Monday, 20 April 2009 01:00

Who is the Newest Riskiest Bank on the Street?

Early in 2008 I named Morgan Stanley the "The Riskiest Bank on the Street" (see historical links at the bottom of this article). Well, now its time to update my opinion. Who deserves the title "The Riskiest Bank on the Street" now? Well, let's see what the market says...

As defined by Wikipedia: Cost of Captial - Capital (money) used for funding a business should earn returns for the capital providers who risk their capital. For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital. In other words, the risk-adjusted return on capital (that is, incorporating not just the projected returns, but the probabilities of those projections) must be higher than the cost of capital.

This means that one should not simply glance at accounting earnings and declare all is clear on the western front. Whatever return your company generates has to exceed the cost of investing in said company. Well, of the bulge bracket, who has the highest cost of capital? Who has the highest bar? Who does the Street see as the Riskiest Bank on the Street?


Well it seems as if the company that had the highest cost of capital apparently had enough risk to actually implode. Is there a pattern here? If so, I must be the only one that recognizes it because the current number one spot (the graphed number one spot already collapsed) traded over $130 per share last week.

For those that don't believe in Cost of Capital in measuring risk, I bring you to another metric. As defined by Wikipedia: Leverage (or gearing due to its analogy with a gearbox) is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced.[1] It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity. Deleveraging is the action of reducing borrowings.[1]

Financial leverage

Financial leverage (FL) takes the form of a loan or other borrowings (debt), the proceeds of which are (re)invested with the intent to earn a greater rate of return than the cost of interest. If the firm's rate of return on assets (ROA) is higher than the rate of interest on the loan, then its return on equity (ROE) will be higher than if it did not borrow because assets = equity + debt (see accounting equation). On the other hand, if the firm's ROA is lower than the interest rate, then its ROE will be lower than if it did not borrow. Leverage allows greater potential returns to the investor that otherwise would have been unavailable but the potential for loss is also greater because if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid.

Margin buying is a common way of utilizing the concept of leverage in investing. An unleveraged firm can be seen as an all-equity firm, whereas a leveraged firm is made up of ownership equity and debt. A firm's debt to equity ratio is therefore an indication of its leverage. This debt to equity ratio's influence on the value of a firm is described in the Modigliani-Miller theorem. As is true of operating leverage, the degree of financial leverage measures the effect of a change in one variable on another variable. Degree of financial leverage (DFL) may be defined as the percentage change in earnings (earnings per share) that occurs as a result of a percentage change in earnings before interest and taxes.


Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb - 17 pages

Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages


Derivatives allow leverage without borrowing explicitly, though the "effect" of borrowing is implicit in the cost of the derivative.

  • Buying a futures contract magnifies your exposure with little money down.
  • Options do the same. The purchase of a call option on a security gives the buyer the right to purchase the underlying security at a given price in the future. If the price of the underlying security rises, the value of the call option will rise at a rate much greater than the value of the underlying security. However if the rate of the call option falls or does not rise, the call option may be worthless, involving a much greater loss than if the same money had been invested in the underlying instrument. Generally speaking, a put option allows the holder (owner), the investor, to achieve inverted-leverage and/or inverted enhancement--- sometimes called inverse enhancement and/or inverse leverage.
  • Structured products that exist as either closed-ended funds, or public companies, or income trusts are responding to the public's demand for yield by leveraging. That's a good idea. Let's refer to Goldman Sachs as a Structured Product!

Risk and overleverage

Employing leverage amplifies the potential gain from an investment or project, but also increases the potential loss. Interest and principal payments (usually certain ex-ante) may be higher than the investment returns (which are uncertain ex-ante).

This increased risk may still lead to the optimal outcome for the entity or person making the investment. In fact, precisely managing risk utilizing strategies including leverage and security purchases, is the subject of a discipline known as financial engineering.

There are economic periods when optimism incites to a widespread and excessive use of leverage, what is called overleverage. One of its forms, associated to the subprime crisis, was the practice of financing homes with no or little down payment, playing on the hope that the price of the assets (the property in this case) will rise. Another form involved the five largest U.S. investment banks, which borrowed funds to invest in mortgage-backed securities, increasing their leverage between 2003-2007 (see diagram). During September 2008, the five largest firms either went bankrupt (Lehman Brothers), were bought out by other banks (Merrill Lynch and Bear Stearns) or changed to commercial bank holding companies, subjecting themselves to leverage restrictions (Morgan Stanley and Goldman Sachs).

Well, on the topic of leverage, who do you think is the most leveraged bank? Notice that these leverage ratios below are unadjusted. That means that they will go up significantly if I took the time to extract the accounting shenanigan trash that is used to give the impression of lower leverage (this adjustment is explictly done in the 131 page Goldman Sachs Professional Stress Test).


Notice that although Goldman Sachs is the leveraged risk winner as of now, but they would have probably been beaten by Merrill Lynch. Hey, where is Merrill Lynch by the way? You know, it can get pretty painful for guys to play hide the "leveraged" sausage. If you know what I mean...

Okay, for you real stubborn guys and gals who don't think the cost of capital or leverage are legitmate determinants of risk, let's take a look at other popular risk metrics. Surely they will vindicate the riskiest bank on the Street, right? Below, please find the Goldman Sachs VaR and Risk Adjusted Return on Risk Adjusted Capital Chart.


Now, as we can plainly see, Goldman Sachs has steadily trended down in its RARORAC and steadily trended higher in VaR. In other words, risk has steadily increased as risk adjusted return has steadily decreased.

For those who feel I am simply blogging in sanscrit, let's pull up the Wikipedia definitions for VaR and RARORAC:

Value at Risk (VaR):

In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level.[1]

For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 5% probability that the portfolio will fall in value by more than $1 million over a one day period, assuming markets are normal and there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is termed a “VaR break.”[2]

The 10% Value at Risk of a normally distributed portfolio

VaR has five main uses in finance: risk management, risk measurement, financial control, financial reporting and computing regulatory capital. VaR is sometimes used in non-financial applications as well.[3]

Risk adjusted return on capital (RAROC) is a risk-based profitability measurement framework for analysing risk-adjusted financial performance and providing a consistent view of profitability across businesses. The concept was developed by Bankers Trust in the late 1970s. Note, however, that more and more Risk Adjusted Return on Risk Adjusted Capital (RARORAC) is used as a measure, whereby the risk adjustment of Capital is based on the capital adequacy guidelines as outlined by the Basel Committee, currently Basel II.


Broadly speaking, in business enterprises, risk is traded off against benefit. RAROC is defined as the ratio of risk adjusted return to economic capital. The economic capital is the amount of money which is needed to secure the survival in a worst case scenario, that is it is a buffer against heavy shocks. Economic capital is a function of market risk, credit risk, and operational risk, and is often calculated by VaR. This use of capital based on risk improves the capital allocation across different functional areas of banks, insurance companies, or any business in which capital is placed at risk for an expected return above the risk-free rate.

RAROC system allocates capital for 2 basic reasons:

  1. Risk management
  2. Performance evaluation

For risk management purposes, the main goal of allocating capital to individual business units is to determine the bank's optimal capital structure—that is economic capital allocation is closely correlated with individual business risk. As a performance evaluation tool, it allows banks to assign capital to business units based on the economic value added of each unit.

Now that we're all up to speed, let's take this one step farther. Below you may find the One-Day Trading VaR of GS with a 95% confidence level.


Here we find proof that Goldman Sachs has indeed usurped Morgan Stanley for the title of "Riskiest Bank on the Street".


Hey, notice how Goldman Sachs has trended DOWNWARD regularly and steadily over the one year period. As a matter of fact, the only company that had a lower risk adjusted capital return was Lehman. So let's compare what is happening now... Oh yeah, we can't because Lehman has already collapsed. What does that portend for Goldman who appears to operate quite similarly?


I know many of you new readers are wondering, "Who the hell is this guy?". Well, this guy is someone who has been pretty good at ferreting out weak companies on the verge of collapse:

There is the call of the fall of REITs and commercial real estate in 2007 - "GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months". I also called Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]), Lehman Brothers CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008]), Countrywide and Washington Mutual (Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide with its peer), nearly all of the failed or failing regional banks of significant size (As I see it, these 32 banks and thrifts are in deep doo-doo!), MBIA (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton) and Ambac (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap and Follow up to the Ambac Analysis), among others - well in advance.

More Goldman Sach's Research:


Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb - 17 pages

Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages

Free research and opinion

§ As Reality hits, the Masters of the Universe are starting to look like regular bank employees

Premium Stuff!

Goldman Sachs - strategic investment and public offering Goldman Sachs - strategic investment and public offering 2008-09-26 02:29:15 895.36 Kb

Goldman Sachs Report June 21, 2008 Goldman Sachs Report June 21, 2008 2008-10-20 16:48:01 361.18 Kb

Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional 2008-12-18 10:12:37 267.49 Kb

Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Retail Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Retail 2008-10-20 15:45:05 348.99 Kb

GS ABS Inventory GS ABS Inventory 2008-02-25 06:48:56 1.22 Mb

Historical context for the "Riskiest Bank on the Street" moniker.

Banks, Brokers, & Bullsh1+ part 1

Wednesday, 19 December 2007 | Reggie Middleton

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered... Last week, Morgan Stanley called Citibank the “short play of...

The Riskiest Bank on the Street
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

Key highlights of my research on the "Riskiest Investment Bank on the Street": The Riskiest Bank on Wall Street – Morgan Stanley has US$74 billion of Level 3 assets, over 200% of its eq
Monday, 11 February 2008

A closer look at the exposure of the other brokers
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)

...- Who has the most of their assets tied up in illiquid Level 3 as a proportion to tangible equity? You guessed it, The Riskiest Bank on the Street. Now, they do have a decent amount of liquidity the ...
Sunday, 16 March 2008

19. On the insolvencies of non-bank financial institutions
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
...Bullsh1+ part 1 Banks, Brokers, & Bullsh1+ part 2 Money Panic Bear Fight The Breaking of the Bear The Riskiest Bank on the Street Here comes the CRE Bust (Quip on Lehman Brothers)...
Tuesday, 18 March 2008

20. Quick Morgan Stanley update from my lab
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
This is a refresher to the The Riskiest Bank on the Street piece that I posted a few months ago on Morgan Stanley. Let me get straight to the salient points. High exposure to lev
Thursday, 20 March 2008

21. Early morning scan of events
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
For those that haven't noticed, I've begun sharing my early morning news and data routine with the blog. Here goes Monday moring EST. Is the Fed running out of ammo? Reserve
Monday, 31 March 2008

22. Reggie Middleton on the Street's Riskiest Bank - Update
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
This is the update to my forensic deep dive analysis of Morgan Stanley. It is still, in my opinion, the "riskiest bank on the street". A few things to make note of as you browse through my opinion a
Sunday, 06 April 2008

23. Banks, Brokers & Bullsh1t 3.0: Shenanigans at Morgan and Lehman
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
I've been promising to give an illustration of the shenanigans being played by the commercial and investment bank's for some time now, but I've been quite busy working on my entrepeneurial pursuits
Wednesday, 16 April 2008

24. I warned you about the risk of those I Banks
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)
...ive counterparty and credit risk to imperfect hedges to dead and depreciating assets held off balance sheet: The Riskiest Bank on the Street Is this the Breaking of the Bear? Banks, Broke...
Wednesday, 21 May 2008
Last modified on Monday, 20 April 2009 01:00


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  • Comment Link Reggie Middleton Thursday, 23 April 2009 04:32 posted by Reggie Middleton

    Roger, for one you are not looking at the total calls, you are looking at the tail end. MS was over 50 when I went bearish on it. I gave a valuation band considerably above 9. Everything went exactly as I anticipated. Look at the original reports and you will see.

    I never claimed to be a pronosticator or to see things that other people can't. I am simply a pure fundamental investor, and the fundamentals are way off. As I have told Phirang, the record still stands out, and the fact that we are in a bear market rally does not change that. Imagine if I was wrong for two years and right for 6 weeks, would you be as staunch a supporter as you are currently a critic? Its a rhetorical question designed to put things in perspective, no need for an answer. Retail investors squander the one advantage that they have over institutional investors and that is the ability to invest for the long term without monthly or quarterly performance anxieties. That means they can, theoretically, cut through the chaff to get to the wheat. That ability is wasted because they are too easily distracted by the noise that is daily or even monthly and quarterly gyrations of an imperfect and inefficient market (at least in the short term). That is why my returns are higher than average, I see past this week, this month or even this quarter. I have no problem admitting that I am wrong, but I will have to be wrong first in order for me to do that.

    [b]MS is a perfect example. My reports valuation band was way above $9, which directly implies $9 was underpriced for MS, yet you failed to state that.[/b] They also said that $50 was over priced for MS, you failed to state that. MS market price has pretty much followed the valuation bands of my reports (at least as much as can be expected), yet you failed to state that as well. 15 months ago, when MS was trading at $43 dollars, I publicly stated it was worth $26.41 (See [url][/url]). Where did it fall to? Where is it trading now? Answer: $22.41. So again, I ask, what is your point? Basically, I was 100% correct. According to the report, $9 was an implicit (and explicit) undervaluation. This is not the impression that I am getting from you. Even now, my evaluation of MS is on point. It is trading right about where I though it was fairly valued, nearly to the dollar. I think my work deserves a lot more respect than you are giving it. The new work is looking forward 6 to 12 months as well, so don't expect the price to jump in lock step over the next few weeks.

    None of my single stock valuation have been significantly off for nearly two years, save the most recent 6 week rally. During this period, I freely and fully admit my valuation bands and current market prices are significantly disparate, but that is where the profit opportunity lies. Either I am right or I am wrong, but only time will tell. I explicitly warned on these comment forums of the upcoming bear market rally which I stated I thought would be violent. In retrospect, I was more correct than I would have wanted to be, but again, there are no inconsistencies there. In February of 2008, you could have been making the exact same argument about MS, fast forward one year later and...

    The same thing goes for GS, which was at $180 when I said it was worth $70 or so. Was I right? Where did it fall to? Was the profit there to be made? We most definitely didn't find out for several months, did we? Fast forward to the following year and you see thus far I have been vindicated. The same time frame needs to apply to the current crop of research. If it is wrong or off, I will indicate it in a research note, but again, we need time to know. 6 weeks is not time. The banking sector has received a lot of government assistance, hence it is laborious to keep up with programs A, B and C, yet I have done a commendable job of updating opinion on the investment banks.

    Again, this is not to say that I am never wrong or that I am even not wrong now, but this attitude of "your picks didn't make rain over the last 6 weeks" is counterproductive. I have said before repeatedly and will say again, if you don't have a 6 month to 1 year time horizon, my investment and research style is not for you. The results have clearly illustrated this. I cannot predict bear market rallies (even though I did see this one coming, I simply underestimated its severity and length) and daily, monthly or quarterly stock market fluctuations. What I can do is measure the relative health of a company and ascertain the relative credibility of managements pronouncements over time though.

    One final word, I never said MS/GS were the riskiest banks based on stock volatility/performance. I said there were the riskiest due to risky/level three asset exposure as a proportion to equity. I don't trade stocks, I take positions in companies. I painstakingly laid out the argument of their risk over at least 16 pages each time I made it. I have yet to be proven incorrect, either. Each of the banks that I labeled as the riskiest has halved in price, accepted government bailout money, and changed its entire business and corporate charter to avoid being driven out of business. Does this not sound like risk? As I stated in my earlier post, the reason MS is around and LEH isn't is that MS had their bank charter application expedited, and LEH didn't. If the charter wasn't obtained, we would be discussing MS in the past tense as well.

    If market volatility is all that matters to you, so be it, but don't read into the reports what is not there while actually ignoring what is there. Remember, by the time a stock becomes volatile, the cat is already out of the bag and the only way to profit is to trade beta. Trading beta is not my style. I attempt to generate alpha by being first, not competing on capturing volatility.

    I feel that that is enough of my trying to defend an impressive 2 year (or so) track record due to a 6 week bear market rally, that still has the blog's research performance over practically every other metric that I know of.

  • Comment Link rogerj1 Thursday, 23 April 2009 03:40 posted by rogerj1

    "The problem is that you consider it a "game""

    I don't consider it a game. That Friday when I bought the stock at 9 in my 401k, there was a question of whether my life savings would survive the following week.

    "I am continuously amazed at how difficult it is for the layman to see the facts when laid in front of them. I got a lot of resistance in 2007, 2008 and 2009 despite the fact that I haven't even been close to wrong yet."

    Not even close to being a layman. I've been in the trenches managing peoples money since 1982. In my world, when you screw up, you're dealing with real people and their very real money. It's very painful to get it wrong. One thing I can tell you is that I've seen a lot of prognosticators come and go in that time claiming to be able to see something nobody else could and they were just as confident in their abilities as you are.

    "If you did listen to me, you would have probably shorted MS from $50 down to $9!"

    Was this trade successful because of the sector it was in or stock selection? Last year MS underperformed their industry by 5% and has outperformed their industry by 2% this year. You could have shorted the sector and done about the same.

    "So, exactly what is your point?"

    You made a very bold call on the investment banks that turned out to be prescient. You certainly had my attention. I admire the fact that you were able to stand so far from the crowd on your call. That's not easy to do. Being in the business, I like to get an outsiders perspective to make sure I'm not drunk on the Kool-aid. You provided that, and I appreciate it. It's just that, up to this point, the single stock calls have been off. MS and GS have not been the riskiest banks to be in based on stock volatility/performance which is all that matters to me.

  • Comment Link phirang Wednesday, 22 April 2009 02:27 posted by phirang

    but will the Treasury let them???? I don't think Obama will give up this leverage over the banks: Rahm had a great saying about this, yes? You know how Rahm lost his finger... it wasn't a paper-cut!

    Politics have conflated with finance, and the result is a broken market, both in credit and equity (although credit markets are ignored by J1P and pensions on the take).

    Also, strange things happen when capital dries up: look at P&C rates, which are UP across the board!!!

  • Comment Link Reggie Middleton Wednesday, 22 April 2009 02:10 posted by Reggie Middleton

    I've got to pick you on again Phirang. The willingness to pay back the TARP is not grounded in the fundamentals, but is grounded in management's desire to return to an overly lucrative pay structure. Thus, they will attempt to pay back the TARP by any means necessary, even if it is to the detriment of the shareholders. GS's actions have proved that. It is going against the fiduciary duty of management to pay back cheaper money before expensive money, and if the bank has to raise capital and sell assets to pay back money that they allegedly didn't need in the first place after just a few months, then they obviously needed it, didn't they?

    Very few of the banks can actually afford to pay it back or they would have done so already, or at least tried to. Goldman, with its rapidly deteriorating metrics should not be trying to retire financing. That is simply an imprudent move. If you were in business, would you give back a loan knowing that 8 or your 9 revenue streams went negative, half of them were taking a loss and the one that didn't go negative took a lost anyway if you didn't change your fiscal calendar?

  • Comment Link Reggie Middleton Wednesday, 22 April 2009 02:02 posted by Reggie Middleton

    Tilting at the Fed has been the most profitable tilt for two years running now. Tons of money in its brokerage business??? Phirang, go back and read their quarterly report. Their brokerage business on the decline, big time!

    [quote]The value of GS' assets is irrelevant:[/quote]

    Everybody I know who has ever said that has lost their money. The value of assets is the only thing that counts in a bank. Don't listen to the media trying to mislead you Phirang. You cannot accurately value a bank off of cash flows, which is probably why those who may want to mislead you are throwing out the cash flow argument. the tons of cash that you are alleging the banks can make (yet somehow have not been seen yet despite an unsustaianably favorable environment induced by the Fed) will not outweight the megatons of deprecating assets. You are trying to move a pound with an ounce without a lever!

    That same financing was available to Lehman Brothers after Bear Stearns failed Phirang. Where is Lehman now???

    The XLF is irrelevant to me. It is hard enough to accurately value a single company. To value an entire index accurately is near impossible. Those indexes and ETFs are for traders, not a fundamental guy such as myself.

    Soros buying HBC shares is not a Datum Phirang. Maybe, the credit deterioration in HSBCs US portoflio increasing by 100% would be a datum, but not the investment activity of Soros. Are we going back into that name brand worshiping thing again. My track record is better than Soros'. Does that mean you short financials just because you heard that I did?

    The stress test methodology white paper is out Friday, not the results. Even when the results do come out, that is not necessarily going to tell you who will fail and who will not. If we (as a group, not just you - I'm not picking on you individually) were to shake the short term memory syndrome, we will realize that the treasury has been wrong with practically every prediction made and program instituted for 2 years straight! It would be unwise to throw all of your chips in the pot now in anticipation of them getting it right this time.

    COF does seem to have some problems with their credit quality, though.

  • Comment Link phirang Wednesday, 22 April 2009 01:59 posted by phirang

    I'd be interested to know WHEN they intend to pay back the TARP!

    There are TWO types of financials now: those that can pay back TARP and those that CAN'T.

  • Comment Link phirang Wednesday, 22 April 2009 01:47 posted by phirang

    you're tilting at the Fed.

    And the Fed can expand its B/S indefinitely, to the advantage of GS.

    That and GS is a primary dealer and broker which makes TONS of money in its brokerage business.

    The value of GS' assets is irrelevant: so long as there is no cashflow problem on the liability side, the "value" of its assets is irrelevant. Short-term financing is readily available from the Fed for FREE or in exchange for garbage assets under ABCD programs. XLF is most overvalued index aside from IYR, BUT what can you do: the .gov will backstop the money center banks, and GS is most certainly in that group!

    Also, Soros BOUGHT HBC shares in their last offering... just another datum.

    Anyway, stress tests are out Friday. We'll see who needs to raise equity capital and who doesn't. I'm betting PNC and COF will get spanked.

  • Comment Link Reggie Middleton Wednesday, 22 April 2009 01:03 posted by Reggie Middleton

    I am relaying multiple data points that have come out in my research. I don't recommend shorts or longs here, I only provide researched facts and I feel they speak for themselves. Morgan Stanley survived only because it ran for cover and the government provided it by expediting a bank charter for them. Without the bank charter, MS would have failed just like Lehman and Bear Stearns - pretty much as I predicted. Lehman probably would have survived as well if they were thrown a similar life line - but they weren't!

    I am continuously amazed at how difficult it is for the layman to see the facts when laid in front of them. I got a lot of resistance in 2007, 2008 and 2009 despite the fact that I haven't even been close to wrong yet. The refusal to face facts simply provides fodder for bureaucrats to attempt to pull the wool over your eyes, after all it wouldn't take much bravado if one believed you didn't want to see the truth in the first place.

    In addition, since when does a company have to fold in order to be a good short? You should run that theory behind the common stock holders of Citi, BAC, WAMU, Wachovia, Countrywide, etc. None of these companies folded, yet they are or were very close to zero - down from over $50.

    This is why I don't run other people's money. The short term memory effect. The investment bank research has had to have been some of the most profitable research on this blog (or on the web), yet there are still those who question it. Goldman is almost at the price where I originally went bearish on it, while ALL of its business lines are deteriorating rapidly, as well as the assets it is carrying on its balance sheet, the macro environment stinks and is getting worse, they cannot overcompensate their employees like they use to despite the fact that their non-interest and compensation expenses are actually rising, their business is rife with government intervention, and they were forced to convert into a commercial bank to save their skins. That means less margin, less leverage, and less freedom in risk taking.

    So, exactly what is your point?

  • Comment Link rogerj1 Wednesday, 22 April 2009 00:46 posted by rogerj1

    Morgan Stanley was not the most dangerous bank on wall street. In fact it ended up being one of two survivors that didn't get taken over. Goldman Sachs isn't going out of business. They're the other survivor. All of a sudden the competition has been virtually eliminated. What are you suggesting here, a short? Thank God I didn't listen to you when I added to MS at 9 when the Mitsubishi deal was being questioned. Time to move on. The crisis has passed. None of the major banks are going to be allowed to fold.

  • Comment Link YAYANKEE Tuesday, 21 April 2009 09:04 posted by YAYANKEE

    Bank Profits Appear Out of Thin Air..

    This is starting to feel like amateur hour for aspiring magicians.

    Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.

    But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

    With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

    Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

    Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

    “Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

    See the link for the full article.

  • Comment Link gwizz Tuesday, 21 April 2009 07:19 posted by gwizz

    The MSM keep all saying in unison that Goldman is one of the strongest banks and will return TARP. But will Treasury let them do it? These talking heads on CNBC are a joke. Anyone with any contrary position on CNBC is usually shown the door or muted.

  • Comment Link Vincenzo Monday, 20 April 2009 22:43 posted by Vincenzo

    Interesting...Martin Weiss is also ripping the banks and has a nice chart showing GS's derivatives exposure...I mean overexposure that goes right along with Reggie's fantastic forensic investigation.

  • Comment Link shaunsnoll Monday, 20 April 2009 20:07 posted by shaunsnoll

    interesting to note that on the IBM call, IBM grew revenue 11% and 12% in China and India.

  • Comment Link cube660 Monday, 20 April 2009 16:42 posted by cube660

    You may miss that sinking ship.

  • Comment Link uniprof Monday, 20 April 2009 16:35 posted by uniprof

    Reggie gets mention on:

    The site the GS is trying to close down.

  • Comment Link shaunsnoll Monday, 20 April 2009 16:24 posted by shaunsnoll

    yeah, amazing work reggie, seriously amazing. you are what we all wish the sell side could be: rigor and discipline.

  • Comment Link phirang Monday, 20 April 2009 16:22 posted by phirang

    but I am fueling and loading torpedoes!

  • Comment Link cube660 Monday, 20 April 2009 15:55 posted by cube660

    Your skills are second to no one!
    It is amazing to see Goldman Sachs back in your cross hairs again.
    It sure brings back some fond memories. ;D

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