Goldman Sachs: The Don's Best Kept Secrets
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite Lloyd C. Blankfein’s statement in front of 400 people at the Economic Club of Washington, D.C. rejecting claims of proprietary trading by Goldman, Bloomberg discovered a secret department at Goldman Sachs (NYSE: GS) involved in proprietary trading. About a billion dollars of the bank’s own funds are being gambled on the stocks and bonds of companies, including a cement producer and a mortgage service, revealed interviews with over 20 people working for the department, some as recently as last year. The Multi-Strategy Investing (MSI) department's survival shows how the bank dealt successfully with the Volker rule restricting banks from short-term investment. However, the spokesman at Goldman Sachs says MSI, which is headed by a person nicknamed “the Don,” engages in long-term trades.
The department is composed of a dozen employees of which half a dozen say that some of the trades end earlier than the 60-day cutoff period mentioned in the Volker Rule. The team’s traders “should be market-savvy, enjoy a quick pace, dislike long-term projects and have a risk appetite,” a former MSI team member said. Neither the department’s performance nor holdings are reported.
Proprietary trading has led to enhanced risk and massive losses to lending banks like the $6.2 billion loss at JPMorgan (NYSE: JPM). Therefore, regulators have set up clear distinctions between the activities of lending banks and hedge funds.
Among other issues, going into 2013, Goldman Sachs faces the issue of further improvement in client risk appetite driving a sustained opening of the capital markets. The bank’s preparations for the implementation of the upcoming Basel 2.5 regulations, expense management and the 2013 CCAR are other key issues.
Recent Performance
The bank reported a bottom line of $1.51 billion on revenues of $8.35 billion at the end of the third quarter of the prior year. Both revenues and earnings surpassed their consensus mean estimates. Net revenues surged 26% sequentially, while the bottom line grew 57% over the same time period. Much of this improvement in the top line was a result of a 36% sequential surge in the bank’s non-interest revenues. Revenues from market making were responsible for this improvement in non-interest revenues of the bank during the third quarter of the prior year.
Goldman Sachs is scheduled to reports its prior year’s fourth quarter performance on Jan. 16.
Capital Position
The Basel 1 tier 1 capital ratio at Goldman Sachs as reported in its latest 10-Q filing is 15%, up from 13.8% at the end of year 2011. This is compared to a tier 1 capital ratio of 16.9% for Morgan Stanley (NYSE: MS) at the end of the same quarter. Goldman’s tier 1 capital ratio reflects the lack of capital adequacy compared to other US money center banks.
Valuations
Goldman Sachs trades at 7% discount to its third quarter book value, compared to a significant 35% discount for Morgan Stanley. JPMorgan, America’s largest bank by assets, trades at a 9% discount to its book value.
Analysts have a consensus mean price target of $133.46 for Goldman’s stock, which is currently trading at $134.26.
In conclusion, I believe Goldman Sachs will have to shed its hidden department involved in proprietary trading to comply with the regulatory requirements under the Volker Rule. I also believe the bank’s earnings will be negatively affected once Goldman shelves proprietary trading. Therefore, I recommend investor stay away from the stock.
equityfinancials has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs Group. The Motley Fool owns shares of JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
