for total gross proceeds of approximately $5 bn. Earlier on September 23, 2008 GS announced $5 bn strategic investment by Berkshire Hathaway in the form of perpetual preferred stock with an annual dividend of 10% callable at any time at a 10% premium. In addition, Berkshire Hathaway would also receive warrants to purchase $5 bn of common stock at a strike price of $115 per share exercisable at any time for a five year term. This combined offer would help GS to raise a total capital of $10 bn.

Public offering  
# of shares

            40.7

Share price $123
   
Total proceeds $5,000
Face value $0.41
Premium $5,000
   
Private offering  
   
Total proceeds $5,000
Preffered dividend rate 10.0%
Annual preffered dividend $500
   
Total gross proceeds $10,000

 

Other preferred stock Redemption
Series Date Value
A Apr-10 $750
B Oct-10 $800
C Oct-10 $200
D May-11 $1,350

 

Impact of additional capital raised by Goldman Sachs

We believe that this additional capital would have the following impact on Goldman Sachs:

  • Help Goldman Sachs in reducing its leverage position
  • Improve Goldman Sachs liquidity position
  • As a result of improved liquidity position Goldman Sachs would have to sell fewer distressed securities to Fed resulting in lower write-downs
  • Increase preferred dividend to be paid by $500 mn per annum
  • Dilution in earnings for existing shareholders' equity

 

Impact on leverage and book value

 

Including the impact of preffered stock and public offering                      
  4Q-2008 1Q-2009 2Q-2009 3Q-2009 4Q-2009 1Q-2010 2Q-2010 3Q-2010 4Q-2010 2011 2012
Total Assets ($ bn) $1,103 $1,095 $1,088 $1,084 $1,078 $1,092 $1,099 $1,105 $1,110 $1,133 $1,123
                       
Tangible Equity ($ bn) $50.3 $49.4 $48.1 $46.8 $45.3 $45.6 $45.0 $44.9 $43.7 $44.1 $47.6
                       
Book value per share $114 $112 $109 $106 $103 $103 $102 $102 $99 $100 $106
                       
Adjusted Book value per share $103 $101 $98 $96 $93 $93 $92 $92 $89 $90 $97
                       
Adjusted leverage 21.8 22.0 22.5 23.0 23.7 23.8 24.3 24.5 25.3 25.6 23.5
                       
Excluding the impact of preffered stock and public offering (previous model)                      
  4Q-2008 1Q-2009 2Q-2009 3Q-2009 4Q-2009 1Q-2010 2Q-2010 3Q-2010 4Q-2010 2011 2012
Total Assets ($ bn) $1,092 $1,083 $1,076 $1,071 $1,065 $1,079 $1,087 $1,093 $1,098 $1,121 $1,112
                       
Tangible Equity ($ bn) $40.5 $39.6 $38.2 $36.9 $35.4 $35.8 $35.3 $35.4 $34.2 $35.1 $39.1
                       
Book value per share $102 $100 $97 $94 $90 $91 $90 $90 $87 $88 $97
                       
Adjusted Book value per share $90 $88 $85 $82 $79 $80 $79 $79 $76 $78 $87
                       
Adjusted leveraege 26.9 27.3 28.1 28.9 30.0 30.0 30.6 30.8 32.0 31.9 28.4
                       

 

Goldman Sachs currently has nearly $1,090 bn worth of assets on an equity base (tangible) of $40 bn with an adjusted leverage of 27x. Goldman Sachs effort to raise $10 bn of capital on such a huge asset base looks minuscule. We believe that if Goldman Sachs were to remain financially strong any kind of re-structuring exercise must entail removing their toxic assets from their balance sheet which are causing massive write-downs rather than re-structuring its capital base. Although Goldman Sachs efforts to raise additional capital are expected to reduce its leverage to 21.9x at the end of 2008 from 27x presently, GS's leverage post capital raising efforts would continue to be on a higher side, in our view.

Impact on write-downs

Additional capital raised by Goldman Sachs would provide Goldman Sachs the flexibility to sells its assets to Federal Reserve.  In our previous analysis (Impact of Fed bail out plan) we had estimated that under the base case scenario Goldman Sachs would sell $34 bn worth of distressed securities comprising nearly 25% of its level 1 assets, 50% of its level 2 assets and 80% of level 3 assets. However after considering the impact of additional capital raised, Goldman Sachs now would have to sell $24 bn of distressed securities under the base case scenario. This would mean that under the base case scenario Goldman Sachs would now have to sell 17% of its level 1 assets, 34% of its level2 assets and 55% of its level 3 assets to Federal Reserve.

Following are our revised assumptions regarding sale of distressed security by Goldman Sachs:

 

  Analytical  impact (thru reduction of sale of distessed secutities to Fed resulting in lower write-downs)
GOLDMAN
Total Sales
Total Sale of disressed securities in 2008 and 2009 Previous estimates Difference Factor
 
(using goal seek)
Current estimates
Sells Aggressively 58,612 (10,000) 79% 48,612
Base case 34,453 (10,000) 69% 24,453
Sells Conservatively 19,965 (10,000) 49% 9,965
         
           
Assumptions regarding the proportion of MBS / ABS by MS  
-       2009 (previous estimates)        
                                    Sells Aggressively     Base case         Sells Conservatively  
Level 1-        50% 25% 10%    
Level 2 -        70% 50% 25%    
Level 3 -  90% 80% 50%    
           
Factor 79% 69% 49%    
-       2009 (revised estimates)        
Level 1-        39% 17% 5%    
Level 2 -        55% 34% 12%    
Level 3 -  71% 55% 25%    
           
  Distressed securities to be sold to Fed       
  Base case        
  Old estimates        
  2008 $4,645      
  2009 $29,808      
  Total $34,453      
           
  Reduction of need of sale of distessed securities by GS to Fed -$10,000      
           
  Revised estimates (by using goal seek)      
  2008 $3,191      
  2009 $21,262      
  Total $24,453      

 

Due to lower sale of distressed security by Goldman Sachs, it would have to take the lower ‘haircut'. Total write-down on account of sale of securities to Fed under the base case scenario is expected to reduce by nearly $1.8 bn to $4.4 bn as against previous estimates of $6.1 bn.

 

Potential write-downs due to sale of distressed securities to Fed
GOLDMAN
Selling  pace
  Fed   (Pricing scenario)
  Low discount Base case Deep discount
Sells Aggressively 1,629 8,170 10,440
Base case 918 4,367 5,573
Sells Conservatively 378 1,789 2,285
       
         
Potential write-downs due to sale of distressed securities to Fed
GOLDMAN
Selling  pace
  Fed   (Pricing scenario)
  Low discount Base case Deep discount
Sells Aggressively 1,962 9,760 12,433
Base case 1,295 6,147 7,833
Sells Conservatively 754 3,573 4,563
       

 

Dilution effect and accounting impact 

 

Accounting impact (increase in cash flow, book value per share, increase in assets and reduction in leverage)    
  4Q-2008 1Q-2009 2Q-2009 3Q-2009 4Q-2009 1Q-2010 2Q-2010 3Q-2010 4Q-2010 2011 2012
Preffered stock (series A-D) 3,100 3,100 3,100 3,100 3,100 3,100 2,350 2,350 1,350 0 0
Rate 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%
Preffered stock dividend 35 35 35 35 35 35 27 27 15 0 0
                       
Preffered stock issued to Warren Buffet 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000
Rate 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Preffered stock dividend 125 125 125 125 125 125 125 125 125 500 500
                       
Total preffered dividend 160 160 160 160 160 160 152 152 140 500 500
                       
Total Preffered stock  8,100 8,100 8,100 8,100 8,100 8,100 7,350 7,350 6,350 5,000 5,000

 

As a result of issuance of preferred stock to Berkshire Hathaway, Goldman Sachs's preferred stock dividend would increase to $35 mn in 3Q2008 to $160 mn in 4Q2008 with annual impact of $500 mn of preferred stock dividend negatively impacting Goldman Sachs earnings per share by nearly $1.07. Issuance of common equity of $5 bn would increase Goldman Sachs shares by nearly 40.7 mn resulting in a dilution impact of nearly 9.5% for its existing shareholders.

Impact on valuation

Owing to additional capital raised Goldman Sachs shareholders' equity at the end of 2009 is expected to... The balance of this analysis is for subscribers only. Subscribers may download the pdf version of this analysis update, with a full additional page of valuation metrics and my opinion of the current value of Goldman Sachs shares here - spreadsheet  Goldman Sachs - strategic investment and public offering (895.36 kB 2008-09-26 02:29:15)  

More Free Stuff

Since the Goldman Sachs issue is so timely, I have made the retail and professional/institutional research reports for Goldman Sachs available for free. See the pdf retail_gs_report_sample 108.08 Kb for an example of our retail summary analysis, and download pdf professional_gs_report_sample 350.12 Kb for an example of the full blown analysis for professional individuals/institutions. You may subscribe by clicking this link.