Goldman and Morgan Stanley: Banks of Choice - Barron's

With Bank of America (BAC) and Wells Fargo (WFC) on the ropes and much of the international banking industry in ruins, Barron's Andrew Bary says Goldman Sachs (GS) and Morgan Stanley (MS) are the bank stocks you want to be in:

Look at what has happened on Wall Street. Lehman is gone. Bear Stearns is part of JPMorgan (JPM). Merrill Lynch merged into Bank of America, which bought Merrill for its retail brokerage network, not its institutional business. Citigroup (C) is wounded. Most European banks are on the ropes, including UBS (UBS), which has been scorched by enormous U.S. mortgage losses. A year ago, about a dozen financial heavyweights were scrapping for U.S. debt, equity and advisory business. Now there may be just three committed and deep-pocketed rivals: Goldman, Morgan Stanley and JPMorgan.

Jittery investors seem to believe in the pair's efforts to reduce their risk and remain liquid. They're also not blind to the benefits of $10B each in TARP money, and another $20B in FDIC guarantees that provides them with cheap financing. In appreciation, shares have moved up: Goldman and Morgan Stanley are the only two U.S. banks whose stocks have climbed in 2009 (17% and 58% respectively).

Goldman commands a higher book value ratio than Morgan Stanley (100% to 83%), because it largely avoided the mortgage and real-estate disasters that burned its peers, and because its brass - led by CEO Lloyd Blankfein - is considered savvier. Goldman's investment management arm, once dwarfed by Morgan's, is now larger and more profitable than its rival's which has been battered by mismanagement.

Looking ahead, Morgan is slashing its risk by abandoning proprietary trading and reducing its investments in real estate and private equity - in favor of fee-based revenue such as client services; witness its recent merger with Smith Barney. In contrast, Goldman still believes it has the talent and knowhow to trade prudently and invest in real-estate and other opportunities. Both have solid tangible common equity ratios of about 4.5%, vs. the 3% industry average. And both mark their assets to market each quarter, as opposed to the once-yearly obligatory posting.

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• Barron's called a bottom to the bear last week. It's still too early to tell, but after last week's surprising market strength, it'll be interesting to see how much interest their bank call generates.
• Kirk Shinkle wonders whether Goldman might be one of the new Dow components.
• Meanwhile, Tyler Durden wonders what all the banks would look like absent government stimuli - particularly the lucrative and addictive FDIC guarantees.

Comments

[DevKumar:]

Sure , Banks of choice
how about $100 billion in level3 assets each bank has ?

Mar 15 05:21 PM

[SoCalsurfbum:]

Both their Level 2 and 3 assets are huge vs Equity where small losses wipe it out... both are still highly leveraged which they need to unwind (because they are now banks) in bad markets. And are they holding anything off balance sheet? You don't know.

GS has huge exposure to AIG (AIG just released a presentatin on this)... they changed business models to get access to government support (seems more desperate than strategic)... Banking is much less profitable than their old business. Combine that with how new and immature their banking business is and I wouldn't be too confident in their stock.

But besides that Mrs. Lincoln, how was the play?

Mar 16 01:54 AM

[mleshem:]

what about european banks ?
UK in particular
it seems that the oportunities there are significant
UK, Germany. Sweeden, norwey

Mar 16 02:20 AM

[damonmcalli...:]

Two words: SIV's and derivatives

ok - one word and an acronym

Mar 16 02:48 AM

[Susan:]

GS was one of the biggest beneficiaries (if not the biggest) of the latest TARP money to AIG to cover CDS implosion liabilities.

Does anyone know the remaining numbers of GS exposure to CDSs vs the cash infusion they just got via AIG?

Essentially, betting on GS is a bet that the CDS bleeding is now under control. AIG is being 'saved' in order to save its insured counter-parties.

Mar 16 02:53 AM

[donzelion:]

Hmmm...this seems a bit deceptive...
---
A year ago, about a dozen financial heavyweights were scrapping for U.S. debt, equity and advisory business. Now there may be just three committed and deep-pocketed rivals: Goldman, Morgan Stanley and JPMorgan
---
The advisory business does appear to be up for grabs (after all, those advisers did such a good job...didn't they?), but the debt/equity business seems to be undergoing a transition where the role of investment bank is no longer quite as essential.

It could be that Goldman + Morgan became "commercial banks" because they wanted to feed at the TARP trough and couldn't pass up "free money." It could also be that they correctly perceived a transition as "necessary" due to structural changes now underway that would destroy earnings in the old model. Since I can't tell which one is true, I'll invest when I get a Buffett-sized dividend on his Goldman stake.

Mar 16 04:14 AM

[Moon Kil Woong:]

Good call Susan. I'm much more bullish on Goldman now that they sucked over $12 billion in worthless derivative bets with AIG thanks to Paulson. I wonder if Geithner will be so accommodating.

In fact, now that Paulson is gone perhaps they will eventually let AIG burn. After all, AIG already burned the taxpayer $130 billion and counting. The public has little stomach for any more recklessness propping it up for the sake of siphoning public money to banks so they can say they are fundamentally strong and don't need more public financing.

I mean, who are they joking? Maybe they need a little Jon Stuart limelight as well. They can do the self-deprecating innocent stunt that Cramer just did in front of 100 million viewers.

socalsurf bum and devkuman have good points too.


I don't hold any position on Goldman and Morgan Stanley.

Mar 16 05:53 AM

[Gaucho:]

All I can say about Barons is "When Barons is pumping the big guys are dumping". Anyone that followed this hedgefund groupies advise deserve what they get

Mar 16 09:36 AM

[HBWOW:]

I still can't believe that Goldman and Morgan were able to obtain "bamk" status but considering Paulson being
X-Goldman and part of Goldman's retirement funds, what else could we expect. Strong bonds between the parties.
The big advantage to G an M is the ability to borrow from the Fed, Big Ben. Isn't Wall Street the force who propelled us into this mess anyhow? Now rewarded.

Mar 16 10:54 AM

[foxy 44:]

normal way Susan
Paulson was former GS CEO sorry to taxpayers.
Now noboby know geithner plan.


On Mar 16 02:53 AM Susan wrote:

> GS was one of the biggest beneficiaries (if not the biggest) of the
> latest TARP money to AIG to cover CDS implosion liabilities.
>
> Does anyone know the remaining numbers of GS exposure to CDSs vs
> the cash infusion they just got via AIG?
>
> Essentially, betting on GS is a bet that the CDS bleeding is now
> under control. AIG is being 'saved' in order to save its insured
> counter-parties.

Mar 16 11:55 AM

[Stimpy:]

Both are insolvent at present, and neither has a viable business model in the post bubble landscape.

Both will see employee outflow as it becomes evident that the public has ana appetite for AIG style bonus clawbacks and endless Waxman/FGrank star chamber hearings with management.

Mar 16 01:00 PM

[TaurusTrader:]

... but, Moody's just spoiled the party! MS is down about 6% now!

MS has been great to me .... I've been riding it since it bottomed around $7. Volatility with MS also makes it great for day trading! I also write covered calls on my long MS positions! It's just a fantastic stock to trade!

TaurusTrader

www.taurustrader.wordp...

Mar 16 02:47 PM

[k9s-4-k8:]

Can't help but note the sell off on MS and GS the first trading day after Barrons' report. Maybe a little buy on the rumor, sell on the news? Always makes me wonder if some financial writers hold a story till some institution gives them the go ahead to publish so that they can sell into the story. But maybe I'm being too conspiracy minded. Its hard in a bear market.

Mar 16 05:55 PM

[pacman1947:]

I agree, Moon Kil Woong. "I'm from Goldman Sachs" Poulson certainly showed that he had no real conflict of interest, right? I also found it interesting that the AIG bailout had nothing to do with the shareholders at AIG, but is a simple ruse to make the banks look good that placed bets rather than investments. "Risk management" seems to be defined by these investment banks as finding ways to arbitrage casinos with what they can take in chips from one and cash into the chips of another.

We all knew that the taxpayer was going for a ride. They surely may want a pound of flesh from all these gamblers!

On Mar 16 05:53 AM Moon Kil Woong wrote:

> Good call Susan. I'm much more bullish on Goldman now that they sucked
> over $12 billion in worthless derivative bets with AIG thanks to
> Paulson. I wonder if Geithner will be so accommodating.
>
> In fact, now that Paulson is gone perhaps they will eventually let
> AIG burn. After all, AIG already burned the taxpayer $130 billion
> and counting. The public has little stomach for any more recklessness
> propping it up for the sake of siphoning public money to banks so
> they can say they are fundamentally strong and don't need more public
> financing.
>
> I mean, who are they joking? Maybe they need a little Jon Stuart
> limelight as well. They can do the self-deprecating innocent stunt
> that Cramer just did in front of 100 million viewers.
>
> socalsurf bum and devkuman have good points too.
>
>
> I don't hold any position on Goldman and Morgan Stanley.

Mar 16 07:11 PM

[Victhom:]

Honnestly I load up Barclays (BCS) from UK....why???

"We have committed to recommencing dividend payments during the second half of 2009. Thereafter, and as
previously announced, dividend payments will be made on a quarterly basis. We will set out our dividend policy
at the Annual General Meeting in April."John s. Varley CEO

I bought 25000 shares at $2.75 the day Cramer open his mouth on CNBC...Today BCS touch $5.75 US...I still own then for long term....

Also Jim Cramer tell US tax payers to sell Barclays (BCS) ...who is the king of ETF with iShares....and buy Bank of America and Citi Now read this....

Cramer is a "MANIPULATOR" read..I prove it...watch date....

seekingalpha.com/artic...

Barclays (BCS): “No! We are talking about a bank that is in grave trouble. No European banks are investible, nor do I want to invest in any of their securities.”

www.thestreet.com/stor...

Cramer: Dangerous Debt
01/26/09 - 09:52 AM EST

Random musings: Barclays(BCS Quote - Cramer on BCS - Stock Picks) makes it? They actually didn't blow up? It's interesting to see what happens to a bank when it reports decent numbers. It can go higher.

Now this....

seekingalpha.com/artic...

Barclays (BCS): “Such a sell it's scary…”???


www.thedailyshow.com/f...

PS: NOW YOU KNOW WHY I HATE CNBC....CRAMER...and the gangsters...LOL

Mar 16 11:08 PM

[Victhom:]

Barclays Keeps A Step Ahead
Vidya Ram, 03.16.09, 08:00 AM EDT
The bank's plan to sell part of its asset management division will help it avoid government influence.


Barclays PLC
03/16/2009 4:00PM ET$5.31$0.8920.14%



Barclays once again seems to be proving doomsayers wrong, with the British bank on the verge of a deal that could help it avoid it raising capital through a dilutive rights issue and taking on the government as a stakeholder.

Barclays (nyse: BCS - news - people ) confirmed on Monday that it was in talks with a "number of potentially interested parties" about the sale of iShares, part of asset management division Barclays Global Investors, but no decision has been taken by the board. A spokesman for the bank declined to say how much the unit could be sold for but press reports have suggested a figure of between 3.0 billion pounds and 5.0 billion pounds ($4.3 billion and $7.1 billion)

Barclays also received $8.5B from AIG.....

"Barclays was paid $8.5 billion"

Euro banks among top beneficiaries of AIG bailout
ReutersPublished: March 16, 2009

By Lilla Zuill

Goldman Sachs and a parade of major European banks, including Deutsche Bank , France's Societe Generale and the UK's Barclays , were major beneficiaries of more than $90 billion (64 billion pounds) of money paid out by AIG in the first three-and-a-half months after its bailout by the U.S. government last September.

The disclosure by AIG on Sunday is likely to trigger further criticism of why Goldman, with its many government links, and the European banks were funnelled such huge sums of U.S. taxpayer money after making bad bets on various securities, as well as strengthening the case of those who believe the whole bailout was botched.

Already this weekend AIG has come under intense attack by politicians for bonus payments it made to executives and staff for last year's performance despite its near-bankruptcy and rescue.


White House seeks to block bonuses at A.I.G.China likely to be stronger after crisis Barclays in talks to sell a U.S. unit to raise cashThrough three separate types of transactions, Goldman received an aggregate $12.9 billion. Among European banks, SocGen was the biggest recipient at $11.9 billion, Deutsche got $11.8 billion and Barclays was paid $8.5 billion.

Mar 16 11:13 PM

[User 305589:]

Huh, from a business model point of view and looking at assets and mgmt i favour wells fargo over goldman and jpm by a wide, wide margin. The former have troubles but a sustainable, proven business model and they have progressed with writedowns much farther than gs and jpm. gs and jpm, on the other hand, are in huge trouble with their obscenely large derivatives books (i won't trust goldman's accounting even one second btw) and they struggle to find a new buriness model now that the wall street money making atm has come to a halt. gl with that.
there is a reason why buffet owns a large chunk of wells, but only took preferred shares in goldman with very harsh conditions attached.
apart from that, never ever invest based on a barron's article.

Mar 17 08:49 AM

[Cecily S:]

Goldman and Morgan are the kings of wall street

Mar 17 12:51 PM

[Stone Fox C...:]

The negativity in the posts makes me think the run in MS isn't over. Seems unlikely that capital markets will not rebound. Companies need access to cash in order to expand whether via debt or stock. It appears that GS and MS will escape from this financial crisis with hardly more then a small scar. If the surviving businesses of ML, BS, and LEH are truly reduced to uncompetitive levels, then GS and MS will see a huge benefit. Market could be smaller, but they'll have more market share.

Mar 17 05:32 PM

[Nadeem Juwle:]

One could take a look at the Indian Banks... some of our banks are in pretty good shape eg. Axis Bank, Yes Bank & the slightly riskier ICICI Bank. Indian banks are not highly leveraged although credit defaults need to be factored in ... but these defaults are too small to bring these banks down.

Nadeem Juwle
Easy Investments (a Sharekhan Business Partner)

Mar 22 09:16 AM