Felix Salmon

Chart of the day, Goldman Sachs edition

By Felix Salmon
May 18, 2010

On this day in 2009, Goldman Sachs closed at $141.85 per share, adjusted for dividends; since then, it’s announced $24 per share in earnings. It’s now trading at $137. Somehow, the bank has managed to lose value over the past 12 months, even as the S&P 500 has risen by 25%. Here’s a chart showing the relative one-year performance of Goldman (blue) and Bank of America (green) against the S&P 500 (red), up to yesterday’s close: it doesn’t even include today’s 4% drop in Goldman’s share price.


Goldman is now trading at less than a 7% premium to its book value last quarter of $128.33 per share — and remember that given how profitable it is, that book value is surely rising by the day. Its p/e ratio is floating around 6, which is hilariously low for a company making this much money. And looking at the chart, the fate of Goldman’s stock has nothing to do with being too big to fail — anybody who would stop Goldman from growing would do the same to BofA.

It seems to me that even if a pretty tough version of the Volcker Rule is implemented, there’s a good chance that Goldman will be able to either get around it by cutting off its access to the Fed discount window, or else will be able to make a windfall profit if forced to sell of its swap desk. So the risk here is reputational: Goldman really has lost its golden aura, and with it the prospect of garnering a lot of fee income going forwards. And if Goldman ends up getting convicted of criminal charges — which is still a possibility — then it could just disappear entirely, just like Arthur Andersen.

Suzanne McGee has a book out next month entitled “Chasing Goldman Sachs”, whose thesis is that the financial crisis was caused in large part by banks trying to emulate Goldman and failing. Right now, no one is chasing Goldman Sachs at all, and if the current slump in its share price continues, Goldman will no longer be enviable in any way, and instead will act as a cautionary tale.

Incidentally, that share price is the main thing to look at if you’re handicapping the future of Lloyd Blankfein. He can weather bad headlines, but if he presides over the permanent loss of tens of billions of dollars in shareholder value, then he’s toast. His shareholders will forgive anything but that.

2 comments so far | RSS Comments RSS

Windfall profit from selling the swap desk?

First, we need to distinguish between credit default swaps and interest rate swaps.

Without access to the federal tit, the GS credit default swap desk/books have about as much value as a toxic waste dump. It is knowing that they can dump the losses on the taxpayer and look for the federal government to take out the competition that allows GS to proclaim that they are the greatest traders in the world.

The interest rate swap desk/books probably are worth a little more but again you are talking about traders on training wheels. Traders who have never, ever risked a dime worth of their own capital — only shareholder money and then taxpayer money.

Posted by longandshort | Report as abusive

If Goldman hasn’t already prepared absolute exit strategies, they’re not half as smart as they’ve been given credit for. BofA meanwhile can only hope their turn in the dock doesn’t come too quickly after Lloyd’s, because come it will.

Posted by HBC | Report as abusive

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