Goldman Sachs Is Fish Food

09/02/2011 10:22 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The trading addict is recycling old news in a last-ditch attempt to scare up some business, writes senior editor Igor Greenwald.

What’s Goldman Sachs (GS) for? Investors no longer know, the main reason the former Wall Street titan’s stock is down 36% this year.

Goldman, memorably caricatured by a Rolling Stone writer as the “vampire squid,” at least used to have its tentacles in all the right places.

It helped hedge-fund manager John Paulson make billions betting against subprime mortgages, and made a pretty penny on the trade itself before getting bailed out by the Federal Reserve and Warren Buffett from the unforeseen consequences of its profiteering.

It helped Greece hide billions in fiscal deficits that would ultimately spark Europe’s debt crisis.

In its heyday, Goldman was the biggest dealer in the global financial casino—and one of the savviest gamblers as well, divvying up billions in trading profits among its partners.

Now the manner in which some of those profits were made (and the after-the-fact explanations by Goldman executives) are the focus of a federal investigation, and the reason Goldman’s CEO recently felt the need to hire outside criminal defense counsel.

In some ways, Goldman is still the squid—a nearly dead one stinking up the marketplace. It was the subject of at least four market-moving stories yesterday, and on days like that stocks hardly have a chance.

It’s almost enough to make one long for Abby Joseph Cohen’s sweet lullabies to the firm’s last few retail clients about how everything will turn out alright.

You know it’s bad when the least damaging Goldman story of the day has to do with the settlement it reached with the Fed over (in Fed’s words) “a pattern of misconduct and negligence” by Goldman’s mortgage servicing unit, which Goldman agreed to sell in June for little more than half of what it paid for it four years earlier.

Fine, so the mortgage servicing business is more or less dead. But it was never more than an afterthought for Goldman.

More painfully, it was a big decline in bread-and-butter trading revenue that drove the last quarter’s earnings shortfall. The in-house card sharks just aren’t playing with the same verve, folding more and more often these days to ration risk.

Meanwhile, Goldman’s commission-churning institutional trading clients are also sitting on their hands, less sure than ever that their trading will enrich anyone besides Goldman.

Hence another white shoe that dropped on the stock Thursday, the downgrade of Goldman’s stock by a former fan from ISI Group. The analyst expects trading profits to continue slumping, and cut his earnings estimate for the current quarter by 70%.

This dismal state of affairs perhaps best explains another Goldman newsmaker, the leaked bearish market analysis from Goldman’s chief soothsayer to its hedge-fund clients. He’s ultimately in charge of getting those trading revenues going again, and so has been urging customers to act, belatedly, on information that’s long been in the markets.

Perhaps you’ve heard: US small businesses are struggling, Europe is paralyzed by the debt crisis, and the emerging markets are feeling the combined effects of rate hikes and slackening demand from the developed world. Those are the revelations from a “confidential” 54-page report Goldman’s Alan Brazil sent out in mid-August.

Coincidentally, he had some surefire trading strategies for clients interested in capitalizing on this trend. Presumably, Goldman’s own traders began bidding the various recommended hedges up some time earlier, a possibility Goldman discloses up front.

So this is what the squid is down to these days: peddling the obvious to the bottom-feeders below it in the financial food chain.

Goldman’s economics research team has somewhat purer motives, such as graduating to a sinecure at the New York Fed. Yesterday, it halved its estimate for US payroll job growth in August to 25,000, which proved to be 25,000 too many.

The stalling of the payroll growth is actually a net positive for the market at this point, in so far as it will embolden the pro-growth majority in charge at the Fed. It will also ratchet up the pressure on Congress to act ahead of next year’s elections, out of an instinct for political survival if nothing else.

The economy is not without its positives, with the strong August auto sales and decent summer retail trade suggesting the majority with jobs continues to spend.

But Goldman’s old profit model looks irretrievably dated. Even if growth picks up, the firm looks like a shell of its old self in the new age of debt deleveraging.

As ISI points out, its stock looks cheap below tangible book value. It opened today at just 80% of book value.

Then again, rival Morgan Stanley (MS) is at just 55% of its perhaps somewhat less reliable calculation of book value. And Morgan Stanley doesn’t have Goldman’s headline risk. The path of least resistance for the squid is down.

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