Shenanigans At Goldman Sachs


We never believed the investment of taxpayer funds was intended to be permanent.  We view it as our duty to return the funds.

– Goldman CFO David Viniar on a conference call this morning

Paying back TARP (Troubled Asset Relief Program) funds to allow the firm to raise salaries does not seem to be a valid reason for diluting shareholders.

– Dick Bove, Rochdale Securities

Goldman Sachs (GS) surprised everyone by pre-releasing earnings after the close yesterday – they were scheduled to announce this morning.  Low and behold the numbers came in way above expectations: EPS of $3.39 versus analyst estimates for $1.64. 

On Friday, The Wall Street Journal reported that Goldman was planning a $5 billion share sale to raise capital in order to pay back TARP money.  This morning they announced they priced 40.65 million shares at $123 a share for total proceeds of $5 billion.

I smell some funny business.  It must be pointed out that Goldman changed its reporting period starting this quarter.  Previously, its first quarter ran from December through February.  Starting with this quarter, it will be January through March. 

What happened in December? 

Buried on page 10 of their press release in small type is a one page account for December.  Apparently, December wasn’t so good.  Surprise surprise 😉 

They reported a $2.15 per share loss for December including a $320 million loss in Fixed Income, Commodities and Currencies – the same segment that had record revenues of $6,557 million in the first quarter and drove their strong results.  Investment Banking, Asset Management, Equities, Securities Services – all were notably weak in the first quarter with revenues down 20-30%.

I think it’s pretty transparent what’s going on here. 

Goldman wants to pay back the TARP money to the government because of the restrictions government involvement places on how they do business, including how much they can compensate their employees.  A front page Wall Street Journal article this morning documents Goldman’s crusade to get the government off their back by paying back the TARP money.  So they hatched this game plan: announce a really great quarter to show that they don’t need the government money; issue shares to raise private capital in its immediate wake; pay back the TARP money. 

The point I want to make is that this is more shenanigan than reality as a lot of bodies were buried in December in order to enable them to report a shiny first quarter and carry out the plan.

One way of getting a truly accurate picture of the quarter is to combine December with January through March.  When you do that, you have EPS of $1.24 – much more in line with analyst estimates.  Further, all the strength is driven by FICC, which is a black box.  Nobody really understands what the heck is going on there.  Core services businesses like Investment Banking, Equities and Asset Management are all weak, as you’d expect in the current financial environment.

Goldman shares are getting whacked today – down 9% on heavy volume – and they deserve it.

Disclosure: Top Gun is short shares of Goldman Sachs (GS).

See also: “The Case of The Missing Month”, Floyd Norris, Notions on High and Low Finance, April 14

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