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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

My thoughts on Goldman Sachs

A lot has been written about Goldman Sachs since the SEC allegations arose that Goldman Sachs committed fraud. Many facts regarding the cases are still unknown. Therefore, I do not want to dwell too much on the topic. However, I have a few important thoughts I wanted to add to the debate.

Many people know I have written many articles playing Devil's advocate for Goldman Sachs. This is not because I think Goldman Sachs are angels, I merely believe they are no different than many other Wall Street firms that are as unethical as they are. When it comes to money people are greedy, whether it be the person on main street or wall street.

Goldman Sachs does awful PR and this has brought a lot of attention to the firm. I think this is one reason why Goldman Sachs has become the punching bag of the American people.

I was interviewed by a large European Magazine devoted on Public relations. I gave some thoughts about how I think Goldman Sachs could improve PR which I believe they are doing an awful job until now(this interview was conducted well before the SEC allegations were released). The issue will come out in late May, and I will post a link once the issue is published.

In terms of timing, I think the Goldman Sachs news is highly suspect. Even, if they are guilty of fraud (in which case I think they should be fined and punished to the fullest extent of the law) it is very convenient timing for the release of the news. The news was released literally the week President Obama started pushing for financial reform. The SEC says that they had informed Goldman Sachs about the fraud charge nearly a year ago. I am not surprised the news was released after the health care debate and not during it. The SEC claims there was no contact with the administration regarding the timing of the news release. I believe an investigation should be launched into the matter to determine whether the SEC is telling the truth.

The thing that truly frightens me is the fact the SEC only went after Goldman Sachs. The SEC has sat on it's hands for twenty years doing nothing. I laughed when Bill Clinton claimed that if Arthur Levitt was SEC chairman during the Bush administration none of these excesses would have happened. While I believe Arthur Levitt was a better SEC chairman than Chris Cox, Levitt did not uncover the Bernie Madoff scheme. Levitt also twiddled his thumbs while investment banks were issuing fraudulent IPOs of internet companies that were sold to investors who lost huge sums of money.

This brings me to why is the SEC only going after Goldman? There were many mortgage lenders that falsified documents of sub-prime borrowers to ensure they got loans. This is clear fraud that went on for many years, yet not there was no SEC action. The SEC has also taken no action against many financial firms which may have falsified their balance sheets. Many top executives claimed their firms were in perfect financial help when merely days later the firms collapsed. This was the case of many commercial banks, investment banks, insurance firms and others during 2007-2008. Again, no SEC action in these cases.When the Government starts to selectively punish certain individuals or even companies everyone should be frightened.

Disclosure: None

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website

Rating: 4.1/5 (22 votes)


DocMoney - 7 years ago    Report SPAM
Perhaps they are going after only GS to establish a legal precedent? Something tells me that other wall street firms are not safe.
Yswolinsky - 7 years ago    Report SPAM
I hope they go after other firms. Either a law is enforced or it is not. The SEC cannot decide to enforce a law based on politics that would be a very dangerous _precedent.
Softdude2000 - 7 years ago    Report SPAM
I think it is fair to demand an investigation (to know if SEC has a political objective) but concluding SEC has a political motive is wrong. There is no indication of any sort so far that SEC was directed by political bosses. This reminds me of how justice department integrity was compromised during Bush administration.
Batbeer2 premium member - 7 years ago
>> but concluding SEC has a political motive is wrong.

I don't thing GS did anything wrong. I also don't think the SEC is neccesarily at fault to test this case. The timing is actually great !

They could probably have found a dozen banks with similar cases and they picked GS. Good choice and good timing. Let the investigation move on and let's see what comes out of it.

I expect that the lesson from this investigation for eveyone will be "buyer beware !".

Yswolinsky - 7 years ago    Report SPAM
So you wouldnt mind if you and your ten neighbors committed the same crime and only you were charged as an example to the other?

Batbeer2 premium member - 7 years ago
I don't commit crimes ! At least not the kind the police cares about ;-)

You have a point but the SEC is not the police. There are important differences. But hey... even the police (or more exactly the prosecutor) will try cases just to see what the courts decide. Very often, you just can't look at something and objectively say this is legal and that is not. Maybe that is why a trial is called a trial.

It would not be a good thing if the police went around arresting everyone who did something they think is illegal when no one has ever been tried for such an offense. If it were that simple, there would be no need for independent judges or lawyers.
Softdude2000 - 7 years ago    Report SPAM
So you wouldn't mind if you and your ten neighbors committed the same crime and only you were charged as an example to the other?

Is this not what is happening when there is a speeding ticket? It is rare that someone is going out of way from all others in speeding. It is mostly they pick one in the group of cars. I don't think there is a legal defense to say that others are speeding too. I think it should be a valid defense but unfortunately it is not. Thats how government sucks people blood with stupid rules in many cases.

Yswolinsky - 7 years ago    Report SPAM
With a speeding ticket the cop only has a chance to give one speeding ticket. He can not pull over ten people at once, that is what happens on a speeding highway. If the cop decided he would only pull over people speeding who had a certain appearance that would be illegal, and that seems like what the SEC is doing now.

No one is saying Goldman Sachs defense is that they are innocent because others commit the same crimes. My question is why they are only going after Goldman? They should go after others who committed fraud. Check out this article on Deutsche Bank _http://www.theatlantic.com/business/archive/2010/04/deutsche-bank-also-victimized-goldman-victim/39471/

If England and Germany can go after Goldman, I do not see why the SEC or another US Governmental agency cannot go after Deutsche, since Deutsche has operations in the US.


Batbeer2 premium member - 7 years ago
>> They should go after others who committed fraud.

That presumes Goldman is guilty of fraud. That remains to be seen. The SEC is trying this out in a high profile case. The SEC could have gone after say... Jefferies and we simply would not have this thread.

Setting examples is explicitly within the mandate of the SEC.
Yswolinsky - 7 years ago    Report SPAM
Deutsche committed the exact same alleged fraud on the same deal with Paulson. If they want to set precedent then go after Deutsche also. This is like two people committing the same action together which might be legal but only going after one.

In addition, I believe I heard Carl Levin say(correct me if I am wrong) that they can not go after all the major banks- so this does not look like setting precedent, this looks like "November elections are coming up and everyone hates Goldman lets go after them to gain populist support and get re-elected."
Batbeer2 premium member - 7 years ago
I have nothing further to add.
Zzz - 7 years ago    Report SPAM
It appears JW doesn't know jack. According to the suit... GS started the mortgage backed securities that ended up destroying the economy. One GS trader fabulous fab came up with the product that GS approved and sold. So in theory the SEC is going after the original gangstas.

Was GS acts criminal? No more than a car salesman buying up your life insurance policy after selling you a car with no brakes.
Yswolinsky - 7 years ago    Report SPAM
ZZZ The comparison you used I have probably heard 100 times in the past week, and very poor analogy might I add.

Thinking Goldman caused the economy to collapse is a very naive way of looking at the financial crisis, as there were many factors and players that caused it.

Last point: Just because you do not agree with me you do not have to use personal insults.
Dr. Paul Price
Dr. Paul Price - 7 years ago    Report SPAM

Buyers of GS at today's price will look very smart in a year or two.
Dr. Paul Price
Dr. Paul Price - 7 years ago    Report SPAM

Hot Research PM | MONDAY, MAY 3, 2010

The Case for Goldman Sachs’ Stock

The embattled investment bank’s legal problems seem manageable and its shares are now undervalued, argues Sandler O’Neill.

Goldman Sachs Group (GS: NYSE)

By Sandler O’Neill & Partners

GOLDMAN SACHS (TICKER: GS) shares have significantly underperformed its peer group since the Securities and Exchange Commission civil complaint was announced on April 16, 2010. As a result, the company’s valuation now significantly lags peers despite significantly outperforming them on a fundamental basis.

From what we know today, idiosyncratic Goldman risks appear manageable relative to a $21 billion reduction in market capital. Potential financial losses from the SEC civil suit seem manageable, criminal charges seem unlikely, and reputational risk should be minimized by Goldman’s institutional client focus and strong capital and counterparty position.

Goldman is likely better positioned than most to weather the macro-industry risk of evolving financial-regulation legislation. While the final version should usher in some needed changes, the risk of extreme activity limits on U.S.-based firms is a source of significant investor angst.

We continue to expect calmer heads to prevail as politicians and regulators analyze the implications of proposed legislation in more detail. Whatever the final legislation contains, we expect that Goldman will live up to its reputation as one of the best at rapidly adapting to changing markets.

We reiterate our Buy rating as the best in breed investment bank now trades at a significant discount to its peers. While headline risk should continue to drive share price volatility in the near term, we see significant upside over the next 12-months from the current valuation, and we point out that industry leaders are rarely long-term value traps. We also note that longer-dated call options would allow investors to cap downside risk while maintaining upside potential if the current controversy passes.

Goldman shares have declined by 21% versus a 3% decline in the Amex Broker-Dealer Index (XBD) since the SEC civil complaint was filed. The SEC has accused Goldman of securities fraud related to disclosures on a synthetic collateralized-debt obligation transaction from 2007 (Abacus 2007-AC1) involving three institutional investors. In addition to the SEC civil complaint, the press has speculated that the Justice Department has been investigating Goldman’s mortgage-related securitization and trading activities.

We believe a third factor weighing on Goldman’s shares is overall uncertainty about the outcome of new financial regulation legislation being drafted in Congress. The real question facing investors is whether idiosyncratic Goldman and SEC and Department of Justice risks warrant a share price decline six-fold more severe that its peers.

Recent client conversations suggest that investor angst fall into five primary categories 1) the risk of financial losses from the SEC’s civil complaint, 2) the risk of criminal charges resulting from Goldman’s mortgage-related securitization and trading activities, 3) related reputation risk (reduced client willingness to transact with Goldman), 4) headline risk as more details emerge, 5) the impact of looming financial regulation legislation.

1) Financial losses related to the SEC’s civil complaint seem manageable. The largest financial threat from the complaint appears to be the possibility that Goldman could be forced to reimburse investors for an estimated $1 billion of losses and return fees earned on the transaction. We estimate that a $1 billion tax-deductible payment (assuming the payment is considered a loss reimbursement as opposed to a penalty/fine for tax purposes) would reduce Goldman’s current $111.41 total book value by a modest $1.20 (1.1%).

2) Criminal charges against Goldman seem unlikely to us at this point. A criminal investigation of Goldman would not surprise us at all. In the wake of SEC civil charges, we would be much more surprised if the Department of Justice was not at least looking into the situation. However, the existence of an investigation provides little insight into the likelihood of charges being brought. The SEC complaint accuses Goldman of securities fraud on the 2007 Abacus transaction, which implies that this transaction was the strongest case for securities fraud found by the SEC during an 18-month investigation. While we are not legal experts, everything we have seen about the Abacus transaction suggests that proving fraud will be a challenge.

Moving from civil to criminal charges seems unlikely because there is a much higher burden of proof. The civil burden of proof is simply a “preponderance of evidence” (majority) that fraud occurred. However, the criminal burden of proof requires showing “beyond a reasonable doubt” that Goldman and its employees intended to commit fraud.

3) Reputational risk is a legitimate concern but one that seems manageable given Goldman’s institutional client focus. We continue to think that reputational risk is diminished by the firm’s institutional client focus, where financial strength and execution capability are paramount. We believe Goldman’s balance sheet is one of the strongest in the industry (Tier 1 common of 12.4% and a liquidity pool of $162 billion representing 18% of assets) and regulators appear to agree as Goldman is one of the few large cap banks that has receive regulatory approval to repurchase significant amounts of stock ($2.3 billion in first-quarter 2010).

We believe that one of the primary reasons institutional clients trade with Goldman is that Goldman is willing to be on the other side of a client’s trade. In fact, we believe that the primary trading-related value-add that Goldman (and the peer group) provides is likely the willingness to provide liquidity to customers by committing capital to facilitate client-trading activity. Specifically, we believe the commitment of capital to facilitate client-trading activities is a secular-growth business in which intermediaries (like Goldman) are compensated for providing a real value-added service.

Consequently, an intermediaries ability to consistently manage risk is of paramount importance and something at which Goldman excels as evidenced by the firm’s relatively-strong fundamental performance during the bursting of the internet bubble and the recent financial crisis.

Clients do not appear to be pulling back from Goldman to-date. While it has only been a few weeks since the SEC compliant, management maintains that there has not been a noticeable disruption in client interaction with the firm. This is consistent with comments we have heard from competitor management teams and other industry participants.

Reputational risk could rise if Goldman is implicated in additional legal actions. However, the fact that no senior executives are being charged in the complaint suggests that if there was wrong-doing, it was more of a one-off situation than a pervasive institutional problem that would lead to multiple actions against the firm.

4) Headline risk should continue to drive share-price volatility in the near term. Goldman shares sold off by 10% Friday on the above referenced criminal investigation speculation by the press. Volatility is likely to continue as additional details emerge and speculation continues. While it is hard to forecast what Goldman’s share price will do tomorrow, we are confident in the franchise’s ability to deliver industry leading fundamental performance.

5) The macro-issue of evolving financial-regulation legislation is also weighing on Goldman and its peers. The Senate is currently debating its bill to overhaul financial regulation. Once the Senate’s bill is finalized the next step will be to merge it with the House’s bill that was passed last December. While the final version should usher in some needed changes, the risk of extreme activity limits on U.S.-based firms (especially in derivatives) is a source of significant investor angst.

The revenue impact from emerging derivatives reform is tough to gauge. Ultimately the devil will be in the details of the final legislation passed. Unfortunately, legislation is still a work in progress and there is a fairly wide range of possible outcomes. At one end of the spectrum, improving transparency and moving standardized-OTC derivative products to exchanges or centralized-clearing platforms (CCP) would likely have a very manageable impact on industry revenues. At the other extreme, forcing banks to exit derivative trading en mass would significantly change the industry and substantially reduce revenues. Derivatives touch virtually every aspect of an investment bank’s business as most cash-trading desks use derivatives to hedge exposures and many corporations expect their M&A adviser to be able to execute hedging strategies (i.e. the industries move to one-stop-shopping).

We believe that a forced exit of bank dealers from the derivatives market could have severe unintended consequences ranging from an overall capital markets market-share shift to non-U.S. firms, to significantly higher-hedging costs for U.S.-based manufacturing firms and less credit extension by larger banks.

Ultimately we expect calmer heads to prevail as politicians and regulators analyze the implications of proposed legislation in more detail. To this end we were encouraged to see that a required spin-out of bank derivative trading desks was not included in the U.S. Treasury’s April 15 list of components for effective derivative-industry regulation.

Goldman has historically been a good investment during times of economic expansion and industry change. The final outcome and industry impact from the congressional overhaul of financial regulation is unknown. In times of environmental change it usually pays to invest in the strongest franchise with a proven management team. We believe Goldman has historically proven to be one of the best at quickly adapting to changing environments.

Additionally, we believe that investors must balance the regulatory risk versus evolving economic and capital markets recoveries. Historically, owning investment banks into economic and capital markets recoveries has been a profitable endeavor. Given a constructive outlook for capital markets activity levels, Goldman’s leadership position in the industry, recent price declines, and resumed share buybacks it might not be prudent to avoid Goldman shares.

–Jeff Harte

–Ted Holzman

Yswolinsky - 7 years ago    Report SPAM
The main problem about being a shareholder in GS, is they are not a shareholder friendly company. Look at how much they pay out in bonuses compared to the _miniscule dividend they pay out

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