Goldman Carries Heavy Burden. One The Mortgage Industry Knows Too Well

by devteam April 20th, 2010 | Share

Goldman Sachs Reports 1Q Earnings Per Common Share OF $5.59

NYSE:GS today announced 1Q 2010 net revenues of $12.78 billion and net earnings of $3.46 billion. This beat expectations and was a net revenue improvement of $1.86 billion from 4Q 2009

Net shareholder return on equity, a profitability ratio, was 20.1%

Where did Goldman Make Their Living?

Investment banking, mergers and acquisitions, public common stock offerings, Fixed Income, Currency, and Commodities Trading.

My point: IT'S A TRADER'S WORLD AND GOLDMAN SACHS WEARS THE KING'S CROWN. (at a time when many are struggling to survive)

They carried that burden all while trimming compensation  paid in the first quarter. Goldman reported their ratio of compensation and benefits to net revenues (basically their commission bps vs. total bps earned before secondary's margins) was the lowest first quarter ratio ever reported.  (Eh. While Goldman is not paying out record commissions, there are more indirect ways to spread the wealth. Think “improved quality of life at work”.)

On top of all this, Goldman's Tier 1 Capital Ratio was 15.0% as of March 31, 2010. Think of the Tier 1 Capital Ratio as a mortgage borrower's reserves. (Ever hear us say “window dressing”?)

Goldman represents capitalism to me. Unfortunately, because the SEC accused them of fraud,  the 1Q performance of Wall Street's shining star of profitability will only encouraged the continued formation of angry mobs on Main Street.  HEAVY IS THE CROWN…

Which by the way they refute:

New York, April 16, 2010 – The Goldman Sachs Group, Inc. (NYSE: GS) said today:We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.

We want to emphasize the following four critical points which were missing from the SEC’s complaint.

  • Goldman Sachs Lost Money On The Transaction.  Goldman Sachs, itself, lost more than $90 million.  Our fee was $15 million.  We were subject to losses and we did not structure a portfolio that was designed to lose money.
  • Extensive Disclosure Was Provided.  IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities.  The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.
  • ACA, the Largest Investor, Selected The Portfolio.  The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions.  ACA had the largest exposure to the transaction, investing $951 million.  It had an obligation and every incentive to select appropriate securities.
  • Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor.  The SEC’s complaint accuses the firm of fraud because it didn’t disclose to one party of the transaction who was on the other side of that transaction.  As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.

Again. I think this is poor timing. It clouds the regulatory environment with a jaded perspective and angry decision making bias. Mortgage professionals know the results of these feelings all too well. I ask you to expand your experiences in this atmosphere and apply them across the financial services universe. Imagine if every financial professional had to deal with one or two misguided “rules” like HVCC.

We need regulation, but we need it to be implemented with careful consideration from the people who operate in the real life environment.  We need open forum discussion from  the Congress…without political pandering across party lines. Transparency and communication in an acceptable timeline. Proper testing. Reform needs to be done right, the first time.

I hope President Obama avoids over-leveraging this event to the point where it slows Main Street's investment on Wall Street and makes the financial services industry miserable with misguided regs.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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