U.S. Bank Stress Test Assumptions + RESULTS

On Thursday, May 7th, 2009, the U.S Federal Reserve FINALLY unveiled its long-awaited, eagerly-anticipated 'Stress Test' (i.e: the Supervisory Capital Assessment Program) results performed on the country's 19 largest financial institutions. These 19 banks each hold assets of at least $100 Billion and, collectively, are believed to represent about 2/3 of the total assets contained in the entire U.S. Banking system.

Of the 19 U.S. commercial banks tested, 10 banks FAILED and will now need to raise a total of about $75 Billion in additional capital by November of this year. The 3 largest Bank Stress Test LOSERS are: Bank of America/BAC (needs to raise $33.9 Billion in capital), Wells Fargo/WFC (needs to raise $13.7 Billion), and the former wholly-owned financial services arm of General Motors (GM), GMAC/GJM (needs to raise $11.5 Billion).

One of the Treasury's primary litmus tests for the stress tests it conducted revolved around an interesting accounting metric known as Tangible Common Equity or TCE. Tangible Common Equity is designed to indicate how much 'ownership equity' owners of common stock would actually receive in the event of a company's forced liquidation. According to Wikinvest, TCE intends to remove the more subjective components of valuation (intangible assets and goodwill) from the calculation of a company's underlying worth. The accounting formula for the TCE ratio is a company's Total Shareholders Equity MINUS its Intangible Assets (non-physical assets on a company's balance sheet - exp's include: intellectual property, brand recognition), Goodwill (the premium paid by an acquiring company over and above the acquired company's Tangible Book Value) and Preferred Stock as a percentage of Tangible Assets. During the stress tests, the U.S. government made it clear that it strongly urges all 19 commercial banks to maintain a TCE of at least 4% moving forward.


Due to uncertainty regarding the future macroeconomic environment, the Federal Reserve tested the TCE of each of the 19 banks under 2 different economic scenarios - 1.) 'Average Baseline' and 2.) 'Alternative More Adverse'. Per the above chart, the more optimistic 'Average Baseline' case carried the following assumptions for 2009: -2% GDP 'growth', 8.4% unemployment and a 14% decrease in nationwide housing prices. Meanwhile, the 2009 assumptions used by the more pessimistic 'Alternative More Adverse' view were: -3.3% GDP 'growth', 8.9% unemployment and a 22% decline in housing values.


Lastly, it should most certainly be noted that the April's U.S. jobs/payrolls report was released this past Friday and the country's unemployment rate currently stands at 8.9% - already exactly matching the more pessimistic unemployment assumption used in the 'Alternative More Adverse' scenario. According to Dean Baker of the American Prospect, a healthier or more realistic assumption for the country's unemployment rate in 2009 would be 9.4%. It should also be noted that per the above S+P Case/Schiller nationwide 10 city housing prices index graph, the current real decline in 2009 housing prices has also ALREADY virtually matched the housing assumption used in the 'Alternative More Adverse' scenario. Furthermore, most 'experts' believe housing prices will continue to decline in 2009 and probably finish the year down by about 24-25%. As a result and anecdotally thinking, it looks like the assumptions used by the Federal Reserve in their 'Average Baseline' scenario are entirely too optimistic (14% decline in housing??) and disingenuous at best. Meanwhile, the assumptions employed in the 'Alternative More Adverse' scenario don't seem to be pessimistic enough unless the U.S. economy rebounds sometime during the 2nd half of 2009.


marketwatch.com/news/story/Stress-tests-see-possible-600/

http://www.wikinvest.com/metric/Tangible_Common_Equity_(TCE)

prospect.org/csnc/blogs/name=background_on_the_stress_tests


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BANK Stress Test RESULTS - Scorecard :


10 Banks That FAILED (Ticker) - Capital Needed :
* Bank Of America (BAC) - $33.9 Billion
* Wells Fargo (WFC) - $13.7 Billion
* GMAC (GJM) - $11.5 Billion
* Citigroup (C) - $5.5 Billion
* Regions Financial (RF) - $2.5 Billion
* Suntrust Financial (STI) - $2.2 Billion
* Morgan Stanley (MS) - $1.8 Billion
* Keycorp (KEY) - $1.8 Billion
* Fifth Third Financial (FITB) - $1.1 Billion
* PNC Financial (PNC) - $0.6 Billion

9 Banks That PASSED (Ticker):
* Goldman Sachs (GS)
* JP Morgan (JPM)
* US Bancorp (USB)
* Metlife (MET)
* American Express (AXP)
* Bank Of New York Mellon (BK)
* State Street (STT)
* Capital One Financial (COF)
* BB&T Corp (BBT)


http://www.cnbc.com/id/30626465/


Data Courtesy: Marketwatch, CNBC + The American Prospect
Full Disclosure: I own shares of GS.

Keeping Tabs On $700 Billion Of TARP

Check out the below informative New York Times link Tracking the $700 Billion worth of funds being ALLOCATED by the U.S. Treasury Department via its controversial Troubled Asset Relief Program (TARP) :

nytimes.com/creditcrisis/recipients/table


* Top 10 Banking TARP Customers :
1. Citigroup (C) - $45 Billion (marketcap = $45 Billion)
2. AIG (AIG) - $40 Billion (mcap = $5B)
3. JPMorgan Chase (JPM) - $25 Billion (mcap = $118B)
4. Wells Fargo (WFC) - $25 Billion (mcap = $96B)
5. Bank Of America (BAC) - $15 Billion (mcap = $82B)
6. Goldman Sachs (GS) - $10 Billion (mcap = $31B)
7. Merrill Lynch (MER) - $10 Billion (mcap = $21B)
8. Morgan Stanley (MS) - $10 Billion (mcap = $16B)
9. PNC (PNC) - $7.7 Billion (mcap = $18B)
10. U.S. Bancorp (USB) - $6.6 Billion (mcap = $47B)


* Top 10 customers account for almost 30% (28% or $195 Billion) of total TARP funds...Citigroup and AIG alone account for over 12% of total TARP spending


* About $410 Billion in total TARP funds remain UNALLOCATED (approx 60%)


Data Courtesy: NY Times
Full Disclosure: I own shares of GS.

Wall Street's 2003-07 Housing BOOM Exces$

During the 5 year U.S. Housing 'BOOM' from 2003 to 2007, Wall Street's 5 Largest firms (Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Sterns and Lehman Brothers) paid their Top 5 Executives a total of more than $3 Billion in compensation!


Three BILLION dollars is of course a stunning amount of money in ANY context but especially so when considering the rather DIRE solvency/financial challenges these same firms have faced over the course of the past 6 months...NAMELY:

* Bear Sterns (the artist formerly known as BSC) was forced into bankruptcy in March

* Lehman Brothers (the artist formerly known as LEH) was forced to declare bankruptcy in September

* Merrill Lynch (MER), in order to avoid being forced into bankruptcy, was forced to sell itself to Bank of America (BAC) in September

* OH yeah, don't forget about that little $700 BILLION Wall Street 'Bailout/Rescue Plan' that was just approved by Congress this weekend !

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According to the informative Bloomberg article linked below:

* The 5 Wall Street firms had combined Net Income (profits) of $93 Billion during the five years through 2007

* Of the $3.1 Billion paid to the top five executives at the firms between 2003 and 2007, Goldman Sachs (GS) paid the highest total with $859 million, followed by Bear Stearns at $609 million...CEO pay at the five firms increased each year, doubling to $253 million in 2007, according to data compiled from company filings

* Merrill Lynch (MER) paid its chief executives the most, with former CEO Stanley O'Neal taking in $172 million from 2003 to 2007 and John Thain receiving $86 million, including a signing bonus, after beginning work in December 2007

* Bear Stearns CEO James Cayne made $161 million before the company collapsed in March and was sold to JPMorgan (JPM) with monetary backing provided by the U.S. Federal Reserve

* Hank Paulson, the current U.S. Treasury Secretary and former CEO of Goldman Sachs, made about $111 million from 2003-2006...current Goldman Chief Executive Officer Lloyd Blankfein received $57.6 million in 2007

* Morgan Stanley's (MS) current and former chief executives, John Mack and Philip Purcell, were paid about $194 million over the last five years.

* Lehman's Chief Executive Officer Richard Fuld made $165 million between 2003 and 2007

* Lastly, it should be noted that Excessive compensation was NOT limited to Wall Street's top executives as Wall Street firms have paid employees a greater share of revenue than any other industry, about 50%...The five Largest firms paid their 185,687 employees $66 Billion in 2007, including about $39 Billion in bonuses...That amounts to an average pay of $353,089 per employee, including an average bonus of $211,849.

bloomberg.com/apps/news?pid=20601109&sid=aGL5l6

Data Courtesy: Bloomberg

Full Disclosure: I own shares of GS.

Warren BUFFETT Ch-Ch-Chooses GOLDMAN

Warren BUFFETT, the uber-BILLIONAIRE and CEO of Berkshire Hathaway (BRK.A or BRK.B), must be an avid reader of this blog. How else can you explain his recent purchase of 'bank-holding' company Goldman Sachs (GS)?? I (wrongfully but still gleefully) credit my 8/27/08 post titled 'RTOB: Six Reasons to BANK on Goldman' for showing the 'Oracle of Omaha' the light. UNwarranted and completely nonsensical boasting aside, here are some of the intriguing details behind Warren's newly acquired 10% stake in Goldman Sachs :


* Berkshire Hathaway Inc. agreed yesterday to a $5 Billion preferred stock investment in Goldman...this will immediately provide Berkshire a 10% interest in GS (effectively valuing GS at $50 Billion...fyi, at $129/share the current marketcap of GS is $51 Billion)


* Buffett also reserves to the right to buy an additional $5 Billion in GS common stock sometime during the next five years at $115 a share.(anecdotally thinking...looks like he is getting an Amazing deal here)

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* FYI + During these turbulent times, Buffett's been pretty busy in terms of putting his $40 Billion of CASH into the markets as Berkshire has announced 9 acquisitions since October 2007, compared with 6 in the prior 12 months, when his largest deal was $350 million to buy VF Corp. (VFC), an underwear and pajama maker


* By mid-2008 (note, not 'through' 2008), Buffet's cash holdings have officially declined to $31.2 Billion from $44.3 Billion at the end of 2007.


* This year, Buffetts' Largest Deals include:
1.) $4.5 Billion purchase of Marmon Holdings Inc., the Pritzker family's collection of 125 companies, in March
2.) $4.7 Billion bid this month for Constellation Energy Group (CEG), the largest U.S. power seller
3.) Buffett also provided $6.5 Billion in April to help Mars Inc. buy Wrigley (WWY), giving Berkshire a stake in the chewing gum maker.
4.) Buffett also pledged $3 Billion in July to Dow Chemical Co.'s (DOW) $15.4 Billion takeover of Rohm & Haas Co. (ROH)


* Buffett's other $IGNIFICANT FINANCIAL stakes include:
1.) Wells Fargo (WFC - 9% stake)
2.) US Bancorp (USB - 4% stake)
3.) American Express (AXP - 13% stake)
4.) Wesco Financial (WSC - 80% stake)
5.) Moody's Corp. (MCO - 20% stake...even the greatest get it wrong sometimes)
* Buffett's Berkshire Hathaway is the Largest Shareholder for these 5 companies


* Buffett also owns less significant stakes in other financials including: Bank of America (BAC - 0.2% stake), M&T Bank Corp. (MTB - 6% stake) and Suntrust Bank (STI - 1% stake)

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Random
Thoughts
Of Brilliance: In this chaotic market the PSYCHOLOGY of shareholders matters perhaps more than anything else. Even though Goldman is giving Berkshire a bargain on its shares (I'm referring to the follow-up $5 Billion stake at $115/share), you CANNOT underestimate the psychological importance of being able to tell the investing public that Warren Buffett, arguably the world's $aviest investor of ALL TIME, is firmly behind your company and stock. I think this is a GREAT move for shareholders of both Goldman and Berkshire. Lastly, it will also be interesting to see how shares of GS react in the next 6 months to a year...wonder if this move by Buffet will end up marking the bottom in GS shares.


bloomberg.com/apps/news?pid=conewsstory&refer=conews&tk

http://www.cnbc.com/id/22130601/


Data Courtesy: Bloomberg + CNBC.com
Full Disclosure: I own shares of GS.

RTOB: Six Reasons To BANK On Goldman

Six Fundamental LONG TERM Reasons to Own Goldman Sachs (GS) :


1.) The IN$IDE Boys :
Please refer to my 7/21/08 post titled 'Goldman Sachs - Inside Boys To The Rescue' for more information on this (use the ETB 'Archive Keyword Reference' on the right to search for this post using keyword 'Goldman Sachs'). Bottom line, GS is on the INSIDE...and EVERYONE else seems to be on the OUTSIDE.


2.) The UNSCATHED (What Credit Crisis ??) :
GS is one of the select FEW financial players that have, thus far, been relatively UNSCATHED by the ongoing U.S. Credit Crisis. Because of disciplined, proprietary RISK MANAGEMENT and execution Goldman has NOT had to take on significant 'write downs' on shoddy assets...UNLIKE the majority of global financial peers including: Lehman Brothers (LEH), Citigroup (C), Bank of America (BAC), Merrill Lynch (MER), Wachovia (WB), Wells Fargo (WFC), UBS, etc.


3.) ONCE In A Lifetime MARKETSHARE Opportunity :
Because Goldman has been relatively UNSCATHED by the recent Credit Crisis (see point #2 above), GS is in an IDEAL position of being able to use its assets MUCH more productively than its peers. Instead of having to use its assets and existing capital to internally 'patch holes'/shore up the soundness of its Balance Sheet, GS is able to use its capital more productively and actually take advantage of the market's current Asset 'Fire Sale' (kinda like a 'clearance' shopping event...just about all of GS's peers are unloading assets in a 'Everything must GO!' fashion) to GROW its business. The departure of Bear Sterns (BSC) ALONE is a great reason to own Goldman. Throw in the CARNAGE currently being suffered by competitors Lehman Brothers, Merrill Lynch, etc. and Goldman Sachs is in PRIME position to soak up some Attractive LONG TERM brokerage MarketShare (whether its in Asset Management, Equity/Bond Underwriting, Commodities Trading, Mergers and Acquisitions, etc.).


4.) The Massive Stock Buyback :
While most U.S. financials are scrambling to RAISE Capital (mostly by diluting the shares of stock owned by existing shareholders), Goldman is doing the exact opposite via BUYING BACK ITS OWN STOCK and returning Capital to its shareholders. Which financial would you rather own - An investment that is RETURNING you money vs. One that is DILUTING/reducing your money?! For the record and per my 6/22/08 post titled 'GS 2Q08 Earnings Recap', Goldman has 62 million shares remaining in its authorized share repurchase program...this represents about $9.5 Billion or 16% of the company's total FLOAT/shares outstanding.


5.) DEMONSTRATED Competence of Management :
The executive management team of Goldman Sachs is often referred to as 'the Smartest Guys in the Room'...regardless of WHO's in the room. With all due respect to Google (GOOG), Goldman is probably the smartest company in the WORLD. For validation's sake, look NO further than how GS has executed its brokerage business during arguably one of the country's most HISTORICALLY trying times for financial institutions. Save The 1990 U.S. Savings and Loans Crisis (fyi + for more info on this ERA you can refer to my 7/14/08 post titled 'The U.S. Savings and Loans Crisis'), most banks have never seen a market environment THIS difficult. For empirical evidence of GS's track record of execution during the ongoing Credit Crisis, please refer to the ETB 'Archive Keyword Reference' under 'Earnings' or 'Goldman Sachs'...in there you will find the details behind a couple of impressive, recent GS quarterly reports courtesy of my proprietOHRI GS quarterly 'Earning Recap' posts.


6.) The CHEAP, Single Digit P/E Multiple :
While 'cheap' is of course relative, it should be noted that Goldman Sachs is trading at just 7.5 x 2008's expected earnings. Goldman's Forward 2009 P/E is currently 10. Despite its EXECUTION BRILLIANCE as a company, GS as a stock has been taken down like the rest of its financial cohorts...the company's stock is currently Down 28% year to date (GS is down 13% year over year). Anecdotally saying, If you're looking to build a CORE investment position in GS then you gotta believe that 10 x 2009 Earnings (or $150/share) represents an attractive entry point.


Full Disclosure: I own shares of GS.

Will Cox Spread SEC Order To ALL ?

In testimony delivered today during a U.S. Financial Services Committee hearing in Washington, Securities and Exchange Commission Chairman Christopher Cox stated that he is interested in SPREADING recently imposed Short-Selling restrictions from a small group of 19 financial stocks to the ENTIRE stock market.

news/newsfeeds/articles/djf500/200807241703DOWJONESDJONLINE000879_FORTUNE

Quoted from the Above Link:
* The SEC issued an emergency order last week, which took effect Monday (7/21/08), to tighten requirements for short sales focused on 19 U.S. financial companies including Fannie Mae (FNM) and Freddie Mac (FRE), the federally sponsored housing-finance giants. In addition to the two Government Sponsored Enterprises (GSE's), the order included 17 Federal Reserve primary dealers in U.S. Treasury debt. FYI, for a list of The U.S. Fed's Primary Dealers please refer to my 3/16/08 post labelled 'REF - U.S. Fed Primary Dealers (Discount Rate)'.

* SEC Chairman Cox said the 19 stocks were originally targeted because they were institutions able to borrow from the Federal Reserve. But he said the SEC aims to extend "operational protections" marketwide.

* Short sellers sell borrowed shares which they hope to replace later at lower prices, profiting from stock price declines...The SEC has put restrictions in place in recent years to curb illegal "naked" short sales, in which stocks are NOT borrowed before short sales. That effort was extended with the emergency order which calls for borrowing or arranging to borrow shares in advance of short sales in the 19 targeted stocks.

* Cox told reporters after the hearing that the SEC staff also is discussing changes that would require disclosure of significant short positions, similar to requirements to divulge big long position in stocks.

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RTOB - When there's only TWO SIDES to the Stock Market (Up or Down...Long or Short...Bull or Bear...Black or Red), there's No way one can assert that increased SEC regulation imposed on one side will NOT benefit the other...Skipping the always lively ethics debate (Is the SEC overstepping its 'free market' bounds ?), I'd rather focus on the decision and what it represents. Besides being a psychological victory for those individuals 'long' stocks (and possibly a catalyst leading to another short-squeeze induced stock market rally), this event also marks the Beginning of a New ERA...An ERA that is governed by a much more active and vigilant Securities and Exchange Commission. Maybe I'm being too optimistic, but it seems like the 'New' SEC is More Willing THAN EVER to SWIFTLY Re-examine and Address stock market MANIPULATION. Regardless of your SIDE, score one for the Longer term Sustainability of the GAME.

Data Courtesy: CNN Money
Full Disclosure: I own shares of GS.

Goldman Sachs - In$ide Boys To The Rescue ?

The Wall Street Journal is reporting that one of Goldman Sach's (GS) most senior institutional bankers, Ken Wilson, is temporarily leaving the firm to advise U.S. Treasury Secretary Hank Paulson on how to resolve the country's current banking crisis.


* Mr. Wilson, 61 years old, is temporarily leaving his post as chairman of Goldman's Financial Institutions Group and is expected to serve the administration without pay, in a period through January 2009

* President George W. Bush made a personal call to Mr. Wilson in recent days, asking him to assist Mr. Paulson

* Prior to becoming the U.S. Treasury Secretary (May 30th, 2006), Hank Paulson served as CEO of Goldman Sachs from 1999-2006

http://online.wsj.com/article/SB121660908385169563.html?mod=googlenews_wsj

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THE GS IN$IDE BOYS:



* Per Wikipedia, Paulson and his three immediate predecessors as CEO of Goldman Sachs — Jon Corzine, Stephen Friedman, and Robert Rubin — each have left the company to serve in GOVERNMENT:

- Jon Corzine as a U.S. Senator (now Governor of New Jersey)

- Stephen Friedman as chairman of the National Economic Council (later chairman of the President's Foreign Intelligence Advisory Board)

- Bob Rubin as both chairman of the National Economic Council (later, U.S. Treasury Secretary under President Bill Clinton)

- Hank Paulson as current U.S. Treasury Secretary under President George W. Bush


Data Courtesy: WSJ + Wikipedia
Full Disclosure: I own shares of GS.

BIO - Lakshmi Mittal, CEO of ArcelorMittal

Lakshmi Mittal, the CEO and Founder of the World's Largest STEEL company, ArcelorMittal (MT), is the world's 4th richest man for a reason.

For a brief recap on Mr. Mittal's career + successes, please refer to the link below for Richard Wachman's excellent write-up :


http://www.guardian.co.uk/business/2008/jun/29/11


Interesting quotes from the the link above:

* 'About 10 years ago, Mittal was the visionary who saw that the fragmented international steel industry, serving local markets, was crying out for consolidation,' says a London-based metals analyst. 'Many firms were owned by national governments where the phrase "entrepreneurial flair" was missing from most people's vocabulary. True, some companies had been privatised, but the sector was poleaxed by chronic overcapacity, high indebtedness and steel prices that had hit rock bottom.'

* (Lakshmi Mittal) in 2006 took on and beat the European establishment when he acquired Arcelor (for $26.9 Billion Pounds or approx $54 Billion Dollars), the steel company that was created through the merger of firms from Spain, France, Luxembourg and Belgium. Its chairman, Guy Dolle, was famously forced to eat his words after controversially dismissing Mittal Steel as 'a company of Indians' paying with 'monkey money'. In the end, Arcelor's shareholders decided to sell out despite opposition to the deal from politicians including former French President Jacques Chirac.

* ArcelorMittal was the first company to produce more than 100 million tons of steel a year; that could double in a few years as Mittal goes on another buying spree, extending his empire to Africa, Australia and China...Today, ArcelorMittal employs 300,000 people in 60 countries, but accounts for 'only' 10 per cent of global output, so it could grow much bigger before attracting the attention of the anti-trust authorities. 'Certainly, there is the opportunity to grow,' Mittal said recently. 'To what size? You could go up to 150 or 200 million tons a year,' he said.

* Mittal's family owns a 44% stake in ArcelorMittal...his son, Aditya Mittal, a graduate from UPenn's Wharton Business School, is the company's CFO.

* ...Mittal is plotting his next move. He wants to secure deposits of coking coal and iron ore, which have doubled in price in the past four years and which are vital for the production of steel. He is in talks to acquire coal mines in Australia and Russia, while expansion elsewhere means that ArcelorMittal now meets 45% of its iron ore requirements from its own supplies. Mittal has also invested in shipping and rail to cut transport costs. The only part of the supply chain that remains outside his control is oil and gas.

* At the age of 26, Lakshmi set up his first steel mill, in Indonesia, producing 26,000 tons and generating annual profit of $1m

* Mittal's Kazakhstan move 'propelled the company into the 'big league of international steelmakers'...In the clapped-out former Soviet Republic, larger than Western Europe and on the brink of bankruptcy, Mittal bought the country's Karmet Steel works in Temirtau for the knockdown price of $400m. Kazakhstan shared a border with China, where demand for steel was about to take off, and the acquisition would soon pay for itself many times over


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* Somewhat related, Lakshmi Mittal was recently elected to Goldman Sachs (GS) Board of Directors as an independent director:


http://ap.google.com/article/ALeqM5j5fNg5YCCfmnGePlYUGRlJ5jGw2gD91JTVP80


Goldman Sachs CEO, Lloyd Blankfein on Mittal joining GS's board: "Lakshmi Mittal has reshaped a global industry and, in the process, has engineered new modes of production, identified unrealized value and sparked remarkable growth...He has a keen understanding of the global economy, having operated in virtually every corner of the world. Lakshmi's experience, judgment and independent thinking represent an important addition to our board of directors, and will be of tremendous value to our people, our shareholders and our clients."


Data Courtesy: Richard Wachman + The AP
Full Disclosure: I own shares of MT and GS.

GS 2Q08 Earnings Recap

GOLDMAN SACHS 2Q08 Earnings Report Stats:

Beat ?: YES ! (reported $4.58/share vs. analysts' consensus of $3.42/share)

Profit--> down 11% to $2.09 Billion (from $2.33 Billion)
Sales --> down 7.5% to $9.42 Billion (from $10.2 Billion)

Sales By Business Unit:
A.) Trading and Principle Investments: net revs of 5.59 billion (down 16% yoy)
*Fixed Income, Currency + Commodities (FICC): net revs of $2.38 Billion (down 29% yoy)
*Equities: net revs of $2.49 Billion (unchanged yoy)
*Principle Investments: net revs of $725 million (down 8% yoy)

B.) Asset Management + Securities Services: net revs of $2.15 Billion (up 18% yoy)
*Asset Management: net revs of $1.16 Billion (up 10% yoy)
*Securities Services: net revs of $985 million (up 30% yoy)

C.) Investment Banking: net revs of $1.69 Billion (down 2% yoy)
*Financial Advistory: net revs of $800 million (up 13% yoy)
*Equity Underwriting: net revs of $616 million (up 72% yoy)
*Debt Underwriting: net revs of $269 million (down 59% yoy)

Other Highlights + Guidance:
*Marks the 12th straight quarter GS has exceeded analyst estimates
*Goldman Sachs currently ranks #1 WW in 2008's year to date announced Global M+A sales volume
*GS earned 57% of its 2Q08 revenues in the U.S. (43% overseas)
*GS's 'global core excess liquidity' (a pool of cash + liquid securities) increased to an avg of $88 Billion in the quarter from about $64 Billion in 1Q08
*Operating Expenses decreased by 2% yoy to $6.59 Billion
*Goldman reduced employee headcount by less than 1,000, or 1%, quarter over quarter to 31,495 during the quarter.

*The 29% drop in Fixed Income (FICC) revenues was negatively affected by $775 million worth of writedowns and credit market losses

*Assets Under Management --> Assets under management increased by $22 Billion to $895 Billion during the quarter ($16 Billion due to market appreciation and the remaining $6 Billion via new client inflows)

*Tax Rate --> Effective Tax Rate for 2Q08 was 26.3%, down from 29.5% for the first quarter of 2008 and 34.1% for fiscal year 2007 (the decreases in the tax rate were primarily due to changes in the geographic mix of earnings)...the lower than expected 2Q08 tax rate accounted for about 35 cents of GS's $1.16 earnings 'beat'...GS expects a fiscal 2008 annualized tax rate of around 27.7%

*Book Value --> Book Value Per Common Share was $97.49 and Tangible Book Value Per Common Share was $85.16, an increase of 5% and 6%, respectively, during the quarter

*Return On Equity --> The annualized return on average common shareholders' equity, a measure of how well the firm reinvests stockholders' money, was 20.4%, compared with 14.8% in 1Q08 and 26.7% in the second quarter of 2007.

*Buyback Program --> GS repurchased 1.2 million shares at an average cost per share of $173.85, for a total cost of $203 million during the quarter...remaining share authorization under the firm's existing buyback program is 62.4 million shares.

*Loan Committments (LBO Loans) --> At the end of 3Q07, the bank had $52 Billion worth of open LBO Financing Loan Commitments...GS has now brought that number down to $11 Billion

*Mortgage Related Assets --> Goldman ended 2Q08 with $15 Billion in Residential Mortgages (down from 1Q08's $20 Billion)...$8.5 Billion in Prime, $4.7 Billion in Alt-A and $1.8 Billion in Subprime mortgages...GS ended 2Q08 with $17 Billion in Commerical Mortgages (vs. 1Q08's $19.4 Billion)

*Leverage --> GS cut its Gross Leverage Ratio to 24.3 times in 2Q08 vs. 27.9 times in 1Q08...the 'adjusted' leverage ratio fell to 14.7 from 18.6 in 1Q08.

*Level 3 Assets --> GS's Level 3 Assets (those balance sheet assets which are the most illiquid and therefore most difficult to value/price) decreased from 8% of the firm's total assets to 7% during 2Q08 from 1Q08 (from $96 Billion to $78 Billion)

"...it’s pretty obvious that March was a really difficult period in the financial markets. And so the world has certainly improved since March. And I said again on a call before, someone asked me and I said, March was definitely the low point through now. I can’t tell you it’s going to be the low point going forward. But it certainly has been the low point through now." - Goldman Sachs CFO, David Viniar

"We are realistic about the market challenges we face, but times of market dislocation also produce opportunities, and we will continue to take advantage of the most attractive of these as they arise." - Goldman Sachs CEO, Lloyd Blankfein

Full Disclosure: I own shares of GS.

BANK Stocks - Weapons of MA$$ Destruction

In order to to build some market perspective 6 months into 2008, I decided to do a 'Performance' Check on some of the Financial + Homebuilder stocks I follow.

BEHOLD the HORRID Year To Date (1/01/08 - 6/16/08) and year over year returns (...the graph to the left is courtesy of Societe Generale equity research + shows the marketcapitalization of the Financial sector as a proportion to the marketcap of the entire S+P 500 index...currently financials make up about 17% of the entire S+P 500):

Company (Ticker - Mcap): Year To Date Change, 1 Year Change

* Large U.S. Banks (Ticker...Marketcap): Returns
Bank of America (BAC - $135B): -27%, -39%
Bank of New York (BK - $48B): -14%, -6%
BB&T Corp. (BBT - $15B): -11%, -35%
Citigroup (C - $109B): -29%, -61%
Deutsche Bank AG (DB - $48B): -26%, -36%
JPMorgan (JPM - $137B): -9%, -21%
Northern Trust (NTRS - $16B): -7%, +9%
PNC Financial (PNC - $21B): -8%, -19%
Soverign Bancorp (SOV - $5B): -19%, -59%
Sun Trust Bank (STI - $16B): -29%, -51%
Wachovia (WB - $39B): -52%, -67%
Washington Mutual (WM - $7B): -50%, -84%
Wells Fargo (WFC - $87B): -13%, -27%
U.S. Bancorp (USB - $55B): -1%, -8%

* Brokers + Asset Managers:
AIG (AIG - $85B): -42%, -53%
Barclay's (BCS - $43B): -36%, -56%
Bear Sterns (formerly BSC): DEAD
Credit Suisse (CS - $49B): -20%, -35%
Goldman Sachs (GS - $72B): -15%, -20%
Jefferies Group (JEF - $3B): -16%, -31%
Legg Mason (LM - $8B): -26%, -46%
Lehman Brothers (LEH - $15B): -58%, -66%
Merrill Lynch (MER - $38B): -27%, -57%
Morgan Stanley (MS - $47B): -20%, -52%
Piper Jaffray (PJC - $0.75B): -12%, -34%
Raymond James (RJF - $4B): -5%, -5%
State Street (STT - $29B): -15%, -1%
UBS AG (UBS - $49B), -47%, -61%

* Stock Exchanges:
CME Group (CME - $23B): -39%, -24%
Intercontinental Exchange (ICE - $9B): -36%, -22%
NYSE Euronext (NYX - $16B): -32%, -25%
Nasdaq OMX Group (NDAQ - $7B): -33%, +4%
Nymex Holdings (NMX - $9B): -33%, -37%

* Other U.S. Financials:
Ambac Financial (ABK...$0.7B): -91%, -97%
Berkshire Hathaway (BRKA...$195B): -11%, +15%
Charles Schwab (SCHW...$26B): -11%, +5%
Countrywide Financial (CFC...$3B): -44%, -87%
Downey Financial (DSL...$0.125B): -84%, -93%
E Trade Financial (ETFC...$2B): +7%, -84%
Fannie Mae (FNM...$25B): -36%, -63%
Freddie Mac (FRE...$16B): -30%, -63%
MBIA Inc. (MBI...$2B): -67%, -91%
Metlife (MET...$42B): -4%, -12%
Moody's Corp. (MCO...$10B): +11%, -42%
PMI Group (PMI...$0.4B): -66%, -91%
Sallie Mae (SLM...$12B): +23%, -57%
TD Ameritrade (AMTD...$11B): -6%, -9%
Thomson Reuters (TRI...$30B): -12%, -15%

* International Banks:
Australia and New Zealand Banking (ANZBY...$34B): -23%, -25%
Banco Bilbao/Argentina (BBV...$77B): -15%, -17%
Banco Bradesco/Brazil (BBD...$66B): +3%, +28%
Banco de Chile (BCH...$6B): +2%, -1%
Banco Itau/Brazil (ITU...$66B): +7%, +21%
Bancolumbia/Columbia (CIB...$7B): +4%, +6%
Banco Santander/Spain (STD...$120B): -11%, +2%
Bank of Ireland (IRE...$11B): -30%, -51%
Creditcorp/Peru (BAP...$8B): +13%, +45%
HDFC Bank/India (HDB...$12B): -34%, +3%
HSBC Holdings/UK (HBC...$195B): -3%, -12%
ICICI Bank/India (IBN...$21B): -40%, -21%
Kookmin Bank/South Korea (KB...$20B): -18%, -36%
Lloyd's TSB Group/UK (LYG...$40B): -27%, -40%
Mitsubishi UFJ/Japan (MTU...$105B): +8%, -14%
Mizuho Financial/Japan (MFG...$61B): +9%, -29%
National Australia Bank (NABZY...$209B): -21%, -24%
National Bank of Greece (NBG...$24B): -25%, -8%
Royal Bank of Canada (RY...$64B): -5%, -9%
Royal Bank of Scotland (RBS...$77B): -47%, N/A
Shinhan Financial/South Korea (SHG...$17B): -19%, -23%
Toronto-Dominion Bank/Canada (TD...$54B): -4%, -2%
Unibanco/Brazil (UBB...$38B): -2%, +21%
Westpac Banking Corp./Australia (WBK...$39B): -16%, -5%

* U.S. Homebuilders:
Beazer Homes (BZH...$0.2B): -27%, -83%
Centex (CTX...$2B): -40%, -65%
DR Horton (DHI...$4B): -8%, -43%
Hovnanian (HOV...$0.5B) -7%, -67%
KBH Home (KBH...$2B): -12%, -57%
Lennar Corp (LEN...$3B): -11%, -62%
MDC Holdings (MDC...$2B): +13%, -20%
NVR Inc. (NVR...$3B): +17%, N/A
Pulte Homes (PHM...$3B): +1%, -57%
Ryland Group (RYL...$1B): -10%, -40%
Standard Pacific (SPF...$0.2B): -4%, -83%
Toll Brothers (TOL...$3B): +2%, -25%

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*According to the New York Times, "Between early 2004 and mid-2007, a period of unprecedented wealth on Wall Street, seven of the nation’s largest financial companies earned a combined $254 billion in profits. But since last July, those same banks — Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley — have written down the value of the assets they hold by $107.2 billion, gutting their earnings and share prices. Worldwide, the reckoning totals $380 Billion, much of which reflects a plunge in the value of tricky mortgage investments."

http://bigpicture.typepad.com/comments/2007/12/underwriting-th.html

Data Courtesy: Bloomberg, New York Times, Barry Ritholtz

Full Disclosure: I own shares of GS and IBN.

2007's Highest Paid S+P 500 CEO's

Per the AP, 2007's Highest Paid S+P 500 CEO's:

1. John Thain, Merrill Lynch (MER), $83.1 million
2. Leslie Moonves, CBS Corp. (CBS), $67.6 m
3. Richard Adkerson, Freeport-McMoran Copper+Gold (FCX), $65.3 m
4. Bob Simpson, XTO Energy Inc. (XTO), $56.6 m
5. Lloyd Blankfein, Goldman Sachs Group Inc. (GS), $53.9 m
6. Kenneth Chenault, American Express Co. (AXP), $51.7 m
7. Eugene Isenberg, Nabors Industries Ltd. (NBR), $44.6 m
8. John Mack, Morgan Stanley (MS), $41.7 m
9. Glenn Murphy, Gap Inc. (GPS), $39.1 m
10. Ray Irani, Occidental Petroleum Corp. (OXY), $34.2 m

*The total pay figures are rounded, and are based on the AP's compensation formula, which adds up salary, perks, bonuses, above-market interest on pay set aside for later, and company estimates for the value of stock options and stock awards on the day they were granted last year.

Data Courtesy: The Associated Press

Full Disclosure: I own shares of FCX, GS and NBR.

U.S. Residential Mortgage Securitizations

Per respected Oppenheimer & Co. financial analyst Meredith Whitney, for every $1 of U.S. mortgages that were originated since 2000 there were about $7 of 'assets' that were created/SECURITIZED by Lenders. (FYI, the 'securitization' process would largely consist of mortgage lenders + banks packaging the mortgages they originated into mortgage-backed assets that were then sold to a plethora of GLOBAL customers including institutional holders like hedge funds, pension funds, brokerages, banks, etc.)

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*The Average Quarterly amount of U.S. Residential mortgage SECURITIZATIONS that were produced from 1991 to 2004:

- 1991 to 1995: $9.8 Billion
- 1996 to 2000: $59.7 Billion
- 2001 to 2004: $174.4 Billion

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*The Banks with the Greatest Residential Mortgage Exposure:

1.) Bank of America (BAC) --> $266 Billion
2.) Wachovia (WB) --> $170 Billion
3.) Citigroup (C) --> $155 Billion

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*The Banks with the LARGEST Asset Writedowns since the Beg of 2007:

1.) Merrill Lynch (MER) --> $24.5 Billion
2.) Citigroup (C) --> $19.9 Billion
3.) UBS (UBS) --> $18.1 Billion
4.) Morgan Stanley (MS) --> $9.4 Billion
5.) IKB Deutsche (DB) --> $8.9 Billion
6.) Bank of America (BAC) --> $7.0 Billion

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Net of the net, this subprime problem runs DEEP and I'm continuing to stay away from the VAST MAJORITY of stocks that belong in the financial sector. My only financial sector positions are IBN and GS and that's largely because I believe both large cap stocks offer compelling/cheap valuations given their exposure to sustainable, long term INTERNATIONAL GROWTH. Who knows when a bottom will be hit in the U.S. financials...in the meantime there are way too many other (largely international) opportunities out there to research + invest in. Lastly, fyi, the CEO of Wachovia, Kennedy Thompson, was FINALLY FIRED today...good riddance.




Data Courtesy: Oppenheimer & Co.
Full Disclosure: I own shares of IBN and GS.

Large Nation INFLATION

Per Goldman Sachs' research, the 2007 (actual) + estimated 2008 Inflation Rates of some of the world's largest economies:

*United States:
2007 = 2.9%
2008 = 3.8%

*Germany:
2007 = 2.1%
2008 = 2.9%

*China:
2007 = 4.8%
2008 = 6.8%

*Australia:
2007 = 2.3%
2008 = 3.7%

*Japan:
2007 = 0.0%
2008 = 0.8%

Data Courtesy: Goldman Sachs research

REF - 1Q08 13F SEC Filings

For my REFerence + Per the latest 13F SEC forms filed quarterly by U.S. Hedge Funds and notable 'Super investors', I found the following 1Q08 portfolio transactions/disclosures to be the most signiciant Re impact to MY 'stock universe':

FYI, I use this 13F data from hedge funds + investors I trust as a point of reference when evaluating my own equity purchase decisions (just one of the variables)...the price shown below is just an avg of how that particular stock/security traded during the quarter (1Q08).

*T. Boone Pickens (BP Capital):
1.) NEW position in RIG @ $133.20/share...owns 1.09 million shares
2.) NEW position in HAL @ $36...1.5 million shares
3.) Added to FWLT @ $66.50...727 thousand shares
4.) Added to ABB @ $24.90...2.7 million shares

*Warren Buffett (Berkshire Hathaway):
1.) Added to BNI @ $85.90...63.8 million shares
2.) Added to KFT @ $30.40...138.3 million shares
3.) Added to IR @ $40.40...937 thousand shares

*Carl Icahn (Icahn Capital Management):
1.) NEW position on AMLN @ $29.90...6.3 million shares
2.) Added to MOT @ $11.40...115.7 million shares
3.) Added to BIIB @ $59.50...9.9 million shares
4.) Added to FOR @ $24.10...2.7 million shares
5.) Added to GFG @ $13.10...2.7 million shares
6.) Added to ENZN @ $8.70...2.5 million shares

*George Soros (Quantum Fund):
1.) NEW position on RIO-P (pref) @ $27.00...3.2 million shares
2.) NEW position on BUCY @ $95.10...300 thousand shares
3.) NEW position on JOYG @ $63.20...322 thousand shares
4.) NEW position on FWLT @ $66.50...268 thousand shares
5.) NEW position on IBM @ $107.80...3 thousand shares
6.) NEW position on TOL @ $20.40...21 thousand shares
7.) NEW position on GOOG @ $518.90...685 shares
8.) Added to NBR @ $29.60...75 thousand shares
9.) Added to EXC @ $77.70...25 thousand shares
10.) Added to GS @ $181.00...3 thousand shares
11.) Reduced CBI position by 50%...245 thousand shares
12.) Reduced POT position by 75%...66 thousand shares
13.) Reduced SGR position by 50%...154 thousand shares
14.) Reduced AAPL position by 99%...2 thousand shares
15.) CLOSED positions: BA, BBY, BIDU, COP, CSCO, EMC, FSLR, GME, HOKU, KFT, MA, MCD, MELI, NOV, PBR, RIG, XOM

*Eddie Lampert (ESL Investments):
1.) NEW position on KBH @ $22.70...605 thousand shares
2.) NEW position on CTX @ $22.90...748 thousand shares

*Seth Klarman (Baupost Group):
1.) Added to NWS @ $18.80...12.3 million shares

*Ken Heebner (Capital Growth Management):
1.) NEW position on PCU @ $99.50...3.1 million shares
2.) NEW position on IBM @ $107.80...452 thousand shares
3.) NEW position on NBR @ $29.60...300 thousand shares
4.) Added to DVN @ $93.30...2.7 million shares
5.) Added to FCX @ $93.70...4.8 million shares
6.) Added to MT @ $71.80...4.2 million shares
7.) Added to X @ $109...3.3 million shares
8.) Reduced RTP position by 50%...164 thousand shares
9.) Reduced RIO position by 68%...2.1 million shares
10.) Reduced HAL position by 45%...700 thousand shares
11.) CLOSED positions: RIMM, AAPL, RIG, FWLT, DE, ATW

*Other Investors' 13F Filing disclosures I'm still looking for include: Bill Gates (Cascade Investments), Ken Fischer (Fischer Investments) and Bill Miller (Legg Mason Capital)

Data Courtesy: GuruFocus.com.

Ackman on Goldman - Risk CONTROL

During a recent television appearance, IMMENSELY successful shortseller Bill Ackman, manager of the $1.6 Billion Pershing Square Capital hedge fund, acknowledged why he believes Goldman Sachs (GS) has been able to outperform its financial peers (Merrill Lynch -MER, Lehman Brothers - LEH, Citigroup - C, Bank of America - BAC, the artist formerly known as Bear Sterns, etc.) during the current credit crisis.

According to Ackman, Goldman Sachs has been able to outperform because of its Proprietary method of RISK CONTROL.

As he put it, Goldman Sachs CEO Lloyd Blankfein requires that company traders uniquely mark-to-market their assets on a nearly DAILY basis. If a manager is unable to price one of his illiquid assets then he is instructed to "sell 10% of the position" and use that price.

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Perhaps more significant than the subject of Ackman's actual acknowledgement (I had already believed Goldman was the best 'Risk Controller' in town as evidenced by their relative lack of subprime-related asset writedowns), is the SOURCE himself - BILL ACKMAN.

*As noted above, Bill Ackman has been one of the most successful shortselling traders on Wall Street the past couple of years - chiefly benefiting from the IMMENSE amount of financial institution (banking, insurance, etc.) failures exposed by subprime + the Popping of the U.S. housing bubble. Nobody knows and studies financial institutions + their risk control practices better and more THOROUGHLY than Ackman. Don't believe me? Check out the below January 31st, 2008 article from Bloomberg titled "Ackman devoured 140,000 pages Challenging MBIA Rating" (MBI is down 86% year over year):

http://www.bloomberg.com/apps/news?pid=20601109&sid=a7.NpGwa19TY&refer=home

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Random
Thought
Of
Brilliance

With Ackman's $IGNIFICANT blessing, looks like GS's risk control practices should be viewed as the NEW STANDARD and until its peers catch up....GS remains the SAFEST, CHEAPEST and BEST way to play U.S. financials.

Data Courtesy: CNBC.
Full Disclosure: I own shares of GS.

Goldman'$ LEVERAGE ?

Apparently GLOBAL investment banker Goldman Sachs (GS) has no qualms about its current 'LEVERAGE situation'. Check out the quoted material below that I grabbed from the linked Bloomberg article written today, April 7th:

"Goldman alone is holding course, refusing to trim its leverage, a measure of how reliant a firm is on debt. The adjusted leverage ratio of assets to equity jumped to 18.6 at the end of February, from 17.5 at the end of November. ``We have no need as we sit here right now to shrink our balance sheet,'' Viniar told analysts on the March 18 conference call...That bravado suggests Goldman, having outmaneuvered New York-based competitors last year by making money in the falling mortgage-backed securities market, is once again poised to take a different -- and potentially more profitable -- tack from the rest of the industry...At Lehman Brothers Holdings Inc. (LEH), CFO Erin Callan told analysts the same day that the firm's ratio of net assets to tangible equity, the way it measures leverage, dropped to 15.4 at the end of February, from 16.1 at the end of November. ``Our goal is to continue to take that leverage down,'' Callan said...Goldman's leverage is also more sustainable because the firm's borrowing costs haven't jumped as much as that of rivals such as Lehman, Morgan Stanley and Merrill Lynch & Co., the No. 3 U.S. securities firm. Goldman, unlike Lehman and Merrill, has maintained a AA rating from all three credit-rating firms. Goldman debt that matures in January 2018 is yielding 2.41 percentage points more than comparable government bonds, while Lehman notes that mature in September 2017 trade at 3.02 points more than Treasuries...When prices of real estate and related securities eventually hit rock bottom, Goldman may have more flexibility than its competitors to start buying assets and add to its leverage, Hendler said.

``That's where Goldman may be able to differentiate itself because it has the capital to go in and take a chance, whereas some of these other guys, especially with regulatory scrutiny, it may be a little more difficult,'' Hendler said.

Another source of comfort for Goldman may be the way it finances its balance sheet. Only 14.8 percent of its borrowing comes from short-term REPO markets, in which firms sell assets and then repurchase them, according to Bank of America's Hecht. ``Our overriding concern has always been liquidity,'' van Praag said. ``The guiding principal is to borrow more, for longer.'' Bear Stearns, the fifth-largest securities firm, had relied on repos for 26.7 percent of its borrowing at the end of fiscal 2007, Hecht wrote. When other market participants became skittish about Bear Stearns's finances, they became less willing to engage in repo transactions, depriving the New York-based company of a key source of funding. Lehman has the highest reliance on repo funding of the industry's five biggest firms, at 27.2 percent of liabilities, Hecht said. "

http://www.bloomberg.com/apps/news?pid=20601109&sid=aA1scZyHazOI&refer=home

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*Regarding GS and ALL of their LEVERAGE - Am I FOOLISH to doubt them? Or FOOLISH to trust them given what's happened to now defunct Bear Sterns (it was levered at 30 x) ? I think of that question and then I WAKE UP and realize that these guys are #1 at LEGALLY minting money..no joke..until that blows up I'm sticking with Goldman.


Data Courtesy: Bloomberg.com, snagged on 4/07/08.
Full Disclosure: I own shares of GS.