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Goldman Sachs (GS)
Time to Believe in Goldman Again?
There is a lot going on at Goldman Sachs. Now would be a good time to evaluate what the immediate and intermediate future looks like for the securities giant as well as get a sense of how the firm managed to get through the worst of times. As detailed in Barrons latest cover piece, it is now safe to say that Goldman and Morgan Stanley (MS: Charts, News, Offers) are survivors. There was a time last September that the prognosis was not too good. But they pulled through (with a little help from friends) and now Goldman reportedly is on the verge of making some key strategic decisions which include bringing some Chinese money back home, attempting to get rid of those omnipresent government officials and making a huge splash in the ETF market.
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Goldman is clearly back in business. It has managed to regain the trust of investors. The stock has more than doubled off its 52-week low of $47.41 and now trades around $113. To be sure, that is well off the $200 range that it was trading at before the financial crisis began but given where the company was last September, when the words 'bankruptcy' and 'Goldman' were often used in the same sentence, it has come a long way. Executives at Goldman now feel confident enough about the future that they reportedly want to pay back the $10 billion they received from the government (back in October as part of the TARP) within the next month. The primary motivation behind such a move would be to get the government and Congress off their backs. The federal stimulus bill passed last month severely restricted the ability of firms receiving TARP money to pay bonuses to top executives and as has been well-documented over the last few days, the House, on the heels of the AIG bonus controversy, has passed a bill that would tax bonuses received by individuals making over $250k at 90% (i.e. essentially if that bill were to be signed into law, which it probably won't be, Goldman wouldn't be able to pay its people adequately).
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Goldman is looking at divesting part of its investment in a Chinese bank, Industrial & Commercial Bank of China (ICBC) to help raise funds to pay the TARP money back. Reports indicate that Goldman will sell about 20% of its stake for about $1 billion. Also, interestingly, Goldman is also looking at Barclays ETF business. The British bank is desperate to raise cash and is therefore, shopping around its iShares unit, which is the leading provider of exchange traded funds (ETFs). Goldman is apparently one of the parties that will be putting in a bid and will be competing with a few private equity firms. iShares is expected to fetch around $5 billion. ETFs are decidedly a main street business catering to retail investors, a segment of the market that Goldman traditionally has eschewed; therefore, it is a little surprising that Goldman would be interested in it.
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But it's probably another sign that Goldman is having to deal with the changing times. Yes, the firm made it through the implosion of the financial markets last fall and now is starting to evoke bullish sentiment. However, that sentiment should definitely be tempered by numerous facts, two of which are critical. One, Goldman is now a bank holding company, its no longer strictly an investment bank. That means much less leverage and more government supervision. Even after the TARP money is paid back, Goldman will still fall under the purview of the FDIC and the Federal Reserve. The return on equity will fall immensely to levels not yet known. Right now, investors don't have a clear idea of how profitable Goldman will be under the structure of a commercial bank. It doesn't have the experience that a JP Morgan (JPM: Charts, News, Offers) has in this field. The first clue will come next month when Goldman reports Q1 earnings.
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Second, no matter how much Goldman decries the federal government and its involvement in Goldman's businesses, it is hard to believe that Goldman could have made it through last fall without Uncle Sam. Assistance was doled out in numerous forms. The $10 billion capital infusion via TARP, the issuance of about $25 billion in corporate debt which was backed by the FDIC (therefore, allowing the firm to pay a much lower interest rate that it normally would have had to, most estimates credit this with saving the company about $500 million a year) and the support given to AIG, are three noteworthy examples. The last one is especially important because if the government had let AIG go into receivership, Goldman would have got only pennies on the dollar for its exposure to AIG which was around $15 billion (even though the company claims this exposure was fully hedged). However, the point is that no matter how you slice it, Goldman has a way to getting favorable treatment from Washington. 'Government Sachs' might be too strong a way to put it but there is no denying that Goldman exercises considerable influence in political circles. There is a real risk that a smaller, less profitable Goldman will not carry the same cachet.
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Click here to view a detailed profile of Goldman Sachs.
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