The New Goldman Sachs Model: Quarterly Losses (GS, C, BRK-A)

Goldman Sachs Group (NYSE: GS) had been the one spot in the brokerage sector which was immune from the credit crunch and nearly immune from the mortgage mess.  In fact, the company made a fortune betting against mortgages from 2007 into 2008.  But now it is a mere bank holding company, and the word is being passed around that the former "Golden Slacks" will report its first quarterly loss since coming public.  Talk of losses at the brokerage firm gone banker first started coming to light a couple of weeks ago, and now it is becoming the new "whisper number" that Goldman Sachs won’t be profitable.

The quarter ending in November is still expected to show earnings northof $1.50 EPS if you trust the raw numbers at Thomson Reuters (FirstCall).  But the issue iis that you know that you cannot trust thenumbers from analysts right now.  Analysts have had their earnings estimateswrong and too high for quite a while, and it is even worse in thebrokerage firm estimates for their own industry peers.  Last night, weeven heard Jim Cramer talk about a wider loss possibly at $4.00 or$5.00 per share.

We do want to pass on more and more conspiracy theories here, but theconflict of interest in brokerage firm analysts covering other brokerage firms is obvious as a cold sore on a beauty queen.  When a brokeragefirm to downgrade or slash estimates on a competitor, it is telling Wall Street and MainStreet that they are also in the same boat.  If you hear investorscomplaining about how much money is being lost in the system and howdifficult the environment is, is that or is that not code language forthem saying THEY are losing their shirts?

Goldman Sachs has become a bank holding company and is having tode-leverage along with every other financial firm.  The company’s hedgefund business has been unable to post the strong gains.  Underwritinghas dried up.  There was about as much corporate bond trading inSeptember and October as their was in the USSR from the 1920’s to the1980’s.  Betting against financial stocks and peers was no longer alay-up, and the market swings from the morning to the close were oftenso severe and often so swift that gains rapidly became losses andlosses rapidly became gains.  And the forced selling took down thebalances of managed fund accounts.

Can you imagine that Goldman Sachs actually made a supposed call toCitigroup (NYSE: C) about a suspected merger?  That is ridiculous. Citi was Wall Street whipping boy for years, yet now it seems thatevery financial firm that is "in the club" of government mandatedsurvivors has to copy their business model.

So what is expected to come in late 2008 or into 2009 is an acquisitionof deposits.  We gave a list of companies which Goldman Sachs mightwant to consider buying.  But that is mere posturing, and it is verypossible that the firm will lop up institutions as they teeter ratherthan by going and being an aggressive buyer.

If Goldman Sachs is going to actually lose money and lay off a hugeportion of its workforce, the firm better come up with a distraction bybuying a bank or depository institution.  Three-Card Monte may be aliveand well.  Maybe Warren Buffett and Berkshire Hathaway (NYSE: BRK-A) will get a chance to buy more stock or preferred shares at lower prices.

Jon C. Ogg
November 7, 2008