It was announced yesterday that Goldman Sachs along with a Digital Sky, a Russian entity, acquired 1% of Facebook for $500 million, valuing the company at $50 billion. Since Facebook is not publically listed, it is difficult to determine the company’s fair value or market value. However, back in October of 2007, Microsoft bought a 1.6% share of the social-network website for $240 million, valuing Facebook at $15 billion. Looking at the two valuation, we see that Facebook’s value grew by 233% within less than 3.5 years. Neither China nor Steve Jobs can boost a similar growth rate, as Baidu, a Chinese search enegine webiste, appreciated by 182% during the same period, and Apple’s value increased by 78%. It is worthy to note that the Nasdaq, the US index that mainly measures IT companies, fell 4% during the October 2007 – January 2011 period.

The current valuation of Facebook puts its as the 51st biggest company in the US, ahead of companies like Yahoo ($22 bn) and eBay (37 bn). The valuation is 25 times Facebook’s 2010 revenue, compared with 7 times sales for Google and 4.7 times for Netflix Inc.

The gold standard is set for the elite, the top of the top, and Goldman Sachs was considered the golden standard of Wall street. The company employed only the brightest minds and it always paid-off: Goldman registered a $13.4 billion profit last year which  set a record for a Wall Street securities firm.

So what happened on Friday? The U.S. Securities and Exchange Commission charged Goldman Sachs with FRAUD. Goldman’s name should never be on the same sentence with the word “fraud” and for that the stock got hammered down 13% and lost $14.2 billion in market capitalization. In fact, the whole market sold-off and the S&P 500 closed down 1.61%.

The fraud case is based on the accusation that Goldman Sachs allowed a client, Paulson & Co, to pick the assets that go into AAA synthetic collateralized debt obligations (CDOs). Further, Paulson choose the lowest quality AAA and packaged it together into toxic CDOs. Goldman went on to market the CDOs to its clients only for Paulson & Co to go and SHORT the hell out of it. It worked well for Paulson who made a name for himself during the financial crisis by shorting CDOs and financials, and later buying financials at their lows. He went on to expand his hedge-fund from a $2 billions under-management desk to a whopping $32 billion shop.

Goldman Sachs denied the allegations and called the SEC’s charges “completely unfounded in law and fact” and said it will contest them. Analysts agree that the risk to Goldman will be mostly reputational. According to an analyst, “People are going to be more inclined to look at Goldman Sachs and think, “Who’s on the other side of this trade?” The financial implications will be minuscule as Brad Hintz, an analyst at Sanford C. Bernstein & Co. said that the “worst-case liability” if the SEC case succeeds would be $706.5 million hit to net income, or $1.20 in earnings per share. There is also the expectation that CEO Blankfein will resign, but replacement is not a problem at Goldman.

A bigger question mark is what will happen to Paulson? Will he be charged too? Even if he isn’t charged, will his hedge fund clients start pulling their money out? Will the redemptions be as fast as his rise from $2 billion to $32 billion assets under management? Gold, traditionally considered a safe-haven, plummeted on Friday as fears surfaced of a liquidation by Paulson & Co, the biggest holder of the Gold ETF. The Friday sell-off also targeted Bank of America and Citi which are two of Paulson’s highest concentrated and most liquid positions.

What do you guys think?

]]> http://www.alphadinar.com/2010/04/18/goldman-sachs-not-golden-any-more/feed/ 3 http://www.alphadinar.com/2010/01/12/the-zero%e2%80%99s-are-back/ http://www.alphadinar.com/2010/01/12/the-zero%e2%80%99s-are-back/#comments Mon, 11 Jan 2010 22:06:43 +0000 Sal http://www.alphadinar.com/?p=2877

Amid increasing public scrutiny over big bonuses and after liberating themselves from the shackles of the TARP and pay-limitations that came with it, Banking executives are awaiting the annual eye-popping ritual, the million-dollar check!

“Discretionary” bonus and incentive compensation plans are used to encourage employees to exceed normal job expectations. However, that is not the case in Wall Street. While most companies pay out bonuses out of profits, in Wall Street they’re paid out of revenues. Thus, employees focused entirely on increasing revenues with the greatest amount of risk possible to achieve their personal goals that are not entirely aligned with that of the shareholders or corporation. As there is limited, if any, downside to the failure of the individual, incentive plans outstrip annual earnings and create the possibility of catastrophic damage to the corporation as a whole.

As bad as 2008 was, most Wall Street firms paid out bonuses in 2008. In fact, Merrill Lynch and AIG, which were both receiving substantial government funding had paid out $4 billion and $165 million respectively at the expense of both shareholders and taxpayers. Criticism over pay practices has resulted in public outrage that urged President Obama to intervene and place bonus limitations, full bank disclosure of bonus payments, and proposing legislations of creating an extra tax on bank bonuses.

As most institutions have started repaying the billions of dollars received in federal aid, the power of the federal government on Wall Street bonuses has started to wane. Cash and stock compensations are expected to run into billions of dollars for the year ending 2009.  During the first nine months of 2009, investment banks have set aside about $90 billion for compensation with bonuses making almost half of that amount. Goldman has set aside $16.7 billion and is expected to pay its employees an average of about $595,000 apiece, JPMorgan Chase employees stand to collect $463,000 on average, while Citigroup has set aside an expected $5.3 billion in compensation.

By: SAL

In a recent report by Goldman Sachs covering its 2010 economic outlook for the region and specifically Kuwait, Goldman drew a very pessimistic picture of what it perceives the future holds for Kuwait. According to the report Dubai and Kuwait will lag behind Saudi Arabia, Qatar, and Abu Dhabi in any recovery in the near future. It estimated that Qatar would grow the most between 7-7.5% and Saudi Arabia will grow at 4.5%. While both the economies of UAE and Kuwait contracted by around 2.5% this year, UAE is expected to grow at 2% in 2010 driven by Abu Dhabi. After much deliberation, I simply don’t agree with Goldman’s estimates. Why would Kuwait lag?

FACTS:

1.    Goldman Sachs forecasts oil at $90 in 2010 and $110 in 2011. According to a report by Reuters, Kuwait’s GDP is forecasted to grow by 17% in 2010 driven by the rally in oil prices and investment in infrastructure projects. With the surge in oil prices from the December 2008 lows of $32, and oil being a main source of revenue for the country, Kuwait’s GDP is expected to grow the most, by 16.9%, followed by Qatar, Saudi Arabia, and UAE at 8.3%, 7%, and 5% respectively.  To note, the estimates were based on a conservative oil price projection of $50/ barrel throughout the budgetary period. With the expected surge in oil prices for 2010 and the OPEC consensus of no change in oil production quotas, crude oil for January delivery trading at $73.38 a barrel, I believe that Goldman undermined the effect of the projected “$90” on the country’s GDP.

2.    The political victory and vote of support that led to the survival of both Kuwait’s Prime Minister and Interior Minister from a non-cooperation vote in the parliament has been praised as a victory of democracy and turning point in the political field that is expected to bring with it’s a transition in the political system and passage of key economic policy changes and developmental projects. Kuwait is at REST. No ouster, no dissolution of parliament, and hopefully no standoffs between the government and MP’s anytime soon.

3.    Global Investment House reaching formal agreements with all of its financiers to restructure $1.7 billion in debt has brought a close to uncertainty and boosted investor confidence and expectations of reaching a similar agreement on Wednesday when the Investment Dar sits down with its creditors.  That, coupled with the  $1.1 billion or 37% profit the KIA made from its successful investment in Citigroup.

Political rest, surging oil prices, and investor confidence finally kicking-in with the noticeable increase in trading volumes in the stock market will help lead the Kuwait SE to break barriers Goldman set for it.

So, WHAT drove oil prices from $30 to $68?  I think this question deems to be answered in 2 parts. The first part is that it became obvious this wasn’t Armageddon. Consequently, oil prices stabilized and rose marginally. The second part is what caused the ≈50% rise in oil prices from $46 to $68. I believe the second part was predominately caused by the plunging US dollar (USD). Please refer to the two graphs below.

In reference to the graphs above, it is evident that the USD weakness caused the 2nd wave of increase in oil prices. The reasons behind the negative correlation between the USD and oil prices are the subject of debate among analysts. Nevertheless, most agree that it exists because oil is USD denominated and as an inflation hedge.

Fundamentally speaking, oil outlook is still bleak. A US Energy Department report for the week ended May 29th revealed that  fuel consumption fell to levels not seen since May 1999! This is particularly worrying since we are in the beginning of the driving season.

Another reason to worry is inventory levels. Yesterday, US stockpiles of crude oil unexpectedly increased. Many analysts think inventory levels are real reasons to worry. “Inventories remain extremely high, including barrels held offshore on tankers. Oil in storage, as well as an uneven economic recovery, could still send prices plunging back into the $40s,” wrote Harry Tchilinguirian, an analyst with BNP Paribas in London. Tchilinguirian revised his 2009 average price forecast to $54 a barrel, from $45 a barrel in March. (Source: WSJ)

The chart above further illustrates the decrease in demand for oil. (Source: ISI Report)

Oil prices rose too fast too soon. Let’s not forget that we are still at high and increasing unemployment levels. Further, I believe the excessive increase is based on USD weakness rather than solid fundamentals and economic expansion potential. It will be rather funny hearing analysts soon talk about how high oil prices will hinder growth prospects (if there are any indeed!).