|
As in Morgan Stanley (The Riskiest Bank on the Street and Reggie Middleton on the Street's Riskiest Bank - Update), Lehman Brothers (Is Lehman a Lying Lemming?), and Bear Stearns (Bear Fight - A most bearish 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 Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis). They have carried a very high, and in my
opinion, unjustified valuation premium at a time when their business
cycle has passed its nadir and the macro environment is crumbling
around them as they carry a boatload of bad assets.
In 3Q2008
Goldman Sachs net revenues declined 51% to $6,043 mn compared with
$12,334 mn in 3Q2007 as all the segments witnessed steep decline in
their revenues.
Investment banking revenues declined 40%
y-o-y to $1,294 mn from $2,145 mn in 3Q2007. Trading and principal
investments revenues and asset management segment revenues declined 68%
and 8% y-o-y to $2,440 mn and $1,174 mn, respectively in 3Q2008.
Interest income and interest expense reported a decline of 32% and 34%,
respectively to $8,717 mn and $7,562 mn, respectively.
In
line with drop in revenues, compensation expenses declined 51% to
$2,901 mn. As a result the ratio of compensation expenses-to-net revenues
stood flat at 48% in 3Q2008. Non-compensation expenses increased
marginally by 1% to $2,182 mn off higher deprecation and amortization
expenses with ratio of non-compensation expenses-to-net revenues
increasing steeply to 36.1% from 17.5% in 3Q2007 (excpect to see painful cost cutting). Goldman Sachs pre-tax
earnings declined 53% to $5,935 mn form $12,549 mn in 3Q2007.
Overall
Goldman Sachs net income available to common shareholders' declined 47%
to $4,328 mn (or $9.62 per share) from $8,241 mn (or $17.75 per share)
in 3Q2007.
Due to increased volatility Goldman Sachs average
daily VaR increased 30% to $181 mn over previous year.
I saw this coming last quarter, and it is a strong chance that it will
blow up in thier face. Reference my post about their previous quarter
concerning risk adjusted performance. As it turns out, it was rather
prescient:
Risk vs. Reward is what the successful investor looks at when
gauging an oppurtunity. The Street and the media are just looking at
reward in regards to Goldman Sachs!
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
|
|
- 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
|
|
