Goldman cuts leverage + CreditSights commentary
As predicted, Goldman reported blow-out earnings. The market had been expecting as much, which is why the stock has been flat today.
The good news is that Goldman’s leverage fell again this quarter. Total tangible assets were $885 billion; tangible common equity was $50.9 billion. That implies leverage of 17x, or a TCE ratio of 6%.
Last quarter leverage was 22x, implying a TCE ratio of 4.5%.
Before we go giving Goldman too much credit for shrinking its balance sheet, it would be nice to understand all its off balance sheet liabilities, a distinctly difficult exercise since Goldman doesn’t disclose the necessary data (more on poor disclosure from CreditSights below)
Moreover, their balance sheet is still far from pristine. Level 3 “mark to myth” assets still equal $54 billion, which is higher than the bank’s TCE. And they didn’t provide any disclosure of Level 2, “mark to model” assets. I’ll provide an update here when they publish the data in their 10-Q.
CreditSights made the following, very interesting points in their report today (no link)
Nominally a bank, still thinking like a broker
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 revenue 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. We note that the company still reports a Basel II Tier 1 ratio which was used by the SEC under its oversight, whereas banking regulators have always been focused on Tier 1 under Basel 1.
Our view is that because Goldman Sachs passed the SCAP stress test with flying colors and repaid its $10 billion in TARP preferred stock, the company has basically been given a green light to continue operating in a “business as usual” fashion. Bank regulators have their hands full with other deteriorating bank situations and for the time being, seem content to let Goldman do what it’s always done. Over the longer term, we wonder if Goldman’s business profile, which relies heavily on trading and principal investments, will sit well with bank regulatory authorities. our understanding base on current reform proposals under Obama is that certain companies deemed as “Tier 2″ — of which Goldman will certainly be one — will face higher capital and liquidity requirements, as well as potentially tougher scrutiny that peers.
Goldman shouldn’t get a green light for paying back TARP preferred. There’s also the matter of AIG collateral payments and FDIC debt guarantees as I blogged yesterday. Until Goldman is out from under those rescue blankets as well, and subject to far more stringent capital requirements, government officials shouldn’t be discussing “green lights.”