The whole video can be seen here on the Max Keiser show, starting from about 19:00 minutes in where I discuss risk vs reward in GS and how they outperform eventhough risk outweighs reward.
Those who like numbers and charts can see where I actually demonstrated in For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks:
As in “When the Patina Fades… The Rise and Fall of Goldman Sachs???“, we can reminisce over the fact that Goldman BARELY earns its cost of capital on an economic basis, and that’s before considering the potential horrors which may (and probably do) lay on the balance sheet (for more on BS horror, referenceReggie Middleton vs Goldman Sachs, Round 2) .
GS return on equity has declined substantially due to deleverage and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike.
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And now we have supporting evidence from the inside... From the NYT:
"TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. I can honestly say that the environment now is as toxic and destructive as I have ever seen it."
"To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."
"I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work."
" I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave."
"How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence. What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym."
"I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all."
"It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen."
More on the topic..
Source
Additional: Goldman Banker goes Rogue amid the Fed's Recent Stress Tests w/Naked Capitalism's Yves Smith
Goldman Sachs gets outed in a scathing resignation letter on the New York Times op-ed page today from executive director and head of Goldman Sach's US equity derivatives business in Europe, Greg Smith. In the letter, Greg Smith does not pull any punches. He says, in his letter, that the environment at Goldman Sachs is now "as toxic and destructive as I have ever seen it." Greg claims that Goldman puts making money ahead of everything else, including ahead of its own clients who it regularly refers to as "muppets,"
sometimes over internal email. He also says that "today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence." An ax murderer?? It sounds like Greg Smith is describing a sociopath, not a 143-year old financial institution. But wait, it get's better. Smith also lists a three-step method for becoming a leader at Goldman Sachs today. He says that one should: a) Execute on the firm's "axes," which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) "Hunt Elephants." In English: get your clients — some of whom are sophisticated, and some of whom aren't — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don't like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym. The mention of illiquid and opaque products is most interesting because it is consistent with behavior we have seen from the TBTFs in the past with respect to derivatives, in that they prefer these illiquid markets as they can better manipulate the price of what they are selling, and thus generate huge fees.
But today is also important for another reason. The results of the Fed's most recent stress test came out yesterday after the market closed, and the results weren't pretty, at least not for 4 of the 19 banks tested, including Citi Group, which failed to pass the test. So how accurate or useful are these tests anyway? After all, we saw during the financial crisis of 2008 that the banks themselves were unsure of how much exposure they had. In addition, these stress tests do not treat the asset side of bank balance sheets the same as they do the liabilities side. The liability side is much more opaque, in part because of the issue of dynamic hedging, which requires constant trading activity in the event that markets begin to deleverage. It is very difficult to model out a deleveraging, like what we saw in 2008, because you have lots of market participants who each have risk models that they have to abide by and that requires dynamic hedging. That can become very difficult in an increasingly illiquid market full of large air pockets. These are all things that we discuss on the show today with Yves Smith, writer of the very popular economic blog, Naked Capitalism.
Lastly, we cover Roger Lowenstein latest article that will make the Atlantic's cover story titled "Hero or Villain." Speaking with Bernanke one-on-one, Lowenstein presents the central banker as a deeply conflicted, but unfathomably human character, and tries to demonstrate that Bernanke's academic and personal contradictions have manifested in his approach to monetary policy. We will give you our take on the today's segment of "loose change."