You don’t have to look very hard to discover someone lamenting the lack of a coherent blueprint for dealing with financial crises. Hank Paulson has publicly called for a legible road map that would allow policy makers to systematically and individually interpret all sorts of diverse financial troubles to assess the appropriate policy response. It’s become almost the mantra of pundits discussing the difficult negotiations and diverse outcomes of the failures of Bear Stearns, the government sponsored mortgage companies and Lehman Brothers. But it’s dead wrong.
We’re apparently meant to understand that the worst of the credit crisis is over, or nearly so. Federal Reserve chairman Ben Bernanke says the markets are “far from normal” but reassures us that the smart and caring gentlemen at the Federal Reserve stand ready to increase its auctioned funds. Banks have started to lend to each other at more gentlemanly rates, narrowing the spread between inter-bank lending rates and Treasuries. All of the big wigs on Wall Street—the kind who get invited to luncheons with Bernanke—have said that we’re finally, or nearly, out of the dark woods we entered sometime last year.
What certainly seems to be passing is our very brief age of anxiety. Those who have been predicting national disaster are a bit quieter. Even the worst fears of inflation resulting from the extraordinary rate cuts from the Federal Reserve seem to be receding with the expectation that interest rates will soon enough—perhaps by year’s end—begin climbing once again. Oppenheimer’s Meredith Whitney says there are more losses to be booked by brokerages but, by the logic of contrarian investing, the attention her every pronouncement gets is an indicator that there is little investment value left in shorting these institutions. This morning on Squawk Box even Jim Chanos, the notorious short seller, indicated that he might be backing off short positions in the financials.
There’s something unsettling about how orderly this has all been. How have we passed through what many have described as the worst crisis in American finance in recent memory with so little blood spilled on Wall Street? That question may seem crass to investors in Bear Stearns, to the holders of still frozen auction rate securities, to the legions of laid-off investment bankers. But the layoffs from this crisis have not come close to those we saw when the tech bubble popped. The holders of auction rates and even Bear Stearns shares have not experienced the pain of investors in the dot coms. To paraphrase a former Kansas senator, “Where’s the panic?”
Four months ago we launched The Big Idea, our occasional feature speculating about the future of finance, with a guess that Goldman might Sachs consider spinning off it’s proprietary trading group. There had been word on the street that the big pay packages received by many of the top names in private equity and at hedge funds had some within Goldman proprietary trading group feeling underappreciated. “We’re hearing from investment bankers who have talked to people inside the firm that Goldman could face pressure to spin-off its trading and hedge fund business in order to realize the value of the business before its guys start to defect or strike out on their own,” we wrote.
At the time, the Big Idea made something of a splash across the financial media and was heavily discussed in the financial community. But Goldman, then trading at it’s fifty-two week high, didn’t seem very keen on the idea. But just because Goldman wasn’t willing to talk spin-off didn’t mean that some of the top guys inside of Goldman weren’t plotting their own private spin-off.
This weekend’s Wall Street Journal details the rise and departure of Mark McGoldrick, the 48-year-old founder and former head of the “Special Situations” group at Goldman. Last year, McGoldrick got a $70 million bonus, one of the highest bonuses paid by the firm and more than Goldman CEO Lloyd Blankfein’s $53 million, but considered himself and his team “under-compensated.”
More After the Jump
[In the very first of our Big Idea columns we proposed something that we knew would be controversial—breaking up Goldman Sachs—but we hoped would spark discussion. And that’s what it’s done. First on the Financial Time’s Alphaville blog, then in Thorold Barker’s Lex column in the Financial Times, and over to the personal blog of Portfolio finance blogger Felix Salmon, where it was picked up by the Evening Standard tabloid. Each writer, of course, has picked up a new aspect of the Big Idea: Barker argued for transparency rather than breakup and Salmon for a leveraged buyout. But the discussion continues today in the latest edition of the Big Idea.]
Analyst Richard Bove is “toying in a recent research note with the notion of a Goldman breakup,” says Mark DeCambre on thestreet.com. DeCambre and Bove, an analyst at Punk Ziegel, both pick up with the notion that got this discussion going: Goldman seems to trade at a discount compared to the multiples the market seems willing to tolerate in smaller investment banks, hedge funds and private equity firms.
Yet for all of Goldman’s dominance, the stock is hardly loved by Wall Street. Richard Bove, analyst at Punk Ziegel, notes that Goldman trades at a steep discount to many lesser rivals — in part because diversified financial giants, like Goldman and Citi, don’t tend to get premium multiples.
Bove points out that Goldman trades at 10.4 times its projected fiscal 2007 earnings. Meanwhile, high-profile boutiques such as Lazard and Greenhill sell at multiples twice that of Goldman.
We haven’t read the Bove note yet but it seems that both Bove and DeCambre treat this as more of an intellectual lark than a serious exercise in predicting a break-up.
“Mark DeCambre admits up front that Goldman Sachs ‘isn’t considering a breakup right now.’But that hasn’t stopped Mr. DeCambre, who writes for TheStreet.com, from joining the others who have recently speculated about what such a hypothetical and unlikely breakup might mean for the hugely profitable securities giant,” DealBook notes on its item following the discussion today.
Last week, however, DealBreaker had lunch with a former Goldman Sachs investment banker who reminded us that there was a time when no-one believed that the Goldman partnership would go public. Some doubted that it was even possible to take the bank public, given the disclosure requirements and concerns about having conflicts between duties to clients and to shareholders. All that vanished, however, when Goldman did finally go public.
Could Goldman actually breakup?
“Stranger things have happened,” he said.
Splitting the Goldman Sachs Difference [theStreet.com]
Playing the Goldman Breakup Game [DealBook]