Goldman Sachs Is Toast

According to a recent WSJ article, Goldman Sachs (GS) received $6 billion in American Insurance Group (AIG) bailout money last quarter. This news confirmed what many had suspected—the rescue from systemic risk justification for the AIG hedge fund bailout was really just simply an AIG counterparty bailout.

This makes Goldman appear a lot weaker than previously perceived. So much for being a frontrunner to be among the first financials to repay TARP loans. Goldman is still overleveraged at 23x tangible equity. Its inherent dire straits are being misrepresented by shady transactions to surreptitiously boost its capital.

One of the reasons Goldman has refused to sell off like other financials is because talking heads on TV repeatedly refer to its “book value” of being $85/share. They said the same thing about Bear Stearns before its collapse to $2/share.

I see massive selling in Goldman to begin soon, as well as a potential credit rating cut. Technically, Goldman is in a rising channel, like a long-term bear flag, and a breakdown at its channel support line should lead to drastically lower prices. It broke its 50DMA on Friday on strong volume, suggesting the selling is approaching quickly. I expect it to really pick up later this week and for Goldman to be trading in the $50 range by the end of the month.

Disclosure: Short GS shares, long GS puts.

Comments

[MMMPARSLEY1:]

I'll take the opposite side of that bet anyday.

Goldman has $122 billion in cash, which I believe is still considered a tangible asset. Are you sure that they are 23x overleveraged?

It appears to me they have significantly more room for error than either Bank of America (BAC) or Citigroup (C). I'd imagine some financial companies are going to remain standing when this is all said and done, and I see few mega-institutions left standing as cash rich as Goldman.

I'm more of a micro-cap hunter than a institutional bank analyzer, so correct me where I'm wrong. Perhaps my arguments are too simple.

Dave

Mar 10 05:53 AM

[nycjgalt:]

Seeking Alpha has to be one of the most unresponsible site on the financial area -- they will publish from just about anyone -- even children:

Naufal Sanaullah is an 19-year-old sophomore at the University of Michigan and co-founder of The Gotham Fund, a nonprofit charity fund whose returns benefit research and treatment for leukemia patients. He is also in the early stages of development of Dorm Room Derivatives, a stock selection blog and newsletter service with daily updates and a customized stock report service. Sanaullah is a well-respected trader, who combines price and volume patterns with a CANSLIM-based and global macro approach to fundamentals to trade stocks, options, futures, and currencies for personal and family accounts, grossing a six figure income while at college in his first year of trading.

Mar 10 07:38 AM

[logicalsinger:]

$122 billion in cash??? Really? Are you confusing their own cash and cash held for other parties? And what are the liabilities on the other side of these cash assets?


On Mar 10 05:53 AM [e-mail] wrote:

> I'll take the opposite side of that bet anyday.
>
> Goldman has $122 billion in cash, which I believe is still considered
> a tangible asset. Are you sure that they are 23x overleveraged?<br/&...
>
> It appears to me they have significantly more room for error than
> either Bank of America (seekingalpha.com/symbo...) or Citigroup
> (seekingalpha.com/symbo...). I'd imagine some financial companies
> are going to remain standing when this is all said and done, and
> I see few mega-institutions left standing as cash rich as Goldman.
>
>
> I'm more of a micro-cap hunter than a institutional bank analyzer,
> so correct me where I'm wrong. Perhaps my arguments are too simple.
>
>
> Dave

Mar 10 08:13 AM

[norom:]

Well, I guess anyone who didn't loose money on bank stocks over the last 2 years were right, anyone who lost money on bank stocks over the last 2 years were wrong. Goldman is a bank, of sorts, and had to be bailed out by warren buffet himself.

Mar 10 10:22 AM

[PainfullyAware:]

If they shut down GS, where is the "Plunge Protection Team" going to go to "Game The Markets"?

GS will likely "Limp" to the end of this calamity.

Mar 10 03:02 PM

[esterhazy:]

Goldman has something more important than assets: political cache.
Funneling money into Goldman either by Paulson or by its current proteges in the White House is not a sign of weakness.

Mar 10 03:04 PM

[Rohan C. Pease:]

The $122 billion in cash is called Global Core Excess liquidity, and is used to provide funding for obligations due within one year. In other words they have the liquidity to sustain the harsh economic recession. Also Tier 1 Ratio is 15.6%, which is well over the 10% benchmark, and Level 3 assets comprise a measly 7.5% of assets. Lehman had over 1/3 of assets in Level 3, or 2x equity before collapse. GS has a 1:1 amount of Level 3 assets to equity. They are well capitalized.

Mar 10 03:29 PM

[Gedankonomist:]

Keep in mind that $122 billion may only buy you a loaf of bread a few years from now.

Oh, but that can't happen here huh!!!!


On Mar 10 05:53 AM [e-mail] wrote:

> I'll take the opposite side of that bet anyday.
>
> Goldman has $122 billion in cash, which I believe is still considered
> a tangible asset.

Mar 10 04:12 PM

[MMMPARSLEY1:]

Rohan,

Thanks for the further clarification on the $122,000,000.00 dollar cash holdings.

If what you are saying is true, this 19 year old blogger from Michigan will be quite wrong as time unfolds.

Dave

Mar 10 06:52 PM

[momomiester:]

No offense but unless you have some time under you belt newbee, I would'nt be pushing it too much on the short end down here. Goldman is Goldman. They are like Jason from Friday the 13th. Just when you think he is dead he pops up and lops off your short little head. Plus market is blasted down and we can get a bear rally before this stuff rolls over again. Remember when you have the Jon Stewart show blasting CNBC and the evil stock market, that smack of a short-term bottom.

Mar 10 08:59 PM

[tom shane:]

I love articles like these, written by unprofessional "pop" analysts who are complete outsiders to this insider business. THEY CREATES MASSIVE TRADING OPPORTUNITIES!
Yes, Goldman lucked out on this one. Do you know how puny is 6bil among the trillion of dollars of AIG counterparty payables - including all the policy holders? You cannot selectively default.

Mar 10 09:43 PM

[MMMPARSLEY1:]

Check out this guy's blog. There is a link provided under his photo at the top left of the page, www.dormroomderivative.../.

Are people paying him to be a professional negative indicator? No offense, brother, but your skill in markets, if applied to chess, would leave you open for a 4 move checkmate.

Mar 10 11:50 PM

[Rohan C. Pease:]

Naufal, how is it a bad thing that top tier banks received TARP funds indirectly through derivative trades with AIG. Last time I checked thats how derivatives work, "IT's a ZERO SUM game" or didn't they teach you that at the University of Michigan. AIG is able to unwind trades and sell off assets over time thanks to the government, rather then a fire sale like Lehman. AIG will eventually be broken up completly, in the mean time AIG will be paying out big sums to healthy banks such as JP Morgan and Goldman Sachs due to poorly executed internal trades. Only difference is, the money is comming from Tax payers, this upsets me too, however the cost of allowing AIG to default on counterparty trades would bring systematic risk to the banking industry. JPM and GS over time will benefit and gain market share from banks that fail. Honestly how are you going to short the pillars of banking, my friend you will be crushed in the weeks to come.

Mar 11 03:05 PM

[Rohan C. Pease:]

Small fact - since this article was written, 60% of short interest in Goldman Sachs has been covered. GS share price is up 18%.

Mar 11 03:09 PM

[norom:]

Gawd I hate banks I prefer widgets.

Mar 12 01:59 PM

[Market Spec...:]

Timing may be an issue for Naufal here...but GS put in a key reversal day today. Not enough volume, but how many times have we heard these guys are well capitalized and they've gone down further.

Would I buy GS, heck no. Would I be short, maybe a tad, but I wouldn't be mortgaging my house for the bet.

Mar 16 04:57 PM

[Rohan C. Pease:]

Naufal, are you feeling the pain yet brother. While you were short GS, I got long BAC and E-Trade, both of which delivered 50%+ gains since March 10th. GS since 3/10 has seen alot of short covering (if you were smart you would have participated in this) and has gained 22% in value. Please reply, I know you must check back on articles periodically and I want to know how it feels to get smacked upside the head. Ohh yah, if your still going to tough it out looking for a fall, remember that short selling means that you have unlimited downside exposure to losses and only limited upside, not what I call a great risk-reward relationship.

Mar 18 03:39 PM

[Rohan C. Pease:]

GS going after that 200 day MA @ 119.75, its only $10 off the mark!!! Anyone still short this banking titan?

Mar 23 01:38 PM

[Market Spec...:]

Looks like GS got denied at its 200dma...but I'd rather be in stocks like SOLR (already long) LFT (already long) that can run much greater than 50%.

The banks can't make money their model is broken, best go with stocks that have the potential to hit earnings out of the park!

Not too mention with all the excess cash the Federal Reserve is pumping into the market it will most likely find its way into the stock market giving it an artificial lift! Please google Zimbabwe and find out what happens when you print a MASSIVE amount of a fiat currency and see how it's stock market performs.

Mar 29 01:35 PM

[Rohan C. Pease:]

If you think that are Federal Reserve parrallels their regieme of Robert Mugabe, my friend you have alot of studying to do. I don't need to Google this, I am well aware of World Events and how this unfolded last year. Political unstability is the root of evil for capitalism. Need a HISTORY lesson (that is relevant) look at the Russian Micex after the invasion of Georgia and the following months.

Mar 30 11:47 AM

[Rohan C. Pease:]

whoops "OUR" Fed Reserve and "the regime"

Mar 30 11:49 AM

[Rohan C. Pease:]

As we get set to end the month, I want to point out that GS is in fact not in the $50's range, and although it has missed its 200 MA, GS is up 26% from when this article was written. I think that GS not hitting the 200 MA is a sign to sell here; the stock could go higher on a possible catalyst on April 2nd, when the Government will decide weather to lax the accounting standards surrounding Mark to Market, and may even temporarily suspend them. The pause in Goldman's accent is probably pausing for this event. I don't intend to hold this position to see how it unfolds. I recommend closing out long positions in Goldman Sachs between $102 - $108. Another one bites the dust!

Mar 30 03:12 PM

[Rohan C. Pease:]

Long term investors, Goldman should never trade below 0.85 of book value, if it does back up the truck, because when it does, the following 3 week return has averaged 28% in the three instances in 2008. And one in 2009. Boo-yaHH.

Mar 30 03:13 PM

[Rohan C. Pease:]

Ohh yah I work for a Power company and got long FSLR at $55 in 2007. That is a much better solar stock then SOLR. Also may I add that while those have POTENTIAL to run higher than 50%, I have already executed 50%+ gain trades. Big DIFFERENCE.

Mar 30 03:29 PM

[Naufal Sana...:]

Clearly I was wrong about the timing (got stopped out very soon after article's publication) but I believe the thesis remains and I'm back in GS short. Watch for statements coming soon from banks about equity issuance at inflated prices from the recent scam-financed rally.

Mar 31 03:18 AM

[Rohan C. Pease:]

In this market, Timing is everything! BAC operating margins got raised today, is that the inflated price your talking about? Back into BAC today, look out for the repeal of FASB 157 on thursday, that will boost BAC and C. Be Long, but prudent (PLEASE use tight stops).

Mar 31 02:35 PM

[teriyaki:]

Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”.


On Mar 31 03:18 AM Naufal Sanaullah wrote:

> Clearly I was wrong about the timing (got stopped out very soon after
> article's publication) but I believe the thesis remains and I'm back
> in GS short. Watch for statements coming soon from banks about equity
> issuance at inflated prices from the recent scam-financed rally.

Apr 01 02:08 PM

[Rohan C. Pease:]

Woowooo hooo haha yea ringing the register baby!!! Ohh yah and GS hit the big 200 Day Moving Average. Damn looks as if you got stoped out again. Good luck next time, I sure eventually you will be right but in the meantime I will just continue to stack up gains.

Apr 02 10:43 AM

[Naufal Sana...:]

i still laugh at this article.

May 14 08:00 AM

[JPPennypacker:]

I think if Goldman had reported the month of December 2008 results explicitly and if AIG had been allowed to go Bankrupt like Lehman etc. knowing now what kind of counterparty risk Goldman had at that time, I can see how Goldman looked like a possible short candidate in early March. I never thought that they would be able to avoid a haircut on those positions like they have to date. They appear to have enough influence to get things their way most of the time, so always leery of betting against those who can make their own luck.


On May 14 08:00 AM Naufal Sanaullah wrote:

> i still laugh at this article.

May 21 12:21 AM

[Rohan C. Pease:]

Well looks like i got the last laugh, look at Golman Sachs, JP Morgan's, etc valuations. You were so dead wrong Naufal. Also very wrong on the recent move in oil. I don't know why you can't admit that, when I make a mistake, I admit it.

Jun 12 06:09 PM