What The SEC Case Against Goldman Means

I underestimated Barack Obama as I thought he was all talk and would get nothing done. Then he surprised me a few weeks back and shoved through health care reform when everyone gave it up for dead. Now he has come out fighting against Goldman Sachs. I now believe he will be able to push through financial reform.

Financial reform will mean lower profits for the banks. Trading stocks has become a commodity business, which is why so many large banks have gone into trading OTC derivatives. The opacity of the markets allows them to earn greater spreads as there is no choice but to trade with the large banks. If these derivatives were traded on an exchange through a central clearing house the banks would not be able to earn such high spreads, which is why they are fighting it tooth and nail. Additionally, prop trading would take a hit if financial reform were enacted and leverage would likely be reduced.

Goldman trades at eight times earnings so clearly a lot is priced into the stock. I believe the largest cost of the SEC's case will be reputational. Goldman's greatest strength has been its reputation as people want to be clients of the "smartest" firm. Goldman Sachs Asset Management has had some of the worst performing funds yet has grown because of the Goldman Sachs name. However, if clients believe that Goldman is trading against them that could induce them to take their business elsewhere. Additionally, companies and sovereign clients that are politically sensitive might not want to be associated with Goldman. The SEC fines and lawsuits can amount to a nice chunk of change but they are one time in nature. The reputational cost is the real cost.


PJ said...

Agreed ... with a few caveats. I'm not sure how bad financial reform will be for the banks once it goes through Congress; and Obama is certainly going to take the banks on for public consumption, but the banks do have friends in the administration and there may be compensating benefits for them that aren't publicized. I am short the banks, but not because of financial reform.

If a true de-risking bank reform did pass, it would be a bonus for me, as it would get us out of the bubble-boom and then crash cycle that I find hard to trade, and to a more rational market with lower but more stable bank earnings. But I think some administration figures know that a bubble economy is their best chance to put off economic pain past the 2012 election, and they need leveraged banks to pull it off, so will water down any legislative provisions to force less leverage and risk upon the banks.

Random Thoughts said...

By popular demand here she is, Kelly Brook in Mammary Monday

Anonymous said...

I guess I'm glad your not a judge!
Guilty as charged with no chance to redeem themselves!! Yikes

Tsachy Mishal said...

where did i say they were guilty as charged?