Monday, 01 February 2010 18:00

Readers Comments on Goldman's Valuation

A knowledgeable reader, who is currently a sell side analyst, questioned me about using book value to value Goldman and investment banks in general. He proposed using a formula that entails revenues as well due to the fact that the main concern during the crisis was breakup value while revenue visibility is clearer now that the crisis is over.

Without going into the merits of his valuation suggestion (I am allowing him to make  a more compete argument with me), this suggestion does bring up several pertinent points. For one, while the crisis may be over, the root causes of the crisis have went nowhere, and the counterparty risk concentration is actually much worse than before. In addition, not only is it political suicide to attempt to bailout another bank, I think it is poor economic policy as well. Combining these two assertions, it is not clear that we will not see anymore bank failures. The probability of such has dropped considerably though.