.There are a number of people feeling skeptical about Goldman Sachs these days. Interestingly, two reporters from disparate publications [The Globe and Mail and BusinessWeek.] both mentioned yesterday having that same cynical feeling themselves. While the potential list of reasons that could have given is long, Derek DeCloet of the Globe and Mail lists five: [Four are summarized here.]
1. The loss of December 2008 on Goldman's books:So the last fiscal year ended on Nov. 28. The current fiscal year began on Dec. 27, 2008. What happened in between? Little children woke up one morning to discover that a fat man in a funny suit left them a wrapped box of Lego under a balsam fir. And Goldman lost $1-billion, primarily because of trading losses and writedowns on investments. But the loss stains neither the 2008 nor its 2009 full-year numbers– it's marooned. It's almost like it never happened.
2. The valuation of Goldman's level 3 assets:
Goldman's stash of level 3 assets is getting smaller – it has shrunk by about $10-billion since November, 2007. But it's not shrinking as fast as the rest of its balance sheet. The level 3s are still nearly $60-billion, or 125 per cent of what shareholders have invested in the company. Most of the money was invested in private equity deals, “leveraged loans” (which finance corporate takeovers or leveraged buyouts) and commercial real estate debt. It's impossible to know how conservative Goldman is being in its valuations, but the size of its level 3 pile remains large enough that significant writedowns would hit the bank's capital.
3. Goldman's willingness to drink at the government well. They, like other banks, are issuing debt backed by the FDIC- but with a difference:
The difference is that Goldman does little lending compared with, say, Bank of America or Wells Fargo. What Goldman does do is trade and invest for its own account.
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A cynic might ask how long the U.S. government will want to guarantee the debt of what is, in part, a giant hedge fund.
4. How Goldman achieved its level of results the first quarter:
On that remarkable weekend when U.S. Treasury Secretary Henry Paulson (ex-Goldman) allowed Lehman Brothers to fail and sent Merrill Lynch into the arms of Bank of America, a lot of competition left the trading floor. So now, when Goldman goes to buy or sell a bond, an oil contract, a yen futures contract, it can pay less and charge more, earning better spreads.
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DeCloet has not the only one feeling skeptical yesterday about Goldman Sachs. BusinessWeek's Matthew Goldstein said of the firms "transparency":
[B]ased on Goldman's current disclosures, savvy investors have reason enough to be skeptical. As we've already pointed out, much of the firm's profit in the most recent quarter came from its trading desk—the same group of bond and commodity traders responsible for much for Goldman's outsize profits during the credit boom. It's not clear how sustainable those results are, largely because Goldman discloses so little information about the inner workings of its trading activities.
One thing we do know is that Goldman's trading desk is still piling on risk. One important securities industry gauge for measuring the risk of a potential trading loss at the firm rose sharply over the past year. The "value at risk" measurement—which is supposed to project a firm's potential losses on any given day—rose 52% over the past year, to $240 million. Before the financial crisis, everyone on Wall Street used to joke that Goldman wasn't so much an investment firm as a giant, risk-laden hedge fund. It seems that old label still applies.
So if you were looking for Goldman to become a bit more transparent and chastened after becoming a bank holding company and falling under the Fed's umbrella, think again.
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Feeling skeptical? Join the club.
***********************************Debi Averett blogs on housing and economic issues at HousingDoom.com.
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