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Bove on GS

Bove on GS

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Published by: zerohedge on May 03, 2010
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Sunday, May 02, 2010
© 2010 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT THE END OF THIS REPORT.
Goldman Sachs (GS)
Andrew Mellon and Goldman Sachs
Richard X. Bove
813.909.1111
 
rbove@rochdalesecurities.com
T
Highlights
Andrew Mellon was the longest serving Treasury Secretary in the historyof the United States. He held the position almost 11 years through theHarding, Coolidge, and part of the Hoover Administrations. He was alsoreputed at one point to be richer than Rockefeller, Carnegie, or HenryFord.He helped found and he owned meaningful positions in Gulf Oil, Alcoa(AA/$13.43/NR), Carborundum, the Mellon National Bank, andnumerous other enterprises. He owned a significant amount of realestate across the nation.In 1933, President Franklin D. Roosevelt decided to make Mellon theobject of his campaign against crooked industrialists
 –
industrialists whocaused the Depression. Therefore, against the advice of the IRS, theAttorney General of the time, and a grand jury that refused to indictMellon, he demanded that the Department of Justice pursue a taxevasion case against Secretary Mellon.Homer Cumming, the Attorney General, then issued the following
statement: “…
financial crimes which have been committed in highplaces growing out of banking irregularities
…” required the Department
of Justice to pursue a tax evasion case against Andrew Mellon.Thus, against all knowledgeable advice the President pursued Mellon.He pursued him even after Mellon donated his extensive art collection tothe nation to create what is now the National Gallery of Art. Hecontinued to pursue Mellon even after the industrialist died. He wasforced to stop his pursuit only when the court system exoneratedMellon.It has been suggested that President Roosevelt felt no animosity towardSecretary Mellon. He even met with Mellon in the Oval Office near the
end of Mellon’s life to discuss the National Gallery of Art. The
Presidentattacked and kept attacking Secretary Mellon even after Mellon diedbecause he needed a symbol of industrial evil that had to be eliminatedfrom the system. Secretary Mellon was that symbol.It appears that President Obama needs a symbol of financial evil thatmust be expunged from the system. That symbol is Goldman Sachs.
Note: The tables in this report have been prepared by Rochdale Securities from sources believedto be accurate. However, accuracy cannot be guaranteed.
 
2009 2010 2011 2012Mar $3.39 $5.59 $5.37 $5.63Jun $4.93 $4.24 $5.48 $5.75Sep $5.25 $3.91 $5.27 $5.55Dec $8.20 $4.99 $4.65 $5.13Year $22.16 $18.72 $20.77 $22.06Previous $22.16 $18.04 $20.12 $22.23Consensus $22.16 $19.46 $20.66 $21.87P/E Multiple 6.6x 7.8x 7.0x 6.6x
SYM/EXCH Current
 
Previous
 
Rating Buy BuyTarget Price $200.00 $200.00 Normalized Earnings $23.00 $23.00
Stock Data (03/10)
 
Current Price $145.2052 Week Low/High $119.34 $193.60Est. 2010 Earnings Per Share $18.72 7.8xEst. 2010 Rev per share/P:RPS $80.50 1.80xBook Value/Price:Book $111.84 1.30xTangible BV/Price:TBV $101.70 1.43xDividend/Yield $1.40 1.0%Shares Out/Mkt. Cap (mil) 590 $85,668
Income Statement (mil)/ Percent of Revenue (03/10)
 
Principal Transactions $9,195 72.0%Investment Banking $1,184 9.3%Investment Management $978 7.7% Net Interest Income $1,418 11.1%Operating Revenues $12,775 100.0%Personnel Costs $5,493 43.0%All Other Expenses $2,123 16.6%Pretax Income $5,159 40.4%
Balance Sheet (mil)/Percent of Assets (03/10)
 
Cash $ %Segregated cash & securities $ %Fed Funds & Repos $ %Securities Borrowed $ %Receivables $ %Trading assets $ %Other $ %Assets $881,000 %Deposits $ %Collateralized Borrowings $ %Payables $ %Trading Liabilities $ %Borrowings $ %Other Liabilities $ %Long Term Debt $180,410 20.5%Preferred Stock $6,957 0.8%Common Equity $65,987 7.5%Tangible Common Equity $60,004 6.8%
Key Ratios (03/10)
 
3-Year RPS CAGR 0.2%3-Year EPS CAGR 4.4%Tier One Common 12.4%Return on Equity 21.0%Return on Assets 0.39%
Source: Trade Station
 
Sunday, May 02, 2010
© 2010 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT THE END OF THIS REPORT.
Political Attack
If this view is correct, Goldman Sachs is jousting with issues that are far larger than whether the company is guilty of imprudentactions in the Abacus suit. It is dealing with the need of the United States government to harm the company in order to make it anexample of all of the evils in the financial system that caused the
Great Recession.
 Evidence of the fact that this is threat coming at Goldman Sachs is plentiful:The SEC suit seems to be based on, what are at best, fanciful conclusions.The Senate held hearings on the company were not designed to elicit information. They were held to allow the Senators tomake a blatant attack on the company. In many instances, the Senators refused to let the Goldman witnesses answer keyquestions.The Justice Department leaked the fact that it might be investigating Goldman Sachs when there was no rational reason,other political frenzy, to make this information public.A group of Congress people have now requested deeper investigations into Goldman.Multiple lawsuits are being formulated.Sources indicate that Goldman is attempting to settle these issues with the government but the government is unwilling to settle.Some have said the government will not even hold meaningful talks with the company
 –
although that may have changed by now.
Goldman
s Defense
 I have felt from the start of the SEC case, actually well before the start of that case, that Goldman
s approach to the charges wasinept to the point of being counterproductive. The company
s devastating appearance at the Senate hearings is the best example of what I mean. Goldman
s witnesses went in with one goal. That goal was to say as close to nothing as possible. While the Senatorshad no desire to hear anything Goldman had to say; Goldman had no desire to say anything, either. Wall Street liked Goldman
sperformance pushing the stock higher for a few days. The Administration did not and came back with the Justice Department leaksmashing the stock.The problem with Goldman
s defense, from two standpoints, is:The company has been reacting to attacks and has not been proactive.Its reactions are the classic ones, which is to avoid giving the other side any information that can be used against thecompany.The net result is that the stock is now down $41.21 per share from its high on the day the SEC suit was released. Goldman hassimply been outclassed at every step and there is no sign that the company knows how to deal with the current situation.
What Should the Company Have Done?
 Goldman Sachs should have done the following to avoid its present dilemma:At the outset of the financial crisis, the company should have attempted to redefine the debate as to what caused the crisis.The fact is that this crisis was not caused by greedy bankers playing casino games with fraudulent products. It was causedby production cost imbalances; a massive and continuing trade deficit; the buildup of massive cash hoards; the need toinvest that cash; and the lack of enough acceptable investment opportunities.Goldman should have immediately attacked the concept that derivatives are bad (as well as any other false statements). Infact, derivatives are good because they provide liquidity in multiple markets; they lower risk; and they allow the economyto function more smoothly. Stated very simply, a loaf of bread costs less than it otherwise would have if there were noderivatives. Warren Buffet owns derivatives because he does not believe that they are
instruments of mass destruction.
 There are supposedly $600 trillion in derivatives outstanding, not because this is a big casino game, but because derivativesmeet defined needs in the global financial system and economy.At all levels the company should have argued forcefully that it was providing a service to the economy. It should haveprovided facts and figures showing what it has done from aiding the United States in funding its deficit down to providingnumbers concerning how many people have jobs on
Main Street
due to Goldman
s fund raising activities.In sum, it should have understood the size and enormity of the forces being brought against it. It did not. Thus, itsresponses were weak and ineffectual. The classic in my mind is Lloyd Blankfein, CEO, indicating that it is beyond his field of competence to understand that some investment portfolios cannot buy less than AAA securities. It was Goldman
sintention to obfuscate and this obfuscation brought the wrath of the Administration against it.
 
Sunday, May 02, 2010
© 2010 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT THE END OF THIS REPORT.
What Now?
 Goldman is going to have to pay a high price for its ineptitude in handling this issue. Its shareholders already have. The company islikely to experience the following:High level executives are going to have to be removed from their positions both in the management suite and from theBoard of Directors.The legal team will have to be replaced with one having greater skills and Washington know how.A fine will of at least $1 billion will be required.A new mission statement will be developed and produced.The company must start to redefine the financial crisis discussion; it must get proactive in its defense. It must do this to support itsdefenders not to change the views of its detractors. Releasing a point by point defense of the SEC charges is useless and should bedone only in the courts.
The Stock
 I refuse to sell the stock. The company is likely to be supported even more strongly by its clients. These clients are likely to beincensed by the actions of the government and may now feel that Goldman is the rallying point to stop the government fromrunning roughshod over all of what is conventionally called
Wall Street.
Someone must start the fight in the other direction atsome point. Despite its political naiveté, it is still the best trading company in the world and the world needs to trade.

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