JasonC

Betting on Goldman's Future

sunil - um, can you add?

Goldman has a $1 trillion total asset base, and US banks routinely net 1% on assets in ordinary times. In the past Goldman has exceed that by a factor of 1.5 routinely, but ignore that. In ordinary times, one can expect Goldman to earn something like $10 billion. Since they made $11.6 billion in 2007 and $9.5 billion in 2006, this is clearly an achievable figure.

Now, suppose they make nothing for the next 2 years. Suppose they never grow at all, forever. Suppose you require a 15% rate of discount. Then they are worth 6.67 - 1 - .85 times their typical $10 billion earning power or $48.2 billion. The market cap this instant is half of that, $24 billion.

Meaning, the present price discounts a 50% chance of the above zero growth outcome and a 50% chance of an outright bankruptcy and value of zero. And returns an expected 15% on that coin toss, plus any growth in the event of a "heads".

Or, if you want to express it as a higher discounting rate on those cash flow assumptions, then Goldman is currently priced at a 24% rate of discount, plus any growth ever achieved.

The smashed to heck financials are screaming buys unless they go bankrupt. All the current pessimism is unjustifiable in any value analysis, it is the result of pure news and momentum trading perspectives, not value perspectives. They might go bankrupt. Or some might, and some might not. I sincerely doubt half of them will or that those that survive will never grow again, ever.

Value investors are already buying. That isn't calling a bottom but it is calling a level.