(This is a guest post from Crossing Wall Street.)
In Tom Wolfe’s The Bonfire of the Vanities, the D.A. was known as Captain Ahab for his tireless search for the Great White Defendant. I can’t help but this of this when looking at the SEC’s case against Goldman Sachs (GS). This is a very convenient target coming at a very convenient time.
If the facts we have are correct, then Goldman should clearly be found guilty before a moral court. However, the actual legal case the SEC has seems shockingly thin. Even after several months, the case will turn on the materiality of John Paulson’s role in forming the Abacus portfolio. Furthermore, Mr. Tourre isn’t merely a small fry—he’s a micro-guppy.
The Wall Street Journal opines:
After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world’s most sophisticated investors about a single 2007 “synthetic” collateralized debt obligation (CDO)? Far from being the smoking gun of the financial crisis, this case looks more like a water pistol.
My guess is that Goldman will end up writing a big check to make all this go away, say, about $200 million which would be around 40 cents a share for a company with a book value of $117. The damage to their reputation won’t be so easy to take care of.
Let’s look at some numbers: Goldman is probably on track to earn about $10 billion this year, give or take, which works out to around $18 a share (in their Annus mirabilis of 2007, they made close to $25 a share). Owning Goldman is almost like owning your own ATM—the cash just flies out anytime you want.
Using some mathematicification we can see that Goldman is going for around nine times earnings, and 1.4 times book value. Is that good buy? The stock is probably cheap but it’s definitely not a good buy. Looks can be deceiving. Sure, the SEC’s case may fall apart and Goldman will zoom back to $200 a share, but there are too many uncertainties to judge if that will happen. One of the most important keys to investing is to avoid any unnecessary risks. I don’t know what the SEC has up its sleeves. The agency is clearly under political pressure and they’ll do whatever they have to validate their existence. Buying Goldman now is a bet I’m not willing to take.
Being a bank is all about trust. Ultimately, that’s the product you offer your clients. The specifics of the SEC’s case are surprisingly sloppy, but the picture is very stark. Goldman was not fully honest with their clients. This will probably lead to a string or more lawsuits. Until the dust clears, there are many better buys elsewhere.
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