Dear investors: If you own Goldman Sachs (GS) you’re mainly making a bet on faith. Unlike with other companies, where you might gain by reading the report or listening to the conference call, your mainly betting on your belief in the Goldman management and its place in the financial system.
It’s been commented before, and it’s still true: Goldman Sachs is a black box. Sure, there are lots of numbers you can point to, but in the end, we still have very little sense for how the company makes money. The conference call was mainly a lot of un-probing questions, followed by milquetoast, middle-of-the-road answers.
This is something Matthew Goldstein at Reuters has been harping on lately:
Before everyone starts crowning Goldman the king of trading, is it too much to ask that analysts ask more probing questions of the firm’s executives? Investors deserve more disclosure about where all those dollars are coming from.
A question or two about how much of the trading revenues was related to client trades versus proprietary trades for the firm’s own account would be a good place to start. Don’t let Goldman executives get away with the firm’s standard answer about how most of its risk-taking is for clients, without ever quantifying that risk.
Now given Goldman’s general animus to the notion of fuller disclosure, I wouldn’t expect its executives to say much if pressed by analysts. So it probably will require the power of the Federal Reserve — Goldman’s new overseer — to lean on the investment bank to force it to provide more detail about the firm’s trading prowess.
And from Goldstein, again today, pointing out question marks about the quarterly:
First, Goldman continues to do investors no favour by failing to publish a detailed financial supplement along with its earnings release (something every other big bank does) to help decipher its quarterly numbers.
Second, Level 3 assets–assets that the firm can’t value and trade–remain stubbornly high at $54 billion. Sure, the dollar value of Level 3 assets is down by $5 billion from the first quarter. But these impossible-to-value assets (some of them toxic) represent 6.1% of Goldman’s total assets.
Third, the risk Goldman is taking in its trading operation continues to edge up. The average daily VaR, or value at risk, was $245 million as of June 26. That’s up from $240 million in the first quarter and up from $184 million as of May 2008. Goldman keeps piling on risk to drive its trading gains.
Fourth, the firm says a good chunk of its 28% year-over-year gain in net revenues from stock trading came from “significantly higher net revenues in derivatives.” Goldman, since its conversion to a bank holding company last year, now ranks second among US banks in total notional value of derivatives contracts. More and more, counterparty risk is getting concentrated in Goldman–now that Lehman and Bear Stearns are gone.
All interesting things worth probing, almost none of which showed up on the call.
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