Everybody Else Was Doing It

Last night the Wall Street Journal reported that Morgan Stanley is being investigated for its mortgage derivative sales practices. This is very good news for Goldman Sachs as they can now use the "all my friends were doing it" excuse. I doubt the government is looking to take down the last two remaining independent investment banks. More likely they are waging a public relations war to get financial reform passed and look like they are doing something before the election.

Goldman's market cap has taken a $25 billion hit since news of the investigation broke. This increasingly seems like an exaggerated amount. Any government penalty is likely to be a fraction of that. The fact that others were allegedly knowingly selling crap to their customers makes it less likely that customers will defect to other firms. While this does not make Goldman's behavior right it does make their stock look cheap.


PJ said...

Yes, rumors are Goldman's fine will be $1 to $5 bn ... the financial reform bill will have nothing bad for the banks. Investigations are for show.

No idea where GS goes in the short term, but I will bet that it's down in 6 months.

Tsachy Mishal said...

Tangible book will be $120 by the end of the year. There is also some franchise value in the many businesses they built up. Unless you are predicting major trading losses or dont trust their marks its hard to see major downside.

As an aside I dont trust the marks at most major commercial banks but I trust Goldmans.

PJ said...

I would agree that Goldman has the soundest marks ... they needed conservative marks to conceal their outrageous profits this last year. And no, I don't expect trading losses, in the ordinary meaning of "trading."

Still, I'm expecting enough bad news to hurt their asset portfolio. I'd expect tangible book to be less than $120 and the market to gravitate toward a 1x book valuation - if not this year, by mid-2011.

Earning power will be gravely impaired in a bear market. You don't need trading losses, just reduced trading income with some asset writedowns. What's a zero earnings, $100 book value company worth, if it's leveraged to the gills and you don't know what its derivative exposure is and distrust the solvency of its counterparties?

Probably won't go back to the 2008-2009 lows though, unless it blows up.