The chickens have finally come home to roost at Goldman Sachs after CEO David Solomon’s succession of strategic blunders triggered a 33% slump in Q3 earnings. This is the 8th successive quarter of profit decline at the fabled Wall Street investment bank that was once known as the planet’s most profitable hedge fund that just happened to have an NYSE listing.
In essence, Goldman took the hit for Blankfein/Solomon failed gamble into consumer lending, specially the botched acquisition of the specialty lender GreenSky Capital and the mismanagement of the personal loan portfolio, wealth management and GSAM failure to achieve scale. After the colossal litigation and reputation hit the firm took under king Lloyd and prince Tim for the Malaysian sovereign wealth fund’s $5billion fraud, it is a sad testament to his legacy that the stock has dropped below its 312 a share book value under the dubious leadership of his handpicked successor.
It is no wonder that the financial media is agog with rumors of partnership civil wars and palace coups at Goldman Sachs. I find it difficult now to believe that Goldman went public on its IPO at almost 5 times its book value back in the Stone Age in 1999. Shelley said it best “My name is Ozymandias, King of Kings, Look on my works, ye Mighty, and despair! Nothing besides remains. Round the decay of that colossal wreck, boundless and bare…”
The ice age in investment banking primarily in M&A and IPO underwriting is not yet over. Banking valuations are invariably correlated to ROE and Goldie has managed to generate only a pathetic 7.6% ROE, well below Solomon’s 16% target level. To add insult to injury, archrival Jamie Gorman’s spectacular wealth/asset management deals like the acquisitions of Smith Barney, E-Trade and Eaton Vance has bequeathed Morgan Stanley almost $6 trillion in AUM and a val metric of 2 times book value. Even JPMorgan Chase, a global money center commercial bank trades at 1.6 times book value.
I do not see any imminent turnaround in Goldman Sachs unless DJ Solly Boy gets the boot. So all I’m doing is selling 0.6 Delta put options where my worst case scenario is getting delivery well below the bank’s tangible book value level of $290 a share where the implied vols spasm up and make the trade a no brainer in my risk/reward cerebral calculus. As MLK said, “free, free, free money at last!” And the arc of the trading universe definitely tilts to profits!
Also published on Medium.
