Goldman Sachs Heading to $20? Buffet getting desperate?

[touchring]

Is Goldman Sachs Heading to $20?


Those invested in Goldman Sachs (GS) should be hoping for a share buyout offer, triggered by the dire need to take the Wall Street investment bank private, prior to thoroughly revamping its business model. Otherwise, questions regarding Goldman's short and longer term viability will continue to linger, since management is still unable to publicly define a deleveraged business model suitable for a public listing.
The old business model (essentially incorporating securities trading, risk arbitrage, M&A advisory and bond underwriting) has obviously collapsed. Some elements of the older version do possess the potential to generate profits once the domestic and global economy takes a decisive turn for the better. But the days of exponential gains from leverage-loaded activity are well behind us. And, when calculating returns on equity by any deleveraged measurement, it is indeed difficult to justify a share price above the $20-$30 range today for Goldman's 395 million outstanding shares.


http://seekingalpha.com/article/1052...-heading-to-20


The value of Berkshire hathaway seems to be tied to Greenspan's fire economy (see chart below). With the fire fading away gradually, has mr warren buffet become desperate by making buy calls when knowing that the worst is yet to come? That buffet has deviated from his usual self is the worrisome part - would mean that the downturn is going to be severe.

http://finance.yahoo.com/echarts?s=B...urce=undefined

[c1ue]

Re: Goldman Sachs Heading to $20? Buffet getting desperate?

Touchring,

I'm not sure I understand your point.

Sir Warren basically loaned money to Goldman in return for a 10% annual return; the convertible part of it is just a free CYA for him.

His ultimate goal was the 10%, nothing more.

Sure, BRK is a FIRE company in the sense that it is built around an insurance company. But it is also different in that BRK used its insurance float to buy strong goods producing companies in addition to the odd auto insurance unit.

Contrast that with any of the former broker/dealers, or the existing banks, or even many of the real estate trusts: their models are built on pyramids of debt - either their own or loans to others.

BRK has had a remarkable couple of years, but it was impossible that both a continued growth in American consumption and a relative lack of super-cat events would continue.

[marvenger]

Re: Goldman Sachs Heading to $20? Buffet getting desperate?

Buffet also major shareholder of moody's. He's in on the game. He's a competitive guy, don't think his ego could take being beaten by FIRE players for 20 years. Ptetty hard not to be when you're that huge and the FIRE econ is that huge.

[c1ue]

Re: Goldman Sachs Heading to $20? Buffet getting desperate?

Moody's is a major BRK holding, true. (or was) :0

But Moody's also fits most of Sir Warren's investment criteria - especially the monopoly/near monopoly one.

You should also note that Sir Warren has owned Moody's for a long time - the initial stake was bought for $499M in 2001.

A lot of Moody's value has been lost relative to 2 or 3 years ago, but his original stake is still ok - and he's been adding to it.

[marvenger]

Re: Goldman Sachs Heading to $20? Buffet getting desperate?

That really doesn't help quash my tinfoil hat tendencies. Buffets a smart guy who understood derivatives potential for mass delusion and mass destruction. The guys steering always end up better off, I think buffet probably saw the whole thing coming and made sure he was at least partially steering so he didn't get massively screwed or totally left behind and forgotten more like it. It's not the kind of enterprise I think he's attracted to but, but given the size and force behind it, i think he was adult about it as EJ would say.

[c1ue]

Re: Goldman Sachs Heading to $20? Buffet getting desperate?

Marv,

I'd caution you to assume Sir Warren is super-human.

His comments on derivatives came well after Berkshire's entry into Moody's - due to the acquisition of General Re in 1998 (or 1999?). The wind-down of the derivatives at General Re caused significant and greater than expected costs for Berkshire in the 2003 and later time frame.

Direct from the 2003 Berkshire annual report:

When we began to liquidate Gen Re Securities in early 2002, it had 23,218 outstanding tickets
with 884 counterparties (some having names I couldn’t pronounce, much less
creditworthiness I could evaluate). Since then, the unit’s managers have been skillful and
diligent in unwinding positions. Yet, at yearend – nearly two years later – we still had 7,580
tickets outstanding with 453 counterparties. (As the country song laments, “How can I miss
you if you won’t go away?”)

The shrinking of this business has been costly. We’ve had pre-tax losses of $173 million in
2002 and $99 million in 2003. These losses, it should be noted, came from a portfolio of
contracts that – in full compliance with GAAP – had been regularly marked-to-market with
standard allowances for future credit-loss and administrative costs. Moreover, our liquidation
has taken place both in a benign market – we’ve had no credit losses of significance – and in
an orderly manner. This is just the opposite of what might be expected if a financial crisis
forced a number of derivatives dealers to cease operations simultaneously.

If our derivatives experience – and the Freddie Mac shenanigans of mind-blowing size and
audacity that were revealed last year – makes you suspicious of accounting in this arena,
consider yourself wised up. No matter how financially sophisticated you are, you can’t
possibly learn from reading the disclosure documents of a derivatives-intensive company
what risks lurk in its positions. Indeed, the more you know about derivatives, the less you

will feel you can learn from the disclosures normally proffered you.

So Sir Warren's "Derivatives as weapons of financial mass destruction" arose from his own very personal experience.

The Moody's buy thus is easier to understand - Moody's is one of 3 oligopolistic ratings agencies. They had easy money, just blew it due to a combination of greed and willful incompetence. But, as always, Sir Warren bought in cheap enough to still make out.