Brad Hintz, analyst at Bernstein Research, has had a look at Goldman’s results and reached the conclusion that shareholders might be better off if the bank just closed its trading business.
Goldman is trading below its theoretical liquidation value on a book value basis, says Hintz, adding: “Goldman’s trading business, at this point in time, would be worth as much shut down and its associated balance sheet of securities liquidated and the capital returns to shareholders as to continue to run trading as operating businesses.
“Return on average common equity at Goldman Sachs was 3.7 percent in 2011. This is, of course, well below the firm’s cost of equity capital.”
Needless to say, Goldman has no plans to dispense with its trading operations, which continue to account for 60 percent of its revenues. However, its poor return on equity in 2011 underlines the extent to which the current situation is unsustainable. In this week’s call, David Viniar said it remains unclear whether the current situation is secular or cyclical. However, Hintz suggests the valuation anomaly is about more than just the disappointing trading performance of 2011, pointing to “the uncertainty of the EU sovereign crisis, the threat to long-term trading business economics of Basel III capital charges and the concerns regarding the Volcker rule on the firm."
“None of these concerns will be quickly reconciled,” he adds.
In truth, Hintz has a habit of pointing out that banks would be better off getting out of trading: he said something similar about Morgan Stanley earlier this year.
Goldman bankers are said to be upset over this year’s bonuses, although there are allegedly fewer zeroes than expected. However, there is light filtering through into their dark tunnel: the bank’s stock rose 10 percent in the past two days.
The Wall Street Journal says Goldman’s bonuses are deferred for five years. By then, they could be worth a lot, lot more – or a lot less.