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The stock market suddenly turned bullish on Monday after Meredith Whitney upped Goldman Sachs (NYSE:GS) from “Neutral” to “Buy” with a twelve month price target of $186. Appearing on CNBC’s Squawk Box, the normally bearish financial analyst said the recommendation was “a bearish call but a bullish call on the stock.” Whitney said that as the number one underwriter of bonds now that Lehman is gone, Goldman has advantage in this “tsunami of debt issuance” economic environment.

Yesterday, Goldman reported record quarterly net revenues of $13.76 billion; second quarter net earnings were $3.44 billion, or $4.93 per share, which was more than Goldman earned in 2008. Goldman recorded record net revenues from FICC* ($6.80B), Equities ($3.18B), and equity underwriting ($736M). Commissions were up 5%, on higher customer volume. CFO David Viniar said during yesterday’s earnings call that now that the hedge fund redemption cycle “is pretty much through” you should “start seeing money flowing into hedge funds.”

Although Goldman ranked first in global M&A deals this year, the firm hopes that M&A activity begins to pick up as “dialogue has not translated into deals for awhile.” Viniar’s economic outlook was cautious, emphasizing “the world is still not a great place.” When asked during the Q&A if their FICC trading spreads are likely to continue for the near term, Viniar responded that “there is no normal.”

Goldman has managed to execute its business flawlessly and must continue to do so in order to propel the stock back to its 2007 record high of $250.70. (Goldman closed yesterday at $149.66, just shy of its “Whitney Day” close.)

What’s blatantly missing from Goldman’s blowout quarter and year to date earnings is good public relations. Once again Viniar reiterated early on in the earnings call that Goldman has “no exposure to retail consumer business.” Goldman chooses to forget the “missing time” in the autumn of 2008 when it became a bank holding company in order to save its own skin. Goldman might not have needed or wanted $10 billion from the TARP, but TARP money gave Goldman access to something it did take full advantage of: $29 billion** of FDIC-guaranteed debt issuance. And Goldman got more help from the Federal Reserve when the Fed forced AIG to pay Goldman ($13B) and other counterparties the full value of their underlying CDOs instead of negotiating a reduced payout.

Goldman may very well employ the smartest people in the room, but the fact is that Goldman could not have regained its footing – let alone have survived – without taxpayer assistance. Having returned the TARP money and “in discussions with the Treasury on the warrants,” Goldman’s attitude is that it can put the past behind it and continue to accelerate risk taking that by value-at-risk (VAR) has reached record levels. Goldman's only concession to the current financial climate is operating at lower leverage.

Goldman set aside $6.65 billion in compensation and benefits expenses during the second quarter. At this rate, that would work out to a record $770,000 for each of its 29,400 employees.*** And the need to pass healthcare reform to insure all Americans starkly contrasts with Chairman & CEO Lloyd Blankfein’s health insurance valued at $40,543 a year. As unemployment rises and more Americans lose their health insurance or file for “medical bankruptcy,” Goldman would be wise to accrue deferred compensation until overall economic conditions have sustainably improved.

Investors could become fearful of Goldman’s stock if Congress clamps down “AIG-style” on Goldman’s compensation culture. Goldman and Wall Street’s return to “business as usual” increases my conviction that the second act of the financial crisis is a distinct possibility this fall.

*fixed income, currency, and commodities

**Barron’s: How Do You Spell Sweet Deal?” (4/20/09)

***Of course that amount wouldn’t be evenly distributed!

Disclosure: No positions

Source: Goldman Sachs Political Capital Ratio Is Inadequate