Note to Goldman Sachs CEO Blankfein from a Shareholder

In October 1929, the Goldman Sachs Trading Corporation was on its last legs, having suffered from the investment trusts’ holdings in other similar NYSE trusts and from using whatever cash it had left to buy huge blocks of its own shares in a hopeless attempt to support the daily quote. What J.K. Galbraith later called “a form of fiscal self-immolation.” Goldman, Sachs & Co. went on to survive the 1929 crash, but the namesake trading corp. would not.

The lessons of 1929 are multifaceted, and I, without a doubt, haven’t found a unique angle to that moment in history. What I do know is that some amount of transparency and oversight may well have prevented the 1929 stock market crash, and that a small dose of oversight would have certainly prevented the bankruptcy of Lehman Brothers in 2008. Perhaps avoiding some of the economic pain that the world is experiencing today.

Over at my favourite investment bank, the partners of Goldman Sachs (GS) may be ignoring the lessons of history. The first hint? Comments at an investor conference on Feb. 4, 2009 (via WSJ):

“Operating our business without the government capital would be an easier thing to do,” said David Viniar, Goldman’s chief financial officer. “We’d be under less scrutiny and under less pressure.”

(Note to file: Now is probably the worst time in the modern history of the capital markets to be advocating less scrutiny.)

With the news of their unexpectedly profitable quarter, Goldman Sachs is going to be launching a US$5 billion stock offering. One has to wonder if the surprise profit has anything to do with the relaxation of the mark-to-market rules?

Use of proceeds for the US$5 billion equity offering? Pay off part of the US$10 billion TARP funding. Cost? 8% dilution to current shareholders. Rationale? Without TARP funding, Goldman would have no constraints on executive compensation.

As a business, Goldman Sachs should be run for its shareholders, a group of which includes yours truly. If our current liquidity is in excess of US$100 billion, for the life of me I don’t know why we need the additional US$10 billion of TARP funds to run our business. If the idea is to pressure the U.S. Treasury into taking back its TARP capital by launching an equity offering, what does the additional US$5 billion get us if we are already extremely well-capitalized?

Could there be anything more silly than raising US$5 billion to pay back the government money that we don’t currently need in any event? And if we don’t need the capital, although the thought of having too much cash is foreign in these times, why dilute the rest of us with this rumored equity offering? We’ve ridden the shares from US$200 to US$47 in less than a year. As we enjoy this current updraft in the stock, why reward our patience with unnecessary dilution?

Mr. Blankfein, we don’t own an investment bank any longer. GS is now what’s called a “Commercial Bank”. The rules are different (at least until GS applies to rid itself of that Charter, too). Third-party scrutiny and regulatory pressure are the lifeblood of any successful banking system. Get used to it.

Ridding Goldman of the TARP ball and chain is just window dressing so long as we remain a bank. The game has changed. Scrutiny, rather than excess leverage, is your new mistress.

Disclosure - I own GS and GS sub debt

Comments

[dcb:]

the single biggest problem in the united states financial system is that companies are run for the benefit of management, not the owners (shareholders). it runs from the top of the food chain to the bottom, and I will never own an american stock again unless this changes

Apr 14 09:27 AM

[blog.kerdos...:]

This happens everywhere not just the U.S. , and it will never change. Part of the advantages of being a public company.

Apr 14 10:13 AM

[Harry Tuttle:]

They were not unexpectedly profitable, they reported 3+1 months and nobody seems to have checked the extra month.

The way I read it, they reported $3.39-$2.15=$1.24 for 4 months vs. $3.23 for Dec-Feb08

Apr 14 10:26 AM

[SteadfastMason:]

Respectfully, I don't see where you are finding info. confirming the GS just reported earnings for 4, not 3 months. Could you reference a link or show the math?

It appears to me that they reported earnings through March 2009.

Kind Regards,

SteadfastMason


On Apr 14 10:26 AM Harry Tuttle wrote:

> They were not unexpectedly profitable, they reported 3+1 months and
> nobody seems to have checked the extra month.
>
> The way I read it, they reported $3.39-$2.15=$1.24 for 4 months vs.
> $3.23 for Dec-Feb08

Apr 14 10:34 AM

[Linus Wilson:]

Because the Fed and Treasury believe that Goldman Sachs is "too-big-to-fail," taxpayers are on the hook if GS doesn't have enough capital. Long Term Capital Management turned away capital before it had to be bailed out by a consortium of banks organized by the New York Fed. Raising common stock is a good way to reassure regulators that GS is not gambling with the implicit guarantee of US taxpayers if it returns TARP monies. My coauthor and I wrote about this in ssrn.com/abstract=1321666.

Apr 14 10:39 AM

[Harry Tuttle:]

It is in the press release. All you have to do is scroll to the bottom of the page.

The link I have is from the WSJ and I think you need to be subscriber.

GS used to report Dec/Nov and they changed to Jan/Dec when they became a commercial bank


On Apr 14 10:34 AM SteadfastMason wrote:

> Respectfully, I don't see where you are finding info. confirming
> the GS just reported earnings for 4, not 3 months. Could you reference
> a link or show the math?
>
> It appears to me that they reported earnings through March 2009.
>
>
> Kind Regards,
>
> SteadfastMason

Apr 14 10:39 AM

[Allan Frain:]

Let the buyer beware.

Apr 14 10:48 AM

[Harry Tuttle:]

www2.goldmansachs.com/...

The December results are on page 10


On Apr 14 10:34 AM SteadfastMason wrote:

> Respectfully, I don't see where you are finding info. confirming
> the GS just reported earnings for 4, not 3 months. Could you reference
> a link or show the math?
>
> It appears to me that they reported earnings through March 2009.
>
>
> Kind Regards,
>
> SteadfastMason

Apr 14 10:50 AM

[SteadfastMason:]

Thank you!

This is better than watching the Twilight Zone. We get to be in the show.

Apr 14 12:43 PM