I have warned my readers about following myths and legends versus reality and facts several times in the past, particularly as it applies to Goldman Sachs and what I have coined "Name Brand Investing". Very recent developments from Senator Kaufman of Delaware will be putting the spit-shined patina of Wall Street's most powerful bank to the test. Here is a link to the speech that the esteemed Senator from Delaware (yes, the most corporate friendly state in this country). A few excerpts to liven up your morning...

Mr. President, last Thursday, the bankruptcy examiner for Lehman Brothers Holdings Inc. released a 2,200 page report about the demise of the firm which included riveting detail on the firm’s accounting practices.  That report has put in sharp relief what many of us have expected all along:  that fraud and potential criminal conduct were at the heart of the financial crisis.

...  Only further investigation will determine whether the individuals involved can be indicted and convicted of criminal wrongdoing.

I have warned my readers about following myths and legends versus reality and facts several times in the past, particularly as it applies to Goldman Sachs and what I have coined "Name Brand Investing". Very recent developments from Senator Kaufman of Delaware will be putting the spit-shined patina of Wall Street's most powerful bank to the test. Here is a link to the speech that the esteemed Senator from Delaware (yes, the most corporate friendly state in this country). A few excerpts to liven up your morning...

Mr. President, last Thursday, the bankruptcy examiner for Lehman Brothers Holdings Inc. released a 2,200 page report about the demise of the firm which included riveting detail on the firm’s accounting practices.  That report has put in sharp relief what many of us have expected all along:  that fraud and potential criminal conduct were at the heart of the financial crisis.

...  Only further investigation will determine whether the individuals involved can be indicted and convicted of criminal wrongdoing.

Subscribers should take not of the valuation adjustments for both JPM and WFC. Please note the wealth of qualitative information in the quartely reviews and the public blog posts to aid in putting the empirical modeling of the valuations in perspective. JPM 1Q 2010 Valuation Review JPM 1Q 2010 Valuation Review 2010-02-03 05:49:48 156.43 Kb
Tuesday, 02 February 2010 18:00

Continuing the Goldman Sachs Valuation Debate

As mentioned in my previous posts, I have been engaged in a discussion of the valuation of Goldman Sachs and investment banks in general. For the background behind this discussion, reference "Reggie Middleton vs Goldman Sachs, Round 2" and "Readers Comments on Goldman's Valuation".

Here is how it has played out.

ANALYST: Do you think GS or any other bank that is seen as a going concern should be valued at PB anymore, particularly now that the recession is over. I don't think markets are valuing banks seen as going concern on P/B (particularly xx/subs content used for GS).

Let's say it this way. I know the merits of PB but shouldn't it be used to value banks during recessions. Post recession, historically as well, analysts and markets switched to alternative valuation method for banks since PB would give us a base value during recession, and is good proxy during liquidation process that would determine shareholders' value in case bank has to wind up

Assuming GS has ROE of 15%. What about future cash generation now that we have revenue visibility? Or probably you don't expect GS to survive for next 5 yrs. Ok let's say this way, If you value GS with PB of xx with ROE of 15% two years down the line you would expect the book value to increase by 32% (assuming 0% payout ratio) and in five years more than double. Given that I-banks have high ROE this would be conformist, and not "realistic" as some argue, to value an I-bank.

Ideally banks (both commercial and investment banks) should be valued on discounted cash flow methodology taking into consideration cost of equity and future cash flows. But since banks have highly liquid balance sheet, traditional DCF used for industrials might ignore the merit in current balance sheet strength. So there is a need to maintain a trade-off that considers both the virtues - balance sheet strength and future accretion.

Subscribers should take not of the valuation adjustments for both JPM and WFC. Please note the wealth of qualitative information in the quartely reviews and the public blog posts to aid in putting the empirical modeling of the valuations in perspective. JPM 1Q 2010 Valuation Review JPM 1Q 2010 Valuation Review 2010-02-03 05:49:48 156.43 Kb
Tuesday, 02 February 2010 18:00

Continuing the Goldman Sachs Valuation Debate

As mentioned in my previous posts, I have been engaged in a discussion of the valuation of Goldman Sachs and investment banks in general. For the background behind this discussion, reference "Reggie Middleton vs Goldman Sachs, Round 2" and "Readers Comments on Goldman's Valuation".

Here is how it has played out.

ANALYST: Do you think GS or any other bank that is seen as a going concern should be valued at PB anymore, particularly now that the recession is over. I don't think markets are valuing banks seen as going concern on P/B (particularly xx/subs content used for GS).

Let's say it this way. I know the merits of PB but shouldn't it be used to value banks during recessions. Post recession, historically as well, analysts and markets switched to alternative valuation method for banks since PB would give us a base value during recession, and is good proxy during liquidation process that would determine shareholders' value in case bank has to wind up

Assuming GS has ROE of 15%. What about future cash generation now that we have revenue visibility? Or probably you don't expect GS to survive for next 5 yrs. Ok let's say this way, If you value GS with PB of xx with ROE of 15% two years down the line you would expect the book value to increase by 32% (assuming 0% payout ratio) and in five years more than double. Given that I-banks have high ROE this would be conformist, and not "realistic" as some argue, to value an I-bank.

Ideally banks (both commercial and investment banks) should be valued on discounted cash flow methodology taking into consideration cost of equity and future cash flows. But since banks have highly liquid balance sheet, traditional DCF used for industrials might ignore the merit in current balance sheet strength. So there is a need to maintain a trade-off that considers both the virtues - balance sheet strength and future accretion.

Saturday, 30 January 2010 18:00

Reggie Middleton vs Goldman Sachs, Round 2

Before I get started, I want all to realize that this is not Goldman bashing piece. I think it is a [relatively] well run company, but its PR machine appears to be from Kindergarten land, and the aura of invincibility that it enjoys(ed?) is highly undeserved, as a consequence its historical "aura-based" premium is absolutely unjustified. Case in point...

On December 8th of last year, I penned "Reggie Middleton vs Goldman Sachs, Round 1" wherein I challenged all to take a critical look at exactly how much money was lost by Goldman Sachs' clients. Well, here comes round 2, which is directed at Goldman (over)valuation.

 Three months ago I explicitly warned my readers and subscribers about how outrageously priced Goldman Sachs was: Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now! Monday, 19 October 2009.. Goldman was closed at $186.10 that day.

Saturday, 30 January 2010 18:00

Reggie Middleton vs Goldman Sachs, Round 2

Before I get started, I want all to realize that this is not Goldman bashing piece. I think it is a [relatively] well run company, but its PR machine appears to be from Kindergarten land, and the aura of invincibility that it enjoys(ed?) is highly undeserved, as a consequence its historical "aura-based" premium is absolutely unjustified. Case in point...

On December 8th of last year, I penned "Reggie Middleton vs Goldman Sachs, Round 1" wherein I challenged all to take a critical look at exactly how much money was lost by Goldman Sachs' clients. Well, here comes round 2, which is directed at Goldman (over)valuation.

 Three months ago I explicitly warned my readers and subscribers about how outrageously priced Goldman Sachs was: Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now! Monday, 19 October 2009.. Goldman was closed at $186.10 that day.

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