Global Investing: Goldman Sachs has not yet bottomed in New York, and here's why

Dubai - Last half-decade has been five separate 'annus horribilis' for lender

The last half-decade has been five separate "annus horribilis" for Goldman Sachs, the New York investment bank once hailed on Wall Street as the most leveraged, most profitable hedge fund in the world that just happened to be listed on the New York stock exchange. Goldman's proprietary trading desk's $5 billion bet against the housing markets, its Abacus CDO scandal that led to savage losses for clients but profits for the firm, draconian regulations like the Volcker Rule that limited trading/market making with its own capital, the post-Lehman shrinkage of balance sheet leverage, eroded profitability (a five per cent return on equity for the best and brightest of global finance? I would rather invest in far more profitable Ajman Bank!).
Goldman's fabled "culture of success" (excess?) and political links to world leaders were mocked in a Vanity Fair article by Matt Tebbi in which he described Goldman as "giant vampire squid" sucking blood from humanity. Chairman and CEO Lloyd Blankfein drew global scorn when he said the investment bank did "God's work". In any case, if even a divine mandate could only produce a dismal 5.2 per cent return on equity is a sad testament to the fate of the fabulous investment bank where so many of my friends worked on 85 Whitehall (death star) and Peterborough Court in the Strand, that great temple of money.
Goldman Sachs is a natural loser in Brexit since its scaled up in London after the Big Bang in the 1980s. I used to love hanging out with Goldman bond traders in Broadgate in the 1990s over long, liquid lunch discussing investments, currencies and Third World money politics (we traded, sold and invested in Brady bonds and emerging market Eurobonds) in multiple languages. Goldman's brilliant chief economist Jim O'Niell was a friend and I loved his macro-economic conclaves where I learnt so much. Even now, I consider Peter Oppenheimer my guru on Europe, David Kostin in the US and Kathy Mitsui in Japan.
Goldman Sachs shares have been slammed from their 220 peak in April 2015 to only 148.25 now. Brexit and a global bear market mean the shares could easily fall by another 20 per cent by Christmas. Yet somewhere near $100 a share, Goldman Sachs once again, to paraphrase the Top Gun theme song, enters the highway to the value zone!
Goldman Sachs has scaled down its proprietary FICC business and exposure to capital intensive structured derivatives since 2011. Goldman's asset management business has now achieved global scale. True, commodities, fixed income trading and sales and block trading in equities has mediocre profits while the subprime/Lehman legacy haunts mortgage backed securities. Goldman Sachs was a vocal proponent of Remain, a sensible strategy since London is so mission-critical to its global empire. Yet, like David Cameron, Goldman spectacularly lost its Brexit vote bet. Can Goldman Sachs fall below 100? Sure. It traded at 80-100 in both 2012 and 2013. Yet the discount to tangible book value below 100 would be so staggeringly large, it could provoke accelerated share buy-backs. Even now, Goldman offers a 1.9 per cent dividend yield, a price/earnings ratio of 9.6 and a price-to-book value of 0.8 per cent.
Brexit has choked debt/equity underwriting animal spirits in investment banking and could well hit merger deal pipelines, an area where Goldman excels. The fall in trading volumes and funds exodus from stock markets is bearish for institutional services and Goldman Sachs Asset Management, over 60 per cent of global revenues. Principal investing is hit by the $2 trillion fall in global markets after the Brexit vote. Commodities are in junk since Goldman is one of the world's largest oil and gas traders, though Blankfein was the only Harvard Law School graduate I know who sold gold at J. Aron.
It is a given fact that Goldman Sachs revenues are now only $6 billion, a 40 per cent hit last year. Earnings fell a shocking 56 per cent. The bank has fired hundreds of obsolete ex-rain makers. It will stop on campus recruiting at Harvard, Wharton and Yale and go to more modest colleges where graduates do not expect the GNP of Albania as a sign on bonus.
Notice the 40 per cent fall in compensation costs at a bank that once paid its managing directors a Pharoah's ransom. For now, I see a big chill in IPO, underwriting volumes, cross-border mergers, prime brokerage, high-yield, fixed-income trading, energy trading, merchant banking and asset management. There is no case for a valuation rerating - for now. But times pass, wounds heal, animal spirits return, new bull market emerge. Sometime this winter, I expect to accumulate Goldman Sachs at 90-100 for a $180 strategic target.