Monday, December 17, 2007

Goldman Sachs + Mortgages = Mo' Money

Is anyone really surprised Goldman Sachs (GS) was right on this? We have only been talking about it here since October.

The Wall St. Journal reported Friday "The group's big bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year ended Nov. 30, according to people familiar with the firm's finances. Those gains erased $1.5 billion to $2 billion of mortgage-related losses elsewhere in the firm. On Tuesday, despite a terrible November and some of the worst market conditions in decades, analysts expect Goldman to report record net annual income of more than $11 billion."

While the other banks and brokerages like Citigroup (C), Bank of America (BAC), Lehman (LEH), Morgan Stanley (MS) and Bear Sterns (BSC) all bet one way, Goldman went the other.

The report goes on to question the "morality" of one segment of Goldman packaging these products while another was betting against them. Now, had Goldman's bet gone terribly wrong for the bank, would we be having this conversation? If not then lets just forget it because it is just sour grapes by those who did not see what was coming or nifty conspiracy theories by those with not much else to do. Yes I did see Ben Stein's take on it in the NY Times but let's be real honest here, Ben has been wrong on this whole mortgage mess since day one to such a staggering degree, one must think long and hard before taking to the bank anything he now says on it other than, "oops".

One cannot blame Goldman for playing the game all of them play the best. They are within the rules, if you do not like the rules, change them but until you do, too bad.

Goldman reports earnings on Tuesday and current estimates are in the neighborhood of $6.61 a share, essentially flat from last years $6.59. What this means is that people have no idea what Goldman is going to earn. When you throw the fact that two of the last three quarters Goldman has beaten the estimates by about 40%, one should take the estimates at a floor, rather than the actual number.

Look for revenues coming in around $11 billion, up from $9.4 last year and earnings approaching $8 a share. Perhaps then we can get this sucker back to where the stock should be, $250 a share and rising?

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