Monday, 19 October 2009 01:00

Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now!

In reviewing the last couple of quarter's results of Goldman Sachs operating results, I have come to the conclusion that Goldman is a Federally insured, publicly traded hedge fund!

Reggie Middleton on Goldman Sachs Preliminary 3Q09 results

Goldman Sachs generated net revenues of $12.4 bn in 3Q09 as compared to $6.0 bn in 3Q08 and $13.8 bn in 2Q09. The revenues grew primarily on back of strong performance in its trading and principal investment segment while traditional investment banking arm and asset management segment continued with its lacklustre performance.

The Company's core investment banking revenues declined to $899 mn in 3Q09 from $1,294 mn in 3Q08 and $1,072 mn in 2Q09 with both financial advisory and underwriting business delivering poor performances. Revenues from the financial advisory business declined 47% y-o-y and 12% q-o-q to $325 mn in 3Q09 owing to slow down in industry-wide M&A activities, while underwriting revenues declined 15% y-o-y and 46% q-o-q to $574 mn primarily due to lower debt underwriting volumes.

Revenues from Trading and Principal Investments were $10,027 mn in 3Q09, down 7% compared with $10,784 mn in 2Q09 but were up significantly over the corresponding quarter last year. Trading and Principal Investment revenues were principally buoyed by strong trading performance in its Fixed Income Currency and Commodity (FICC) segment which surged to $5,991 mn compared with $1,595 mn in 3Q08 on back of wide bid-ask spreads. Although bid-ask spreads compressed marginally in 3Q09 (which caused 12% q-o-q decline in FICC trading revenue) they remain wide by historical standards. As industry wide competition intensifies and bid-ask spread get restored to historical levels, revenues from FICC segment could witness some pressure going forward. As a note to all of those groupie types that believes Goldman walks on water, the monopolistic dearth of competition will only last for so long with a clear lack of barriers to entry. This bodes ill for a company whose only valid value driver is predicated upon a lack of competitors leaving wide operating margins.

Besides FICC, revenues from equities and principal investment also contributed to higher trading revenues with their respective share of $2,775 mn and $1,261 mn, respectively in 3Q09 compared with $1,562 mn and $(453) mn in 3Q08, respectively. As of September 30, 2008 revenues from Trading and Principal Investments contributed to 71.1% of Goldman Sachs net revenues compared with 15.2% for JP Morgan, 8.1% for Citi, 34.3% for Morgan Stanley and 16.3% for BAC. Further, the GS' average daily VaR, a measure of the market risk on its investment portfolio, was still higher at $208 mn at the end of 3Q09 as compared to $181 mn in 3Q08 - and this was with the no competition Federal ZIRP (zero interest rate policy) subsidy. Thus, as the free ride of historically cavernous bid/ask spreads continue to normalize, one should expect significantly more volatility of earnings in GS as compared to its competition.


The Asset Management segment reported a y-o-y 29.3% decline in revenues to $1.5 bn as total assets under management dropped to $848 bn versus $863 bn 3Q08 while yield on AUM declined to 0.11% in 3Q09 from 0.13% in 3Q08 due to decline in composition of high yielding assets (it appears as if there are some GS clients who are not eating the green shoots). GS' net interest income increased 48.9% y-o-y to $1.7 bn during 3Q09 as interest expense dropped 83% compared to 66% drop in interest income ~ most likely the result of extensive cost management and cutting, but not truly discernable until the SEC reporting documents are released.

In line with increase in net revenues, compensation expenses increased 84.5% to $5,351 m in 3Q09 compared with $2,901 mn in 3Q08. Resultantly, the ratio of compensation expenses-to-net revenues improved to 43.3% in 3Q09 from 48.0% in 3Q08. Non-compensation expenses increased 2% y-o-y to $2,227 mn from $2,182 mn in 3Q08 with ratio of non-compensation expenses to revenues improving substantially to 18.0% from 36.1% a year ago.


In aggregate, GS' net income available to common shareholders' increased to $3,028 bn, or $5.25 per share in 3Q09 versus $810 mn, or $1.81 per share in 3Q08 and $2.7 bn, or $4.93 per share in 2Q09. The bank's tangible book value per share increased to $92.7 in 3Q09 from $83.1 in 3Q08 while book value per share improved to $101.2 in 3Q09 versus $94.8 in 3Q08.

On July 22, 2009 GS repurchased 12.2 mn shares from US Treasury which was issued under US Treasury's TARP Capital Purchase Program for $1.1 bn which resulted in a reduction of shareholders' equity. Although GS' continues on its endeavour to de-lever its balance sheet the bank still has a long way to go before it could boast of a healthy one. As of 3Q09 the bank's tangible equity capital ratio stood at 6.1%, implying a leverage of 16.4x while its toxic level 3 assets stood at $50.0 bn, or 94% of its tangible equity.

Although GS' had beaten street expectations (which everyone at should recognized as the game that it is), the company's share price has significantly run ahead off its fundamentals. Since December 2008, the company's tangible book value per share has increased by a modest 3.2% while its share price has increased by a whopping 92.1% with its Price-to-Tangible Book value per share ratio currently standing at 1.77x compared with 1.45x in 2Q09 and 0.45x in 4Q08. Based on closing price as of October 18, 2009, GS' price-to-tangible book value per share is at 1.99x while average price-to-tangible book value per of its peers stood is 1.55x, implying a premium of 28% for the Goldman Sachs brand name. As I said, an expensic, federally insured, publicly traded hedge fund with a strong lobby arm and an even stronger brand management department.


Readers should take into consideration that this is the exact same argument that I posed a year and a half ago when I first shorted Goldman Sachs at $185! Where is it trading today? $186.43. This is after it had to be rescued by the government for fear of collapse!

Let's revisit history with an excerpt from Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
Saturday, 05 July 2008, it's deja vu all over again...


I rode Goldman down to the $100 to $75 band, but it eventually
bottomed somewhere around $50. Now it's right back where it started
from, pre-bailout. Does it deserve to be there??? Inquiring minds want
to know...

The Legacy Goldman Sachs direction neutral strategy empirical analysis is still available to Pro subscribers. Click Goldman Sachs Option Strategy Analysis Goldman Sachs Option Strategy Pro Analysis 2009-08-05 09:52:44 1.02 Mb to access or proceed to the downloads section. I will be providing a refresh of this analysis the third week in October.

Below is a complete listing of the fundamental research that we are using to compile the direction neutral strategy analysis for the tickers listed above. Some of it is free for non-subscribers. I would recommend that pro subscribers reread the documents to brush up on my take on the companies listed herein.



Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb - 17 pages

Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages

Free research and opinion

§ As Reality hits, the Masters of the Universe are starting to look like regular bank employees

Reggie Middleton's Goldman Sach's Stress Test: Breaking Ranks with the Crowd Once Again!

Who is the Newest Riskiest Bank on the Street?

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Goldman Sachs Report June 21, 2008 Goldman Sachs Report June 21, 2008 2008-10-20 16:48:01 361.18 Kb

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Goldman Sachs - strategic investment and public offering Goldman Sachs - Buffet's strategic investment and public offering 2008-09-26 02:29:15 895.36 Kb

Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional 2008-12-18 10:12:37 267.49 Kb

Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Retail Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Retail 2008-10-20 15:45:05 348.99 Kb

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Last modified on Monday, 19 October 2009 01:00


  • Comment Link paperon Wednesday, 21 October 2009 10:10 posted by paperon

    always been fond of volker !

    LOTS more than rubin,summers,geithner,paulson etc.

    keep it simple: STUPID !

    analysis of free markets and the "optimal " allocation of resources presupposes that no market participant is so large as to be able to affect the total outcome by itself.

    from the ny times:

  • Comment Link Ned Monday, 19 October 2009 19:12 posted by Ned

    Projected Foreclosures

    A few weeks ago, the Center for Responsible Lending testified before the Joint Economic Committee of the U.S. Congress regarding prevailing conditions in the housing market. The CRL is a non-partisan organization focused on consumer protection. Among their main objectives is the establishment of a Consumer Financial Protection Agency to prevent abusive and deceptive lending practices.

    Among these practices in recent years was a form of mortgage broker compensation called a “yield spread premium.” The YSP was an extra payment that brokers received for delivering a mortgage with a higher interest rate than one for which the borrower would usually qualify. The mortgages were then packaged up and securitized to satisfy the demand of yield-hungry lenders. The yield spread premiums typically encouraged brokers to offer “no doc” loans even when borrowers could verify their income, but also generally require the mortgage to have a prepayment penalty. A lot of these non-standard mortgages (Alt-A, Option-ARM) were written during the late stages of the housing bubble. These are precisely the mortgages that are beginning to reset, and will continue to be reset into 2012. And there is a mountain of them.

    Several facts are worth noting. In September 2007, about a month before the stock market peaked and well before credit strains were obvious, the CRL testified to Congress about the wave of coming subprime foreclosures, encouraging Congress to act before the crisis escalated. “As it turned out,” the CRL noted in its latest testimony, “our predictions – dismissed by some as pessimistic – actually underestimated the dimensions of the crisis.”

    This is important, because here is what the CRL is saying now. First, over 1.5 million homes have already been lost to foreclosure in the sub-prime category, and another 2 million subprime mortgages are currently delinquent.

    But even this figure pales in relation to their data on projected foreclosures of all types. For 2009, total foreclosures are estimated to be 2.4 million. But coupling state-by-state delinquency rates and foreclosure starts (as reported by the Mortgage Bankers Association) with other data, the CRL projects that for most states, foreclosure totals will more than triple over the coming 4 years, for a total of 8.1 million foreclosures, with only about one in ten of these being saved thanks to court-supervised modifications. These figures are consistent with the reset data I've repeatedly presented - it appears to be wishful thinking to believe that the credit crisis is over. Most likely, what we've witnessed in recent months is little more than the combination of a lull in the reset schedule coupled with a wholly unsustainable burst of deficit spending amounting to over 7% of GDP.

    My impression of the U.S. banking system is that it is quietly going insolvent, in a manner that will become evident only when the slack for “significant judgment” (provided by the FASB earlier this year when it altered mark-to-market rules) is taken up so tightly that the rope snaps. Presently, this slack has allowed banks some time, but the question is, time for what? The rules encourage banks to neither modify loans nor foreclose, both which would trigger a restatement of value on the mortgage asset. Meanwhile, banks are reluctant to allow “short sales” in lieu of foreclosure (where a homeowner sells a home to avoid foreclosure, but at a price less than the residual loan value, so the bank has to essentially eat the loss). This again defers the restatement of asset values for a while, but makes business sense only if home prices are expected to recover faster than the foregone interest that could be earned on new loans.

    So if you talk to people who oversee these assets, including people who work with the FDIC, you'll hear that there is an inventory of unrecognized losses being built up, in hopes that the underlying mortgages will turn around without the need for loss reporting. In view of the CRL foreclosure projections, all we can think is – fat chance.

    The FDIC itself is already essentially broke, and is looking at options like taking premium prepayments to try and shore up its own books. Last week, an FDIC spokesman offered the interesting assurance that “our ability to raise premiums essentially means that the capital of the entire banking industry -- that's $1.3 trillion -- is available for support.”

    So the banking system, which is most likely quietly undergoing its own erosion of capital, can expect to see its capital tapped by the FDIC to pay for, well, the erosion of capital in the banking system. Still, don't blame the FDIC. Our policy makers bailed out bank bondholders instead of focusing on debt restructuring. The bad assets are still in the banking system, millions of families will still lose their homes, the Treasury and Fed have jointly issued trillions in new government obligations, but the bondholders of Bear Stearns will still get 100% of their principal and interest.

    Despite the current enthusiasm of Wall Street, this story has probably not ended, and the evidence suggests it will end badly.

  • Comment Link Reggie Middleton Monday, 19 October 2009 16:40 posted by Reggie Middleton

    Enough Goldman hate mail to occupy your evening. I don't even dislike Goldman, but I am perturbed that their cloak and dagger moves are so effective at moving markets, politicos and share prices: [url][/url]

  • Comment Link shaunsnoll Monday, 19 October 2009 15:36 posted by shaunsnoll

    just going through the GE call and they said there are still over 5k locomotives in north america just parked....

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