http://news.google.com/news?um=1&ned...dr=w&as_drrb=q

http://www.bloomberg.com/apps/news?p...d=aa9m6duHps5k

Goldman Sachs Lack of Love Puts Profit at Risk: David Reilly

Share | Email | Print | A A A



Commentary by David Reilly


July 22 (Bloomberg) -- Weathering the aftermath of the financial crisis may prove tougher for Goldman Sachs Group Inc. than surviving the storm.
Long the Wall Street firm everyone loves to hate, Goldman saw the brickbats rain down last week after it posted blowout second-quarter results and set aside a record amount for compensation. Even the arch-conservative Wall Street Journal editorial page joined the attacks.
Usually, Goldman takes a sticks-and-stones approach to such vitriol, even if being labeled a “great vampire squid wrapped around the face of humanity” by Rolling Stone magazine is new. This time, though, names may hurt the bank and its share price.
Goldman is at the center of the debate over regulation of too-big-to-fail institutions that benefited from what was estimated this week to be a $23.7 trillion bailout of the financial system. Even President Barack Obama singled out the firm when talking of the need for change on Wall Street.
“Now, there are some companies, like Goldman Sachs, that have paid the money back and that means that we don’t have the same kind of levers on them that we might have,” Obama said during an interview on PBS earlier this week. “And that’s why I think it’s important to pass this broader financial regulatory reform package.”
The danger for Goldman is that it becomes a focal point for populist bailout ire, leading the government to take a tougher stance on regulation. Treating too-big-to-fail institutions as financial utilities, for example, would curtail Goldman’s ability to generate returns on equity in excess of 20 percent.
Clear Picture
So until the policy picture becomes clearer, it’s tough to justify talk of a return to valuations for Goldman’s stock greater than two times book value, or its net worth. After gaining more than 15 percent in the past 10 trading days, Goldman’s stock is now priced at about 1.5 times second-quarter book value.
Goldman will have to work hard to see that its wings don’t get clipped, especially after posting second-quarter net income of $3.4 billion and setting aside $11.4 billion in the first half of 2009 for compensation and benefits.
For starters, most folks aren’t quite sure how Goldman manages to make prodigious amounts of money. That leads to a feeling the firm must either be taking huge risks, or unduly benefiting from its extensive government connections.
Goldman hasn’t done a good job dispelling such notions and it sometimes makes matters worse. The firm has failed to adequately explain its trading relationship with American International Group Inc. and give a clear sense of whether and how it benefited from the massive bailout of the insurance giant.
Bubble Times
The firm’s 23 percent return on equity in the second quarter also struck some investors as more reminiscent of bubbly times. An old rule of thumb is that the higher a financial firm’s return on equity, the bigger the risk taken to make its money.
On top of that, much of Goldman’s systemic risk stems from its big role in derivatives markets. With outstanding derivatives contracts with a notional value of $48 trillion, Goldman trails only JPMorgan Chase & Co. with $81.1 trillion and Bank of America Corp. with $77 trillion in contracts, according to Office of the Comptroller of the Currency.
Yet Goldman’s total credit exposure from derivatives contracts is more than 10 times its capital, or the buffer available to absorb losses, according to the OCC. That compares with just 3.2 times for JPMorgan and 1.7 times for Bank of America.
Trimming Risks
For its part, Goldman says it has trimmed the risks it takes while shrinking its balance sheet. Over the past year the firm has halved the amount of borrowed funds, or leverage, it uses.
Goldman has also built up the amount of liquidity, or short-term funding, to record levels, while bolstering its cushion against loss. The firm’s Tier 1 ratio, a measure of regulatory capital, stood at 13.8 percent at the end of the second quarter, compared with 9.7 percent at JPMorgan.
“The world is still a tough place,” Goldman Chief Financial Officer David Viniarsaid on the firm’s earnings call last week. “We’re going to be conservative.”
And in all the Goldman bashing, one thing gets lost: it was the only major investment banking firm that avoided self- inflicted wounds during the crisis.
Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. all to some degree had a hand in their own demise, while Morgan Stanley tripped itself up on a botched trading strategy.
Avoiding Landmines
Goldman didn’t step on one of its own landmines and insulated itself early on from the worst of the slump in housing and financial markets.
True, Goldman and Morgan are only alive today because the government propped up the financial system. The same is likely true, though, for others like JPMorgan and especially Citigroup Inc.
Not to mention that the bailouts were meant to keep financial institutions afloat so they could eventually make money. So Goldman did what the government wanted.
The problem is that what the government gives, it may also take away. And in a new era of frugality, the risk is real that policy decisions will be driven by headlines about huge Goldman profits and bonuses.
If that’s the case, Goldman may find its image crisis turning into a profit problem.
(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: David Reilly at dreilly14@bloomberg.net
Last Updated: July 21, 2009 21:00 EDT

__________________

wtf man i thought they only stole 14 trill

__________________
The Gold, Its In The...

This is another reason why 911 when down ... so they could continue to loot the treasury with impunity ... in fact I found a video indicating just that and will put it in my 911 thread ...
these assholes in Washington are crooks and they are going to continue to loot the treasury and commit crimes until we the people stop them. That all there is to it. People are going to have to make a decision to stand with a group working to stop these criminals or keep sticking their ass up so the crooks can keep them. The looting will not stop until we stop them.

__________________
Our Beautiful Ladies ...
Keep Them Safe Keep Them SECRET!
911 ... inside job!

Either way its funny as hell.

Forreal I'm laughing at all of it. We're fucked! :h ump:

__________________
"And those who resisted were dragged out from their homes. This necklace was fashioned out of their teeth and bones."

This is why I said we are witnessing the world's largest train robbery when Paulson first rammed through the first stimulous packages. With government, its never enough wether they are taking our political liberty or our economic liberty.

Vi

__________________
Liberals are people that will believe anything twice.

Yeah... but how the hell did they manage to take this unspeakable amount of money. And why the hell are the American people not talking about this? Why aren't people pissed?

Did you know, you owe $80,000 now? Your children, your parents, your spouse, your siblings. Why are the people not angry yet? Are they really that ignorant and blind?! This is just unreal, it's unimaginable. 24 trillion dollars... lol. Our national debt is only 11.6 trillion. Umm, hello? Why is this not a hot topic?

You know what's funny about it all? They could have paid every household a fat $200,000 check. Can you imagine what that would do to the economy? Spending sprees galore, we would fix this bullshit. But no. They wanted to fucking steal it all and give us NOTHING.

Now I know for certain. It is hopeless, nobody cares and this robbery will continue. Goodbye America.

__________________
"And those who resisted were dragged out from their homes. This necklace was fashioned out of their teeth and bones."

My theory is the the people have been trained to not care. but you can put aig up and make out what they did (legally) and get the people to protest and hate them, but whats 24 trillion among friends right? what .001% realize is that money is going to be spent and its prolly going to be spent against us.

__________________
The Gold, Its In The...

Hell they could have given every man, woman, and child a million dollars. That would only be about 300 million dollars.

__________________

You mean a dollar? $300,000,000 would be 1 dollar per person.

__________________
They may take our lights, but they will never take our freesun!