The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Goldman Sachs’ shareholders have little to grumble about. Sure, the bank’s plans to buy back $5 billion in expensive preferred stock held by Warren Buffett appear to have been put on hold thanks to an industry-wide debate with the Federal Reserve over how to manage capital. That includes deciding when dividends can go up. But investors in Goldman’s common stock already have an advantage over the competition.
The impressive third-quarter showing from General Motors shouldn’t wow prospective investors too much. Sure, the automaker’s $2 billion profit beat Ford’s. It even eked out a slightly better pre-tax margin than its rival. But GM’s last set of earnings before next week’s initial public offering aren’t as flattering as they look.
The company stuffed its dealers with 10 percent more inventory than it did at the end of June. There’s nothing inherently wrong with that. Car sellers have kept fewer vehicles on lots over the past couple of years. Demand was lacking, as was financing. But in GM’s case, many dealers also held stocks down in case the Motown manufacturer cut them loose in its restructuring. Rebuilding those levels now makes sense as the 2011 season approaches and sales pick up.
Closing its proprietary trading desks is just one stage in Goldman Sachs’ make-over — and an early one at that. The Wall Street firm confirmed in a regulatory filing that it has “liquidated substantially all” the positions taken by its principal strategies group. The Volcker Rule mandated the move. But shuttering so-called prop desks is emblematic of a broader shift at the firm.
Goldman used to be the master of managing business conflicts, perceived or otherwise. Even though some clients would occasionally mutter that they suspected the firm’s traders were trading against them, Goldman convinced enough of them of its market nous to boost the number of its trading clients by half to 6,000 between 2006 and 2009.
BlackRock’s new $1 billion jumbo mortgage fund paves the way to reshape the U.S. mortgage market. If its blue-chip presence tempts others to follow, it would reopen the private mortgage securitization market, reduce the need for federal guarantees and bypass many of the conflicts and practices that contributed to the housing-led economic crisis.
The idea, first reported by Reuters, is pretty simple: rather than buying mortgage bonds from lenders, the asset manager will buy packages of loans from the banks instead and bundle them into securities itself. It’s not the first to do so — in April Redwood Trust sold the first, and so far only, mortgage bond in more than two years not backed by government-run entities like Fannie Mae and Freddie Mac.
Taxpayers will have to wait a while yet to get back the money invested to keep General Motors out of the scrap yard. The Detroit carmaker is running far more smoothly thanks to its stint in bankruptcy last year—it earned as much as $2.1 billion in the three months to September, its third straight quarter of profits, according to preliminary results. But the terms of GM’s upcoming share sale show that, once public, the stock will have to as much as double before its biggest shareholder, the U.S. government, gets close to breaking even.
Assume GM’s initial public offering launches at $26, the bottom of the projected price range on the deal. That would mean the U.S. Treasury, which today holds 61 percent of GM, would be taking a 42 percent loss on any stock it sells in the offering. It is planning to sell 263 million shares, or around 28 percent of its holdings. If it does, to get back into the black on its investment GM shares would need to more than double, to above $52 a share, according to a Reuters Breakingviews analysis.
Why should the fate of a bank in one of the tiniest American states be of any concern to the global banking sector? After all, Delaware is hardly the place to look for broader trends. But the manner in which one of the state’s banks, Wilmington Trust, was forced to sell to rival M&T for a song could end up haunting the entire industry.
Wilmington didn’t look shockingly spooky initially. The bank has been struggling for a while, losing money each quarter since the first half of last year. And in early October it became clear chief executive Donald Foley, who only took over in June, was looking to raise more capital. That left the bank looking like any number of regional institutions, including more than 600 that took money under the Troubled Asset Relief Program, that were still struggling with the after-effects of the real estate crash.
Bruce Wasserstein left behind a healthy Lazard. During his nearly decade-long reign, he whipped into shape a firm that had been mired in internecine warfare. When Wasserstein died unexpectedly a year ago, there were fears in some corners his hard work might unravel and Lazard would revert to its bad habits. The shares tumbled in the days following the news. But as the third full quarter of results under new boss Ken Jacobs shows, these concerns have so far proven unfounded.
There’s no apparent sign of vicious infighting or a mass exodus. And revenue for the first nine months of the year in its mergers sweet spot jumped 28 percent from the same period last year, twice the increase in overall global deal volume. That virtually offset the inevitable decline in revenue from its restructuring business as corporate defaults began to decline.
James Gorman took a bop on the nose in the third quarter. While his peers have largely beat estimates by analysts, Morgan Stanley’s chief executive presided over results that not only missed the target but racked up an unexpected $91 million loss—and had to lean on investment gains and a tax break to fend off an even worse showing. After a decent first half of the year, the setback is disappointing.
The surprising writedown on an Atlantic City casino project pushed the firm into the red. Morgan Stanley already had taken what appeared to be a full hit on the Revel investment when deciding to offload its stake early this year. But it has yet to find a buyer at the price initially marked on the books.
What should Goldman Sachs do with its excess capital? According to David Viniar, the finance chief, the Wall Street firm already appears to have more than enough to surpass the minimum 7 percent Tier 1 common equity ratio that will be required under Basel III, and may have as much as 11 percent by the end of 2011.
That is stoking speculation that Goldman could increase its common stock dividend, buy back shares or go on a spending spree. But the first thing executives should do is retire the $5 billion of cumulative perpetual preferred stock that Warren Buffett bought two years ago.
Goldman Sachs is coming down to earth with a bit of a bump. Sure, the Wall Street giant’s third-quarter earnings of $1.9 billion handily beat analysts’ expectations. That’s good news in any quarter, and especially after talk of a summer slowdown. But Goldman’s results usually lead the pack. Not this time.
Take the firm’s market-leading franchise in fixed income, currency and commodities trading, where revenue fell 14 percent from the second quarter, or around 10 percent once accounting for losses taken marking up the value of its own debt.