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 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 “When the Patina Fades… The Rise and Fall of Goldman Sachs???“ and I did it without being privvy to Goldman’s financial innards. It was more or less common damn sense. Goldman and its employees do not walk on water, they do not shit gold, and they cannot perform miracles. If one takes an objective approach to their equity analysis, and simple plug 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 ( Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb – 131 pages). 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!!!
Contrary to popular belief, it does not appear that Goldman is a superior risk manager as compared to the rest of the Street. They may
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.
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 they profited from the crisis. To the contrary, I claimed that they 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 the other. Again I reference subscriber document: Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb – 131 pages
As a matter of fact, it looks just as scary today as it does at the height of the bubble, but since very few people read balance sheets, no one really notices.
You know what most people don’t realize is that it looks quite scary now as well.
“We have a strong track record as an investor,” he told analysts in December 2008.
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.
-worth of 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?
Goldman declined to
… 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 ” For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, ”
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. Using your method, our valuation would drop from where it is to an even lower point.
Second, it still has a bunch of trash on its balance sheet, see Reggie Middleton vs Goldman Sachs, Round 2. 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.
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, “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) .
A Few Questions on Goldman Sachs 3rd Quarter 2010 Results That No One Thought to Ask Wednesday, October 27th, 2010
Recommended reading from Reggie Middleton’s BoomBustBlog in the investment banking space…
- Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
- A Step by Step Guide to Exactly How Much Derivatives Risk Each of the 5 Big Banks Actually Have, and How It Could All Go Boom!
- JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!!
- Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!
- As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves
- The Truth Goes Viral, Part 2: Italian Towns Damaged by Derivatives, Downtown Brooklyn Real Estate, Goldman Sachs, JP Morgan, Europe’s Overbanked Status, Reggie Middleton, Matt Taibbi, and Simon Johnson – All in One Video
More on Goldman Sachs
- The BoomBustBlog Review of Goldman Sach’s 2nd Quarter, 2010 Performance: I Told You So!
- On Goldman’s Latest Earnings Results…
- What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone…
- A Realistic View of Goldman Sachs and Their Latest Quarterly Results
- The Brown Stinky Stuff is Splattering Off the Fan Blades and Landing on That Shiny New Building on the West Side Highway.
- No One Can Say I Didn’t Warn Them About Goldman Sachs, Several Times…
- Subscribers can find our most recent Full Forensic report on Goldman Sachs here -GS 4Q09 Final Review and Updated Valuation, current as of January 2010, the month I started reiterating my warnings about this company’s drastic overvaluation.
- Reggie Middleton vs Goldman Sachs, Round 2
- Reggie Middleton Personally Congratulates Goldman, but Questions How Much More Can Be Pulled Off
- Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now!
- Reggie Middleton on Goldman Sachs’ fourth quarter, 2008 results
- Goldman and Morgan losses in the news, about 11 months late
- Blog vs. Broker, whom do you trust!
- Monkey business on Goldman Superheroes
- Reggie Middleton asks, “Do you guys know who you’re messin’ with?”
- Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
- Reggie Middleton on Goldman Sachs Q3 2008
- § As Reality hits, the Masters of the Universe are starting to look like regular bank employees
- Reggie Middleton’s Goldman Sach’s Stress Test: Breaking Ranks with the Crowd Once Again!
- Who is the Newest Riskiest Bank on the Street?