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.
For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, Wednesday, 24 February 2010 -Those CDO buyers shoudl really heed this article. Not only did the GSAMP investors lose over 80%, but the real estate investors lost 98% (see Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!).
First a little background info. Goldman is supremely overvalued in my opinion. It is even more so considering much of its profit is generated solely from the raping of its clients. I say this holding absolutely no ill will towards Goldman. This is strictly factual. Let’s walk through the evidence, of profit potential, valuation, and the stuff behind some of the value drivers in their business model, like brokerage and investment banking…
But wait! There’s more, and it get’s quite interesting…
Reference “Blog vs. Broker, whom do you trust!” and you will be able to track the performance of all of the big banks and broker recommendations for much of the year 2008 for the companies that I covered on my blog. Since the concept of sell is rather remote to any big broker whose trading desk is not net short a particular position, it would be safe to assume that if the market turns the broker’s recommendations will also turn in a similarly abysmal year as well. Just to be clear, this is not about ability, or who is the smartest. It is about marketing and conflicts of interest. Brokers do not charge for their research. Thus it should be obvious to anyone with even the slightest modicum of business savvy that the sunk costs that is freely disseminated research is most likely a loss leader (with the losses being born by the consumers of said research) otherwise known as the marketing arm for underwriting, sales and trading.
The blind following of Wall Streetresearch, and the abject worshipping of Goldman , research allows them to rake billions of dollars off of their clients backs, yet clients still come back for more pain. A fascinating, Pavlov’s dog’s/Stockholm Syndrome style phenomena. Have you, as a Goldman client, performed as well as their employees receiving $19 billion in bonuses? Don’t get me wrong. I’m not hating Goldman, but now they are actually raking billions of dollars off of the tax payers backs as well. I do not do business with them, hence I do not want get my back raked – but it appears that as a US taxpayer I have no choice. A company that nearly collapsed a year ago, receives mysteriously generous government assistance (AIG full payout during its near collapse as an insolvent company) with the help of highly ranked government officials (many of which are ex-Goldman employees) and then pays out record bonuses on top of so many tens of billions of dollars of taxpayer aid with taxpayers facing high unemployment and sparse credit is not necessarily a company that should be looked upon as a scion of Wall Street. There is no operational excellence here. The only reason such an aura exists is because main street and Wall Street clients have an amazingly short memory, as I will demonstrate in the paragraphs below. This goes for the big Wall Street banks in general, and Goldman in particular.
As stated above, Goldman is now underwriting CMBS under a broad“buy” recommendation in the CRE REIT space. Let’s take a look at another big , marketing push they made into MBS a few years ago…
In April of 2006, a Goldman Sachs forced “Goldman Sachs Alternative Mortgage Products”, an entity that pushed residential mortgage backed securities to its clients through GSAMP Trust 2006-S3 in a similar fashion to the sales and marketing of the CRE CMBS that is being pushed to its clients as described in the links above. The residential real estate market faced very dire fundamental and macro headwinds back then, just as the commercial real estate market does now. I don’t think that is the end of the similarities, either.
Less then a year and a half after this particular issue was floated, a sixth of the borrowers defaulted on the loans behind this product, according to CNN/Fortune, where the graphic to the right was sourced from. Here’s an excerpt from the article of October 2007 (less than a year after the issue was sold to Goldman clients, clients who probably didn’t know that Goldman was short RMBS even as Goldman peddled this bonus bulging trash to them):
The Goldman short from early 2008 continues to print money, challenging B. Bernanke and his steroidal presses for the dollar volume efficiency prize of the year:
- 2008: Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street (trading from $180 to over $200).
- 2009: Get Your Federally Insured Hedge Fund Here
- 2010: No One Can Say I Didn’t Warn Them About Goldman Sachs, Several Times…, and Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look
Although the GS positions weren't as profitable in '09 and this year (at least not yet, we still may have some room to run) as in '08, I am continually proud of this research and trading. The reason? It was one of the most contrarian of contrarian moves and proves once again that math, truly forensic research and an objective perspective will continuously best the crowd following, "Goldman is too connected" huffing, "This is the best company on the Street" touting, Buffet position worshiping, momo chasing, "I just do what everybody else in the industry does" crowd. This should show BoomBustBlog skeptics that sometimes it takes more than brand name marketing and political connections to maintain an unjust premium in a risky business. If anyone ever bothered to actually take a close look, they would have found that, adjusted for risk, Goldman barely covers its cost of capital (see A Realistic View of Goldman Sachs and Thier Lastest Quarterly Results). How can such a thing slip past so many people for so long? Because most were blinded by the brand...
Hey, I and my fellow BoomBustBloggers saw it...
So, How Many Banks and Analysts Were Bearish On Goldman Before Today? and Is the Threat to the Banks Over? Implied Volatility Says So. Some may ask why I’m being so generous in regards to the extent of this quarter’s earning review. Well… A European institutional subscriber recently stated he was able to get the same content found in my offerings from his investment bank research. Whaaatt!!! I told him that he probably wasn’t reading the subscriber content. He wrote back stating that that wasn’t the case. He also said that he doesn’t see any fundamental analysis in the work. I nearly fell out of my chair. Hmmmm. Well, on the day that Goldman executives are due to testify before the Senate, let’s review the opinions of the ONLY entity that I know of that had a bearish perspective (rightfully and profitably so – twice and counting) on Goldman Sachs. If I am not mistaken, nearly every bank and analyst (save Meredith Whitney, you know I love you ) had a strong buy or hold on this company both back in 2008 and last month. So much for relying on that name brand investment bank research. For any others who may hold the sell side propaganda machine in such high regard (or is it me in such low regard), might I recommend the following two posts before we move on: For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and “Blog vs. Broker, whom do you trust!”.
Map those base Jumping, spilunking, sky diving drops in Goldman's share price with the research linked below. This company is very, very risky and the risks are there for all to see. All you have to do is look for them!!!
Those who have not seen these Matt Taibbi videos may find them worthwhile:
Subscribers can reference our valuation of Goldman via this link: GS 4Q09 Final Review and Updated Valuation 2010-02-01 03:04:55 528.52 Kb
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