Goldman Sachs: The Squid and the Whale of a Quarter
Goldman Sachs (NYSE:GS) today threw a giant slab of raw meat (filet mignon, no doubt) to the “vampire squid” conspiracy theorists, who now appear to include Eliot Spitzer in their number. However hard-earned Goldman’s blockbuster quarterly profits were, you’d think they might want to hold some back for (another) rainy day or at least to minimize the inevitable barrage of criticism. But then again, maybe they did.
Critics argue that Goldman benefited mightily from the demise of Bear Stearns and Lehman Brothers, and the weakening of other rivals. Fans say: so what, that’s the way capitalism works. Fair enough, if not for the activist role of the government in helping pick winners and losers.
The Motley Fool has a helpful table showing where the money did and did not come from:
“The big standout — fixed income, currency, and commodities — is blowing up not only from less competition, but a steep yield curve thanks to low interest rates and continued volatility in debt The other moneymakers, equity and debt underwriting, have the wind behind their backs as companies from all industries exploited market optimism to raise capital in the second quarter.”
“This is all great news for Goldman — and will likely spill over to Morgan Stanley (NYSE: MS) when it reports next week — but we have to ask how sustainable these record earnings are. Credit spreads will eventually retract, companies will stop issuing one-time equity boosts, and competition will return.”
Ultimately, that could make Goldman’s blowout earnings look more like a one-off event than a permanent return to greatness.
CreditSights is more bullish, describing Goldman as a greyhound in a mutt world.
Still, not reporting like a bank and not acting like one either.
“After two full quarters as a bank holding company, we note that Goldman Sachs has not yet converted to reporting its earnings in a bank-like fashion. For instance, the company does not provide a full balance sheet with its press release, or provide detailed break downs of revenues and valuation marks. In general, our sense is that Goldman’s switch to bank holding company status was basically a security blanket in the worst of last fall’s troubles, and the company would be happier today if it could let it go. We also sense that Goldman Sachs may not yet have the same level of regulatory scrutiny that many banks routinely live with.”
“Even so, we view those as more long-term issues and for now, we recently moved Goldman Sachs stock recommendation to Overweight from Marketweight based on our view that the legacy brokers should be able to thrive in the current environment of improving capital markets conditions, as both equity and fixed income underwriting volumes bounce back as companies rushed to address their funding needs.”
Still, the stellar results did not impress Standard & Poor’s, which quickly issued a statement that Goldman’s ratings would be unaffected:
The second-quarter performance points up GS’s preeminent competitive position in trading, but also its dependence on this business line.
For more analyst comment, see Alacra Street Pulse.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
