One Year Later: Goldman Sachs's amazing rebound
Filed under: Goldman Sachs , One Year Later
The financial crisis crystallized the realities of systemic risk -- the idea that in certain panic-stricken environments, no company reliant on functioning credit markets is safe, even if it is fundamentally sound on its own merits.
No company may have been hurt more by guilt-by-association during the market's meltdown than Goldman Sachs (GS), widely recognized to have been the best positioned investment bank entering the fall of 2008. As Bear Stearns and Lehman Brothers went under, the competitive landscape was theoretically clear for Goldman to make sizable market share gains. But the same reliance on short-term financing and market fears of potentially hidden risks in the company's assets forced drastic changes.
Goldman joined Morgan Stanley in becoming a bank holding company, transitioning away from the high-leverage investment bank model to gain access to emergency lending facilities created by the Federal Reserve to stabilize credit markets. At the same time, Goldman was also early in raising equity capital from Berkshire Hathaway, effectively gaining the endorsement of Warren Buffett as it bolstered its balance sheet. On that day, Goldman stock traded at $120; it entered this weekend nearly one year later at $175, even as the worst economic macro-environment since the Great Depression continues to unfold.
All conspiracy theories and squid jokes aside, Goldman shone during the crisis because it did not make the same errors that impaired or brought down its competitors. The firm did not push its leverage too far, it was willing to raise capital from Buffett even when terms were less than favorable, and it had relatively little exposure to bad mortgage assets because of its hedging activities.
Unlike some management teams which publicly insisted all was well and that raising capital at dilutive terms was unnecessary, Goldman leaders were willing to give Buffett attractive terms on his $5 billion preferred stock investment to secure equity at a precarious time. Though Goldman's stock would eventually trade for less than $50 per share at its low and Buffett would be second-guessed on his investment, the move was central to giving Goldman the balance sheet strength to wait for the markets to turn.
Of course, one reason why an investor like Buffett was willing to become involved with Goldman Sachs is that it was a fundamentally healthier company than others. Goldman was a late entrant to the subprime securitization business, and thus lacked the significant inventories of mortgage assets that Bear Stearns or Lehman Brothers had on their books. Additional differentiating factors were risk-management practices and proprietary trading, which led Goldman to hedge risks from subprime assets by purchasing protection and actually allow it to profit as prices fell. Finally, Goldman did not push its leverage ratio as far as other banks, and maintained a Global Core Excess Liquidity Reserve, cash meant to tide the firm over in times of extreme distress.
As the acute strain of the financial crisis faded under a wave of government and Federal Reserve initiatives, Goldman was able to take advantage of wider spreads in its trading business and book enormous second-quarter profits. The official investment bank model might be dead, but the early results of Goldman Sachs as the premier bank holding company still look very good.
James Cullen edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns GS, but has no personal position in those stocks.
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Reader Comments (Page 1 of 1)
9-15-2009 @ 4:34PM
Glenn said...
What a crock: the reason GS "shines" above the others is because they and their former head Paulson were allowed to write legislation that allowed them to avoid what would have been their massive looses in AIG by having them covered by the American TAXPAYER ! They were aided and backed-up by Buffett because he was privy to what was going on ! Why it this never mentioned in articles about GS ? One has to believe in the tooth fairy to think otherwise since it is obvious to anyone with even half as brain !
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9-15-2009 @ 5:48PM
jane said...
I just love this website's love affair with GS. I wonder what GS would look like had their past Chairman not have bailed out AIG. Hank Paulsen will have history books written about him in the next fifteen years and they all will tell that he took care of his past employer at the expense of our country and the American taxpayer. I dislike Obama but Paulsen is the biggest weasel having a government position reporting to the president of all times.
The recession is coming to an end but I still think that our country and it's financial markets would still be where they are today had Lehman not be thrown to the dogs. Again thank the weasel Mr. Paulsen for that.
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9-16-2009 @ 7:47PM
VK said...
GS,AIG,Bank of AM.,are sucking taxpayer money the good old way. Even after the promisses by Government that corrective measures will be implemented, nothing have changed an year later. Today they still found way to pay huge bonuses to their top sharks in millions...and say to everyone ..Yes we can. The same golden parachuts to same people who brougt this system down. Filthy money are flying as it was an year ago into Wall Street and Insurance people who do not create anything but papers. We cannot tolerate this criminal behavior and accept the fact that the United Health care CEO put in his deep poket in 2007-2008 $1.1 billion dollars ( $1.1 billion!!!!!!) but customers of this company see yearly services been cut and a weekly check deduction and copay for medical visit constantly growing.
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9-17-2009 @ 8:54AM
Ritchie said...
Like every empire before America, it will not last for ever.
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9-20-2009 @ 8:44AM
NOENERGYFUTURES said...
I HAVE UNITED HEALTH CARE MED INSURANCE THROUGH THE COMPANY I WORK FOR (WE HAVE THOUSANDS OF EMPLOYEES) AND HAVE WATCHED MY CO-PAYS AND DEDUCTS RISE EVERY YEAR..THEY PAY LESS AND GET MORE AND MORE MONEY FROM ME. I AM HARDLY EVER SICK AND VISIT THE DOCTOR ABOUT 3 OR 4 TIMES A YEAR AT THE MAX...THEY WILL NOT PAY ANYTHING UNTIL MY 3000.00 DEDUCT IS PAID. SO WHAT THE USE OF ME PAYING FOR SOMETHING THAT IS OF NO USE???
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9-21-2009 @ 5:05AM
Mike Young said...
Well-are we ready to shoot congress?
No we are pukihamelos pukes-take no action!
A sad day is on us, as we complain and take no action while all our rights are stolen.
The person that shot the first round at Concord was lucky, we backed him up!
Will we do that today?
Mike Young
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9-21-2009 @ 5:04AM
Mike Young said...
Well Glenn you hit the nail on the head.
Please read Mein Kampf if you have not done so already-
Just hope you shoot-guns -not drugs-buy ammo while we can-before the jew law-
Just remember everything we buy we pay a jew tax-small k
Have a great Day,
Mike
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