Bank of America: 'Amazed by Goldman Sachs' Unmatched Risk Taking / Risk Management Skills'

The lately abnormally notorious Goldman Sachs (GS) received a little pat on the back yesterday compliments of Bank Of America (BAC) and its analyst Guy Moszkowski, who in a report published yesterday morning announced his expectation of an "unexpected" Q2 surprise (quick, someone find the next big counterparty that Goldman shorted and also has several tens of billions in collateral exposure with the 85 Broad oracles) and also anticipates forecasts to rise.

Maybe now that Goldman's fate allegedly is in the hands of a few good hackers, Guy may want to redo his hypothesis. But I digress. From the report:

Investment thesis: GS is arguably the most well-respected inv. bank, especially after deftly navigating the 07-08 credit crisis. We view GS as the best-diversified, most global franchise in the industry, with ample intl. growth prospects. The firm has consolidated its toptier position among Capital Markets firms, enabling it to generate strong through-cycle ROEs and book value growth.

Wow, not sure even where to start with Guy's opening salvo. If it was made a little clearer that a "inv. bank" has the implicit backing of the U.S. government for any and every blunder it may make, and the potentially explicit backing of all the collocation facilities at the 60 Hudson carrier hotel, maybe Guy's fascination would be a little more subdued. As to the "most well-respected" bit... well, Zero Hedge won't touch that topic. But Guy may consider adjusting the boilerplate investment thesis shortly.

More from the report:

2Q Trading conditions strong, U/W recovered markedly

Trading conditions remained favorable through 2Q. Buoyed by stable volumes as spreads tightened, fixed income markets continued to see wide bid/ask spreads on muted competition. Thus, we’ve again raised Trading forecasts. Also, cont’d asset price improvement (ICBC, equities and debt), offset by likely real estate losses, should drive increased Principal revs. In IB, M&A remained weak, but Equity and Debt U/W rallied significantly. 2Q could be a record quarter for GS in Equity U/W, though volume data is skewed by their own capital raises.

Comp. leverage could drive significant 4Q earnings boost

At current accrual rate (and assuming rev forecasts correct), GS appears on track to accrue significantly more comp than ‘08, despite little change in headcount. Even with 4Q accrual of 25%, comp would still be up 64% YoY by our estimate. In this scenario, ‘09E would reach $16.30, with ROE of 16%.

Buy: PO to $175 (from $144); 16%+ ROE achievable

PO increase reflects ‘09E/’10E ROE of 16%+, bringing BVPS to over $113 by the end of 2009 and $122 in 12-months. Based on this, ROE suggests 1.6x BV multiple or ~$175, after 10% “haircut” to account for market fluctuations. GS has consolidated its top-tier position among Capital Markets firms, combining front-rank Banking franchise with unmatched risk-taking/risk-management skills in a market that strongly rewards these because of decline in competitor risk appetite. Risk/reward appealing, with upside potential to 1.6x BV, downside unlikely below 1.1x BV.

Decline in competitor risk appetite? How about outright decline in competitors? And how about the unwillingness of competitors to directly engage GS in core fields in which the firm seems to have achieved a barrier to entry with a blessing as if from above?

What is so difficult about calling up two firms to gauge investor interest in a REIT offering and then following through with one, if all it takes is a simple analyst upgrade and a brief stay on the Goldman Conviction Buy List (sorry, bad example, Merrill recently figured out just how simple it is to beat Goldman in its, allegedly, own game)... But fixed income sales and trading? At 40 bps bid/offer spreads for a 300 bps trading CDS or 1.5 points pick on a bond, a blind monkey would be rolling in cash.

As for being a Supplemental Liquidity Provider? Well, why take the free money from Goldman and from the zillions in program traders who scalp each other for nickels per trade. Who would possibly want to do that. Not like being an SLP provides one with a plethora of implicit and explicit additional benefits.

No, all rhetoric aside, investors would be stupid not to buy into the Goldman hype - pretty soon it will be the only investment bank standing if LB's grand plan has its way. And there is nothing on the horizon to indicate otherwise. As for Goldman employees who are set to make a record $1 million in average comp this year - we all feel bad for them, knowing how hard they work scouring the web for pieces of rogue code or kibitzing on various websites checking on minute by minute updates of whether anyone has the temerity to write something negative about the mothership.

So why stop at $175 - go for a cool round number, like $1,000 or $1,000,000/ share. At the current rate of dollar devaluation, the latter has a very high probability of being achieved, nevermind that the investee would likely be happy to facilitate said devaluation as much as it can...

And if oil were to somehow hit the same price/barrel, so much the better. LB et al will be happy to show up at next year's investor meeting and discuss how Goldman managed to generate an ROI of infinity +1. Zero Hedge, with its 1 share of GS will be proudly there, clapping and cheering in a roofied daze, pre-vaseline administration, clutching the Goldman Sachs Ethics Manual, which has long ago replaced the Bible, Koran, Torah, the Bhagavad-Gita, and the Sermon on the Mount, among others, as our bedside soul cleansing material. Of course, if in the meantime, the green shoots turn out to be green swans and the economy crumbles, one can bet that Goldman will be there, generating a cool 20% ROE.

Comments

[Michael Clark:]

Why not take risks. If you lose money, just send your backmen (Neal Kashkari? Is that Kneel, and Carry the Cash?) to the congress and extort money out of the men in power, whom you own through campaign contributions?

Seems like a pretty good job, if you can get it.

Jul 10 07:57 AM

[montanamark:]

every quarter its the same crap - wonderment at GS' trading prowess.
you think the average guy on the street might have the same results if it could have all the inside information and government backing?
how much of their fabulous gains come at the exepnse of some targeted counter party. the media perpetuate the myth of GS.

Jul 10 09:02 AM

[KirbyJF1:]

“Goldman Sachs has a special Trading program see below


www.bloomberg.com/apps...)

-- reporting the arraignment in U.S. District Court in New York of a former Goldman Sachs employee accused of stealing the program. The prosecutor, Assistant U.S. Attorney Joseph Facciponti, was quoted as telling the court: "The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."In letters to the SEC and CFTC, GATA wrote: "The assistant U.S. attorney's comment can be construed to suggest Goldman Sachs considers its own manipulation of markets to be fair, while such manipulation by others would be unfair. The court proceeding described in the Bloomberg News story would seem to impugn all markets in which Goldman Sachs trades.


----------------------...

Goldman Sachs has the United States government under control as well as the SEC If you can't make money the old Fashion way, try the Goldman way & you can do it with out a mask.

Kirby

Jul 10 09:18 AM

[Genti Cici:]

The show will continue. If we never fire the actors in the first place they will make another movie for us. This movie will involve other actors and scenarios, but just like any movie they want to see the money at the box office. And what can you do, we all love movies where everything is possible and we can be just like our favorite actors, but when we come out of the theater it's just us, having learned nothing about reality and also $10 poorer.

Jul 10 09:21 AM

[Emerald:]

Revolving door, corporate nepotism. "It is what it is" or as Yogi Brra said, "It's de ja vu all over again!". Nothing changes, so buy the stock and be on the winning side. If you are worried about ethics and lobbyists, no one is listening. Investors are either demoralized and partailly wiped out or are lookig for the next new, new thing in the "new normal". Wall Street pays the lobbyists who buy the politicians. GS does it one better with imbedded players. Investment thesis: buy the stock.

Jul 10 11:43 AM

[ERCaptain:]

The analysis certainly makes a point. GS is the only global investment bank that has thus far survived the financial meltdown. As a "last man standing" the pie is certainly split amongst fewer players.
Their earnings are coming out next week -- I am expecting some large numbers. Bloomberg commentarty this morning said that their earnings may be close to or surpasing the record numbers of 2007.
Say what you want, hate 'em or love, but GS is going to make money. There is a reason that a large percentage of the Fortune 500 wealthiest families are GS clients.

Jul 10 01:36 PM

[Jonathan Rose:]

More of the same - The SEC's job is to maintain the current status quo and the current administration is made up of Goldman groupies - they have the strongest alumni in the world, closely followed by the Harvard Mafia... America has become exactly what it set out to escape, an entrenched, aristocratic, oligarchy where the "have's" create such complex barriers to entry that the "have not's" have no chance to break in.... So much for innovation, the american dream and people working their way up from nothing with blood sweat and tears (unless you play sports or are an entertainer)

Jul 10 03:02 PM

[ZeroCred:]

"Investment thesis: GS is arguably the most well-respected inv. bank, especially after deftly navigating the 07-08 credit crisis"

Are you kidding me? Strip away the FDIC guarantees on billions of debt which brought their interest expense on liabilities to 100+bps for Q1 and Q2, Buffets $10B and $10B of TARP and an EXPLICIT backing on their cap structure, are they really deftly managed?

Oh and btw must be great to run 30x leverage on your prop desk with near free money and the ability to front-run your clients or have Hank Paulson 'ensure' AIG does not go south on CDS positions for 'clients'.

Gimme a break what a piece of crap research report from BofA perpetuating 'inaccuracies'.

Jul 12 09:56 AM