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What Do Goldman Sachs and B.B. King Have in Common?
From Bloomberg: Goldman Sachs Lost Money on 10 Days in Second Quarter
Goldman Sachs Group Inc. , the bank that makes the most revenue trading stocks and bonds, lost money in that business on 10 days in the second quarter, ending a three-month streak of loss-free days at the start of the year.
Losses on Goldman Sachs’s trading desks exceeded $100 million on three days during the period that ended on June 30, according to a filing today by the New York-based company with the U.S. Securities and Exchange Commission. The firm also disclosed that trading losses surpassed its value-at-risk estimate, a measure of potential losses, on two days.
In “The BoomBustBlog Review of Goldman Sach’s 2nd Quarter, 2010 Performance: I Told You So!” I took the time to remind readers and subscribers that Goldman Sachs, despite adulation in the press and the sell side, barely covers its cost of capital in ROE. This means that the firm is actually a lot riskier (economically) than many either realize or admit. It also brings into question the volatility of Goldman’s trading practice which has been the firm’s bread and butter over the last couple of years. A picture is worth a thousand words, even if we haven’t levered up 22x…
The chart below demonstrates how the volatility of the revenues from the trading and principal investments trickles down into volatility of the total revenues and profits of Goldman Sachs. I don’t call Goldman the world’s most expensive federally insured hedge fund for nothing!
If those that follow me remember, I was bearish on Goldman long before became popular, and profitably too (as the media and analysts fawned all over this company)!
Now, considering that GoldmanGS’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, “Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look” and “When the Patina Fades… The Rise and Fall of Goldman Sachs???“, 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 Reggie Middleton vs Goldman Sachs, Round 2) .
GS return on equity has declined substantially due to deleverage 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.
Subscribers can download my full review of GS’s most recent quarter here: 
GS 2Q10 review. It is a recommended read, for we have performed some sleuthing and believe we may have conclusive evidence that the solvency of thisoverly marketed hedge fund investment bank is again at risk, just as it was in 2008. For those who wish to partake in our services, you may subscribe here.
More on Goldman Sachs, et. al.:
On Goldman’s Latest Earnings Results…
When the Patina Fades… The Rise and Fall of Goldman Sachs??? Tuesday, 16 March 2010
Re: Morgan Stanley’s Q2 2010 Results – The Mainstream Media May Be Hazadous to Your Wealth!
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What difference do 10 days make?
GS is backed by the govt.
GS can take whatever risks and losses.
GS is TOO BIG TO FAIL.
The government forces the taxpayer to backstop GS and bail out GS whenever needed. If the govt did not bailout GS repeatedly during the year of shame (Bear Stearn, Fannie, Freddie, Lehman, AIG, bank charter), GS folks would be packing up there knic-knacs and thrown on the street like Lehmann employees.
GS is not smarter, it is just more connected, has more juice.
But, until a prosecutor with balls of steel impounds 200 West Street and puts every capo at GS on trial, the bottom line is GS can do any damn thing it wants, include losing a little money or losing enough money to sink the U.S.A.
Spot on Reggie, spot on. They are losing revenue and it is making it difficult for them to absorb any writedowns if it happens or is happening now. The market is artificially being propped up by algo's trading via massive computers between a few brokerages and the govt.. Also people are starting to realize how much of a shell game and how opaque our financial system is. They don't like outsiders in the system because if they did see what was happening they would tell and/or get out. When this whole game comes down, it will hurt all of us.
I did what I did before love came to town.
I reckon they decided to lose money deliberately for a few days to shrug off the suspicion that ZH has cast on them for having such a 'perfect' profiteering record
Goldman Sachs Makes Documentary About Itself
Filmmaker Ric Burns, who co-created the PBS series “The Civil War” with his brother Ken, has been hard at work on his next documentary. The subject? Goldman Sachs (GS).But this isn’t going to be some anti-capitalist screed a la Michael Moore’s Capitalism: A Love Story. In fact, Goldman Sachs actually hired Ric Burns to make the film, and will retain complete editorial control over the project through its marketing department.
What other famous "leaders" in history did this kind of thing? Anyone, anyone?
Did I just violate Godwin's law?
You are too close to the truth there, Missy. Better back off or you'll be under surveillance.
Is their cost of equity Really 11.5%?? Seems, um, high, given ZIRP.
Obviously, The Thrill is Gone.
Speaking of Goldman- anyone notice a flash drop around 1315? My ticker shows a GS low for a split second of 13.10 before bouncing back. Maybe Scottrade went loco but that's what I show. Anyone else seeing this?
What do they have in common? They both have a Blues Club on Beale Street in Memphis???
Banker took my money
Bought him a stake
The banker swore that one day
We`d both feel great
Then the 80`s turned to the 90`s
And my money can`t be found
Banker`s on a long trip
Out of town
Fool Me Once
The King
This is a Banker's band. Loyd's got the mike and Jamie's on lead guitar.
What's interesting about GS & Ilk....
Is...
1) Used to make $ on stocks...
When direct access electronics means took over....volume spiked and sub second algos were developed...
The shift from $100 per unit to 1 cents per unit...
Lots of volume....and the need to look elsewhere...
2) Opague mark ups on debt....when debt bid ask became more transparent....other less transparent...and highly levered derivative instruments evolved....
The game now is keep transparency to a minimum...and markups on "money from nowhere" derivatives at a maximum....
Just check the latest lobbying efforts...
..........................................................
Remedies
1) Boiler plate public admissions
2) Boiler plate reporting
3) Electroniic surveillance
4) Eliminate many of the currently allowed opague derivative instruments...
5) Defrag the exchanges
6) Enforce size limitations
7) Make the exchanges for RETAIL participation
....Just the beginning of the list....
Grammar off: What DO GS and BBK Have in Common?
Nobody loves them but their mama and I think she's jivin' too.