Goldman Sachs One-Upped Wells Fargo in Accounting Shenanigans 38 comments
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Lots of interesting things to report regarding Goldman Sachs (GS) today.
- In this post: accounting gimmickry, higher leverage (tangible assets/tangible common equity calculated below), and silence regarding AIG payments.
- In the next post: Goldman raises $5 billion in a sale of stock, which is good news.
Accounting Gimmicks and Tangible Common Equity
With respect to their Q1 earnings announcement, it appears Goldman may have one-upped Wells Fargo (WFC) in the accounting shenanigans department. As Floyd Norris blogged this morning, they ditched an entire month…
Where’s December?: Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can.
How did it do that? One way was to hide a lot of losses in not-so-plain sight.
Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. That leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.
The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.
Would the firm have had a profit if it had stuck to its old calendar, and had to include December and exclude March?
For its part, S&P said it’s not buying the hype that Goldman’s earnings indicate a turnaround:
'Coupled with persisting weak economic conditions and capital markets turmoil, we believe it would be premature to conclude that a sustained turnaround’ in Goldman Sachs’s financial performance is under way, S&P wrote.
It’s important to put this particular accounting shenanigan into context. Yeah, it’s underhanded to play games like this in order to enhance reported earnings; investors hate this kind of thing. [An analyst at my old firm once yelled at a CEO on a conference call when he noticed an extra day was added to a quarter in order to boost profits. We were long-term holders of the stock. In such cases, management credibility is more valuable than an extra penny of "earnings." But I digress.]
Smart investors, however, pay less attention to accounting profits, since these can be manipulated so easily by management. Instead, they focus on the balance sheet and the cash flow statement. Whether Goldman chose to write down a particular asset in the “missing month” of December or during Q1 makes little difference for balance sheet purposes.
So for instance, take OA’s favorite metric: tangible assets/tangible common equity. Writedowns are problematic because they hit the numerator and denominator by equal amounts, more or less. And when you’re talking about a grossly over-leveraged institution like a bank, a 5% writedown of assets can wipe out 100% of TCE. [Remember: a million-dollar house with a $950k mortgage need only fall 5% in value to wipe out 100% of the homeowner's equity.]
The timing of writedowns is clearly important. Banks are delaying hundreds of billions worth via all manner of accounting gimmickry. But the strange timing of these particular writeoffs from Goldman, i.e. the ones that were taken EARLY so as to avoid impacting Q1 earnings, are not as pernicious as those that are being delayed. Whether Goldman took ‘em in December or in March wouldn’t matter for purposes of calculating the bank’s end of March leverage ratio, for instance. And in fact, an argument can be made that it’s better to take the writeoffs sooner rather than later so as to avoid adding too many assets to an already bloated balance sheet.
While Goldman didn’t publish their full balance sheet, it appears you can back into the TA/TCE ratio based on what they did disclose (see pages 4 & 11).
Total Assets were $925 billion at the end of Q1. Intangibles were $5 billion. Backing that out, GS has $920 billion of tangible assets at quarter end. Shareholder equity ended the quarter at $64 billion. Subtract preferred stock of $17 billion and intangibles of $5 billion and you have tangible common equity of $42 billion. In other words, GS’ tangible leverage ratio was 22x at the end of Q1. (920 / 42 = 22)
That marks a slight deterioration from last quarter, when the ratio was 21x.
Besides a full balance sheet, there are other important disclosures we’ll have to wait for. For example, while they noted that mark to myth Level 3 assets fell a bit to $59 billion from $66 billion, they made no mention of changes in mark to model Level 2 assets, which are substantially larger. Level 2 and 3 assets overwhelm tangible common equity, which is a big reason few investors trust that big banks are solvent.
AIG Payments
Many are also wondering about the impact of payments Goldman received for CDS positions with AIG Financial Products. AIG’s bailout, readers will recall, wasn’t so much for AIG. It was for AIG’s counterparties, other banks that made margin calls on CDS positions when AIG’s debt rating was downgraded.
Goldman was the largest recipient of payments from AIG. It received $12.9 billion. Losses due to counterparty risk that should have been absorbed by shareholders and creditors were instead funded by taxpayers. Naturally, Goldman isn’t much interested in discussing the issue. Back to Norris:
Analyst Guy Moszkowski of Merrill Lynch wants to know if they made money from the now-famous government-financed American International Group transactions.
The answer is cautious. Most of the impact was in December. For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.
So what was the A.I.G. effect in December? They did not say.
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Oh, wait second...
Seeing as Goldman underwrote its own deal, I guess it DID put "the client" first!
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By Christine Harper
April 14 (Bloomberg) -- David Viniar, Goldman Sachs Group Inc.’s chief financial officer, said he’s “mystified” by the interest investors and government officials have shown in the bank’s trading relationship with American International Group Inc.
“They’re one of thousands and thousands and thousands of counterparties and the results of any trading with AIG are completely immaterial to what we do,” Viniar said today in an interview. “I am mystified by this fascination with AIG.”
Goldman Sachs, the most-profitable securities firm before converting to a bank last year, received more cash from AIG after the Federal Reserve rescued it last year than any other counterparty. The company has said it was insured against any losses from AIG and it didn’t benefit from the government’s rescue of the New York-based insurer. The Treasury Department’s chief watchdog for the financial rescue program is investigating whether AIG paid more than necessary to banks.
Viniar told analysts today that any profits related to AIG in the January-to-March quarter “rounded to zero,” as most of the transactions were unwound before the end of the year. In an interview, he also said profits in December weren’t significant.
‘Rounded to Zero’
“I would never tell you that we didn’t book any profit, I don’t even know,” he said. “I couldn’t tell you with any counterparty that we booked zero, but I could tell you it rounded to zero.”
After AIG was rescued by the U.S. from collapse last year, banks that bought credit-default swaps got $22.4 billion in collateral and $27.1 billion in payments to retire contracts, the insurer said last month.
Neil Barofsky, special inspector general for the government’s Troubled Asset Relief Program, began an audit two weeks ago into whether there were attempts by AIG or the government to reduce the payments, according to an April 3 letter to Representative Elijah Cummings. The Maryland Democrat requested the probe last month along with 26 other members of Congress.
Lawmakers, frustrated with the cost of an AIG bailout that has expanded three times, have asked why about $50 billion was paid after the initial September rescue to banks that bought credit-default swaps from the firm. The audit will reveal who made “critical decisions” regarding the payments and provide an explanation for the actions, Barofsky said.
‘Misperceptions’
Viniar held a conference call on March 20 to answer questions about the firm’s trading relationship with AIG and to “clarify certain misperceptions.”
When AIG was rescued, Goldman Sachs had $10 billion of exposure to the insurance company that was offset with $7.5 billion of collateral as well as credit-default swaps that would have paid off in the event of an AIG bankruptcy, Viniar said on the March 20 call.
He also said on the call that Goldman Sachs recorded a gain “over time” on the value of the hedges it bought to guard against a default on AIG, even though the government enabled the insurer to honor its obligations. In today’s interview, he said those gains were booked “from 2006 to now” and that any gains booked in the first quarter “would have been very, very small.”
Goldman Sachs reported late yesterday that it earned $1.81 billion, or $3.39 per share, in the first quarter on record revenue from trading fixed-income, currencies and commodities. The firm also raised $5 billion by selling stock at $123 per share, a 5.5 percent discount from yesterday’s closing price.
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.
Last Updated: April 14, 2009 14:17 EDT
there is ample evidence that this bear bounce was mainly due to their quant funds. i.e. people were still buying when tech analysis and logic would say sell. too far, too fast.
they pre announced profits that were likely false, and then made a stock sale ASAP before the retail data came in.
If someone like me can see funny things going on in the market, then it is really clear.
I like to follow oil. I think it give a very good idea to what is going on on a macro level.
I can see it trading 45 at highest, but no matter how bad the data got it kept trading back above 50. this followed the pattern of the S&P quant funds.
If you overlap the S&P daily trading lines with vde of example you will see that you could almost put one on top of another.
Every drop was bought by someone, and many people with a lot of experience saw funny things happening. the only person living in the goldilocks economy is you because you are living down in some rabbit hole. Wake up, companies manipulate the books, manipulate the market and do all kinds of things that are either against the law or the spirit of the marker.
It is like saying why are you upset with enron. they had no profits. Goldman may have had profits, they may have had no profits without government money, they skipped a month of bad results and changed their reporting season to hide it, they are dilluting shareholders so they can continue to take bigger bonuses. Lastly, they get away with it because they are protected. Look at the conditions Buffett got with them. there are reasons why he insisted on them. He knows what they are like. tell me why is a public company allowed to lean their partners money wehn they face margin calls. it that in the shareholders best interests. NO. IT IS NOT A PRIVATE COMPANY. THEREFORE IT IS NOT THEIR MONEY TO SCREW AROUND WITH. IN FACT EVEN THOUGH I DO NOT OWN THEIR STOCK SOME OF THEIR MONEY IS MINE AND THEY HAVE IT WITHOUT MY CONSENT AS IT WAS TAKEN FROM ME AGAINST MY WILL BY THE GOVERNMENT TO GIVE TO THEM. THAT IS WHY THEY HAVE TO START TO PLAY BY THE RULES.
if you bought their stock today, great for you. you bought it based on profits that weren't there and paid more than you should have because of market manipulation. that's what the american stock market has become. if I am joe six pack who want to retire so I hear buffet bought it, they had great profits, and I pick up some I got screwed. the point is you can't trust our financial system and the government does nothing to keep it from happening. in fact it encourages their behavior.
have you noticed the advice they give. when they tell you to buy it is almost the exact time you should be selling. they have been in the trade three weeks already, other have joined, and they are just fooling with the public. I have followed that advice and it always is a sell signal. At that time i didn't know better
On Apr 14 08:05 PM Cetin Hakimoglu wrote:
> Why do so many people here resent Goldman's success? Goldman is run
> by the best minds in the world as opposed to GM. Rcik Waggner's GM
> resstructuring plan was written in crayon on construction paper.
On Apr 14 08:05 PM Cetin Hakimoglu wrote:
> Why do so many people here resent Goldman's success? Goldman is run
> by the best minds in the world as opposed to GM. Rcik Waggner's GM
> resstructuring plan was written in crayon on construction paper.
On Apr 14 08:25 PM Jorb wrote:
> madhedgefund is a spammer. Google his posts and you will see he
> cut and pastes the same paragraph long replies word for word
>
> www.google.com/search?...;hl=en&filter=0
>
>
> On Apr 14 08:00 PM Mad Hedge Fund Trader wrote:
Because just about Every bit of evil practiced or proposed in the recent disaster seems to at least partially trace back to Goldman. Paulson, Gaithner, the AIG unwinds, make-believe accounting, fictional profits, taxpayer rip-offs. And they're Still At It.
From Beggar To Billions With The Stroke Of A Pen.
Maybe I should get Alice to do my accounting as well; she has apparently brought her "Wonderland Style" to "The Books Of the Big".
You post hundreds and hundreds of the most inane and generally unsubstantiated comments on this entire web site. Instead, why don't you just crawl back into your basement "office" in mom and dad's house and try writing a novel or something?
On Apr 14 09:21 PM Cetin Hakimoglu wrote:
> You also don't like the bonusses either I take it?
Unless the system is cleaned up, we will continue to have volatility much to the detriment of investors. And guess who bought Goldman issue - institutions - with your pension/401K money.
History may well record Lloyd Blankfein in the same light as Roger Williams, who killed GM long before Wagoner took over the carcass.
How the mighty have fallen...
Doesn't anyone find it a bit ironic that after losing a ton of money (supposedly) and getting a bailout, and after becoming a bank (which implies a responsibility for increased conservatism on their part), Goldman returns to their same old trading activities and racks up big profits, on the taxpayers dime, but while putting the taxpayers' capital at risk in unintended ways? Why are they allowed to get away with that? How are those activities in the public's interest, and how are they consistent with how TARP funds were intended to be used; i.e., to unfreeze the credit markets? I'm SO tired of smelling this same stink over and over again. Something is very wrong here. We should be outraged.
We need a Watergate-style investigation into this whole mess, pronto. Obama has said repeatedly that he wants to put this behind us and move on, but the taxpayers are owed more than that, like at least $12.9 billion from Goldman, which is what they got from AIG. This whole thing is an obscenity.