The bell dinged loud and clear for Goldman Sachs as the company reported it’s fiscal third quarter 2008 results. Until now, the company’s write-downs and credit-related distresses have been paltry compared to the hundreds of billions of dollars dumped by the rest of Wall Street. Goldman Sachs has yet to even post a loss during the credit crisis, but today’s 70% cliff dive in profits is an undeniable sign that the tide has turned. Indeed, it is an omen that the future offers much less than the past.
Goldman Sachs Group Inc., the largest of the remaining independent U.S. securities firms, said third-quarter profit fell a record 70 percent as revenue from advising corporations and trading stocks declined.
Even in light of a 51% revenue drop, Goldman Sachs admitted only to $1.1B in credit-related write-downs:
Revenue dropped 51 percent from a year ago to $6.04 billion. Fixed-income, currencies and commodities, the company’s biggest source of revenue, generated $1.6 billion, down 67 percent. The firm took $275 million in write downs on leveraged loans and related hedges, $500 million on residential mortgages and securities and $325 million on commercial mortgages and securities.
And $1.1B, may appear to put Goldman Sachs serenely above the fray, but don’t forget that at its “Level 3” assets are $68B as well:
Goldman’s Tier 1 ratio was 11.6 percent, up from 10.8 percent in the second quarter. So-called Level 3 assets, including those to which the firm says it has no economic exposure, totaled $68 billion, or 6 percent of total assets. Level 3 assets are the ones that are hardest to value.
A correction from Bloomberg is in order here. Level 3 assets are not the hardest ones to value. They are the hardest ones to sell. They are the most difficult ones to find a market for. If you hold an asset that no one wants, how much is it really worth? Well, Goldman Sachs got Bloomberg to go along with them in saying it’s worth $68B, but you don’t have to believe in fairy tales.
Goldman Sachs so far has been spared the indignities of forced cash raising and being acquired, but the unthinkable has been spoken by Dr. Nouriel Roubini. He has said that mighty Goldman may cease to exist as a separate entity. In fact the firm spent much of the press conference denying this very thing.
Goldman Sachs, the big Wall Street firm, used its third-quarter conference call on Tuesday to rebut the increasingly popular view that it needed to hook up with a commercial bank to survive.
“There’s a prevailing sense that the business model of the free-standing, highly leveraged investment bank that funds itself in the wholesale financial markets is virtually kaput,” Willem H. Buiter, a professor at the London School of Economics, told the New York Times this week.“The pure investment bank was an American specialty,” he added. “But we’ve now seen three major American investment banks go down, so this model looks like a weakness, not a strength in a down market.”
How could the prevailing sense of “the business model of the free-standing, highly leveraged investment bank that funds itself in the wholesale financial markets“ ever have been anything else? The pure investment bank was an American scam. It was just a device to close the deal, get the fees and leave the rotting fruit on the vine for the next guy to pick. And while you’re at it, pay no more attention to the nonsense about Goldman Sachs beating the Street’s estimates than you would to the statements that they made profits during the subprime crisis. Estimates are made to be beaten:
“Goldman didn’t give us the impression that they were going to be stellar numbers anyway. We go into these and we get some numbers which suggest it’s a business which is still making money when the rest of the world is falling apart.
“It gives the markets a bit of faith that the whole of the U.S. financial system isn’t rotten to the core and that there is still occasionally the odd shaft of good news to come through.”
Goldman’s mortgage department underwrote collateralized debt obligations, or CDOs, complex securities created from pools of subprime mortgages and other debt. When those securities plunged in value this year, Goldman’s customers suffered major losses, as did units within Goldman itself, thanks to their CDO holdings. The question now being raised: Why did Goldman continue to peddle CDOs to customers early this year while its own traders were betting that CDO values would fall? A spokesman for Goldman Sachs decline.
They shorted the same CDOs they sold on the open market. That would be like your financial planner selling you a stock that he was personally short. Your financial planner would go to jail, but the stooges at Goldman got away with it. If I were a conspiracy theorist, I would say the fact that the Treasury Secretary is the former CEO of Goldman Sachs has something to do with that.
So, with the credit crisis kicking into high gear, its best earnings seasons behind it and blood on the streets, what is the end game for Goldman Sachs?
Chief Financial Officer David Viniar said that that Goldman has “compassion” for the employees of the failed firms, he also said their bad fortune is a benefit to his company because “clearly when there is less competition it is better for us” allowing for “more pricing power” and a “competitive advantage.”
Monopoly, not compassion, is what they’re after. What happens if they get it? To control an increasing share of the decreasing credit market and be king of the mole hill only makes sense in an economy where competition is a sin.
Dick Bove, an analyst at Ladenburg Thalmann was less optimistic: “If the markets do not recover, Goldman cannot come back,” he said. “It has no ability to do better than the businesses it serves.”
Wall Street is a criminal organization. In a civilized world, we would called them mafia, and the Godfather is Goldman Sachs. For the sake of the retail investor and the average citizen alike, we can only hope the Godfather fails.