Goldman Sachs: Back in the Crosshairs

What is going on over at Goldman Sachs (GS), whose shares are down 10% or so today at $70 apiece? John Carney says that the market fears Goldman might be lining up yet another secondary equity offering -- after raising $10 billion in September.

That would explain the share price falling on a day when the news of AIG's second bailout would seem to be supportive for Goldman -- after all, Goldman is by all accounts AIG's biggest CDS counterparty, which means it's probably holding a good number of those CDOs which AIG wants to buy at an inflated 50 cents on the dollar. On the other hand, maybe the markets are worried that Goldman will have much less money to play with if it loses all the collateral that it's forced AIG to put up.

More generally, it seems to me that Goldman is pretty much impossible to value. The bulk of its earnings have historically come from proprietary trading operations, and it's not clear how much latitude Goldman will have to continue on that road now that it's a bank operating under the aegis of New York State regulators. Meanwhile, its investment-banking deal pipeline has got to be looking pretty barren these days.

A quarterly loss when Goldman reports its fourth-quarter earnings might at this point be priced in to the stock, and it's astonishing how little time it's taken to reach the point at which Evan Newmark can say that Goldman trading below book value is "unsurprising". (It was trading at $169 in early September; its book value is about $100.)

I'm actually more constructive about Morgan Stanley (MS) than I am about Goldman Sachs right now. Yes, Morgan Stanley has a higher probability of being wiped out entirely -- but Treasury has made it clear it won't let that happen. But it's also easier to see Morgan Stanley functioning as a bank than it is to see Goldman changing its spots. Both of them are going to have to shrink dramatically, but I get the feeling that John Mack, who has looked into the abyss and survived to tell the tale, is more likely to embrace that destiny than anybody at Goldman Sachs, which for most of this crisis looked as though it was escaping largely unscathed. Given that Morgan Stanley is trading at a market capitalization of just $15 billion, compared to Goldman's $27 billion, it might be the better buy of the two.

Comments

[Big Al45:]

Maybe its just anxiety about what will happen to GS when Paulson leaves Treasury in 70 days. His replacement may not have their back like Hammerin Hank did.

Bet they're trying real hard to place Goldman alumni in Obama's Treasury.

2008 Nov 10 03:44 PM

[BottomFellOut:]

Why is MS safer?

Can the Fed save it - it is not a bank - a bank has to buy it to be saved.

Further, it is prime broker to many large hedge funds - would be a run on the Prime brokerage like we havent seen given Lehman turned many funds into unsecured creditors.

2008 Nov 10 03:53 PM

[jepittman:]

IMO there is nothing in these two that is remotely appealing. How they make money has always been an enigma to me. Wall street is a pool full of sharks and I care nothing about swimming with them. There are plenty of great highly understandable businesses with honest shareholder friendly managements out there.

2008 Nov 10 04:25 PM

[texalope:]

Your conclusions are a calculated guess which I would define as a bet. There is no logic to call this an investment.
As a betting man I see the logic.

2008 Nov 10 04:49 PM

[NOWHEREMAN:]

Goldman will be comparing current earnings against exceptionally good ones.

What I wil be looking for will be what sort of writeoffs will be seen in their previously hidden Level 3 assets.

Considering what others have reported, it could be really horrendous. IMHO

2008 Nov 10 05:21 PM

[NOWHEREMAN:]

Buffet is certainly hoping he will do better with GS than he did with GE. I certainly had hoped for better than a 77% drop in net income from him.

2008 Nov 10 05:26 PM

[smooth roger:]

I guess Buffett is no longer I an investment guru I should follow. I am contemplating selling my shares that I bought after he did. This whole thing starts to look like a scam to me, sorry...

2008 Nov 10 08:10 PM

[Alex Filonov:]

MS and GS both are banks now. They became banks after Lehman collapse, that was the only way for both to get liquidity at the time.

2008 Nov 10 08:25 PM

[long term:]

i suspect they will find a way to make money as a bank. even without the extensive leverage, years ago they found a way to make high teens to mid 20's% ROE. with $100 of book, maybe $97 or $98 after this quarter, take the Returns way down, they should be able to earn 10-15% ROE. Maybe not right now, but life will stabilize. so with $10 to $15 of earnings, a much less opague business model, what is that stream worth? 10x, 12x? thats much higher than where we are. whatever the multiple the stock is probably suffering excessive panic. buffet would not have made this investment without understanding the exposure in their holdings. writedowns of sound companies that are long term holdings in the Principal investment holdings are related to the declines in market prices, which are different from assets that are toxic and will never recover their value.

2008 Nov 10 09:03 PM

[investor88:]

Good article analyzing the merits and de-merits of GS and MS. Doesn't seem like good investments right now, at least for momentum investors.

2008 Nov 10 09:57 PM

[NOWHEREMAN:]

MS and GS became banks after the Quarter ended and only after the Bailout Bill was passed. LEH died almost an eternity ago. At least, thats the way it seems to me, too much input in too short of a timeframe leads to system malfunctions. The News is coming fast and furious.

2008 Nov 10 11:20 PM

[dr.doolittle:]

i agree with those here who say "investing" in these companies is more political than anything else. My God, all of Wall Street has been obliterated and it will never return. Ruthless people--they got what they deserved, still it is rather breathtaking. I'd be looking at actual banks to see if they are going to survive (BofA is on my doom list) before I would even consider "investing" in any either GS or MS... what are they now? Banks? And are those...Democrats? Coming to the rescue?

2008 Nov 11 12:52 PM

[jimmy46:]

""it seems to me that Goldman is pretty much impossible to value. ""

NO KIDDING!

GS is run mainly to provide insane pay & bonuses to its employees,

what's left for the investor????????

2008 Nov 11 02:03 PM