I read this headline from the Financial Times and said to myself, “Okay Reg, Don’t say ‘I told you so’”. Thus, you won’t hear it from me, at least not this time. As reported today in the Financial Times: Goldman Sachs (NYSE:GS) reveals fresh crisis losses and Goldman’s republished results present a new picture:
Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.
Hmmmm! I walked through this in explicit detail in here and I did it without being privy to Goldman’s financial innards. It was more or less common damn sense. Goldman and its employees do not walk on water and they cannot perform miracles. If one takes an objective approach to their equity analysis, and simply plugs the numbers into a spreadsheet (objectively) you would have come up with the exact same conclusions that I gave my subscribers all of these years. Let’s reminisce, shall we?
So, what is GS if you strip it of its government protected, name branded hedge fund status. Well, my subscribers already know. Let’ take a peak into one of their subscription documents. I believe many with short term memory actually forgot what got this bank into trouble in the first place, and exactly how it created the perception that it got out of trouble. The (Off) Balance Sheet!!!
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Contrary to popular belief, it does not appear that Goldman is a superior risk manager as compared to the rest of the Street. They make the same mistakes and had to accept the same bailouts. They are apparently well connected though, because they have one of the riskiest balance sheet compositions around yet managed to get themselves insured and protected by the FDIC like a real bank. This bank’s portfolio looked quite scary at the height of the bubble.
And back to the FT article…
The diverging figures, which do not change Goldman’s overall results for 2008, are because of the fact that, like many rivals, the bank did not provide a full breakdown of profits and losses from activities carried out with its own resources.
Interesting: $5 billion of losses goes unreported, yet there was no change to the years results. I wish I could lie about $5 billion of losses that didn’t allegedly exist, make them disappear again after I come clean, then have the media applaud me for my honesty – all at the taxpayers expense as I bonus myself into that new 63 foot Azimut. You know, the one that doesn’t come with the hot international girls with w/6 pack license and bikinis. Hey taxpayers, its your money that bonused these boats!!! Italy has a pipeline straight to the American taxpayers wallet through the Goldman bonus pool.
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Okay, let’s finish excerpting the aticle…
The revelation of the 2008 loss on its investments supports Goldman’s argument that it did not profit from the crisis.
I, for one, never claimed Goldman profited from the crisis. To the contrary, I claimed that it lost, big time! This statement seems awfully conciliatory from the main stream media. I know you guys can’t (or won’t) get as rough around the edges as I do, but come on fellas. ’nuff brown nosing.
Lynn Turner, a former chief accountant for the Securities and Exchange Commission, praised Goldman’s move but called for the SEC to look into the bank’s past disclosures. “This sets a good example that others should follow,” he said. “But it does raise the question as to why the management did not provide this view back then and whether the SEC are going to do something about this discrepancy.” Mr Turner said SEC rules required companies to give investors a view, as seen from “the eyes of management”, of their finances: “For such a discrepancy to have arisen, management must have lost an eye.”
Praise!!! Lost an eye!!! Hold the hell on here. Goldman outright lied, and lied big time. It was an obvious lie, and I pointed it out in full detail to both my blog readers and paid subscribers. As a matter of fact, the losses are most likely STILL on the balance sheet (or hidden off) and will surface one way or the other. Again I reference this subscriber document.
As a matter of fact, it looks just as scary today as it did at the height of the bubble, but since very few people read balance sheets, no one really notices.
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Most people don’t realize is that it looks quite scary now as well.
I said it before, and I’ll say it again, I think this is a prime example of the “Devils Chickens Coming Back Home To Roost“. You see, my dear readers and fellow tapayers… You've been had! This is what they do! Reference this.
The FT reports that neither the SEC nor GS had a comment. I would suppose not. I suggest the SEC buy their entire agency a sitewide subscription to BoomBustBlog, thus in lieu or reading about Goldman’s “Bamboozling” in the British financial mags, taxpayers could get the skinny directly from their own government (directly, and in near real time) and may actually have some faith restored in its ability to safeguard investors in this period of “the hoodwink“, wink, wink. That is, of course, unless the SEC has been permanently captured, see here.
With their ears stinging from accusations that Goldman is “just a giant hedge fund” or, as Rolling Stone said, a “vampire squid” stretching its tentacles to make money for itself, an internal committee looking at reforms reshuffled the bank’s financial reporting.
...losses came from direct purchases of assets. It also said that it had lost $1.7bn on residential mortgages and $1.4bn on commercial mortgages – half of which is believed to be related to Goldman’s investments.
Overall, the old disclosure points to losses of about $8.5bn in 2008, rather than the $13.5bn revealed this week. So why the discrepancy?
A new profit-and-loss account for 2008 released this week shows losses of $13.5bn on Goldman’s “investing and lending” activities.
This material tilting of the risk/reward equation would be obvious to most and many, if they would look at the true economic numbers and stop following accounting numbers! Goldman is a very, very well run company. It is loved by some, reviled by others, but in the end it is respected for something that it truly does not deserve. That something is the ability to make an above average return on risk adjusted capital. Goldman takes gobs of risk! From an economic income perspective, it is mediocre to average at best. See here.
GS' return on equity has declined substantially due to deleverag[ing] and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a
limitation of leverage due to the impending global regulation coming down the pike. Using your method, our valuation would drop from where it is to an even lower point.
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Second, it still has a bunch of trash on its balance sheet, see here. If you look at the period of the most recent credit bubble, Goldman did everything that the other failed and bailed out banks did: Leveraged up on trash assets, invested in and sold the worthless junk, and ran to the government for aid and bailouts.
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In What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone…,, I made the following note:
GS’s considerable leverage provides a means (the lever) of high returns to shareholders when asset prices are appreciating but the same becomes a very material economic concern when the asset prices lose value. With low trading revenues, GS has little cushion to absorb write-downs on these assets, leading to erosion of equity.
As of March, 2010, the GS’s investments portfolio amounted to $339 billion (nearly 566% of the tangible equity). Referencing my previous posts, here and here, we can reminisce over the fact that Goldman BARELY earns its cost of capital on an economic basis. And that’s before considering the potential horrors which may (and probably do) lay on the balance sheet for more on BS horror, reference here.
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Recommended reading from Reggie Middleton’s BoomBustBlog in the investment banking space…
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.