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Strategies & Market Trends : Value Investing

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To: Madharry who wrote (37982)	5/22/2010 1:02:28 AM
From: Spekulatius	1 Recommendation Read Replies (1) of 78458

GS is absurdly cheap only in the current framework. Teh current framework is that they can borrow for almost nothing - their balance sheet is 880B -72B$ in equity that is roughly 802B$ in liabilities. Even if you consider that 200B$ is probably pass through they are currently able to borrow roughly 600B$ and paid only 1.5B$ in interest. This money is not coming from depositors, it's coming from FED's quasi guaranteed interbank lending at libor for 0.6% interest rate currently. Would you lend money to GS for 0.6% annually? 80% of GS revenues are coming from trading business (their own internal proprietary trading and acting as a market maker for all sorts of things) and the remaining 20% from asset management and investment banking. Those trading business are profitable only when they are financed cheaply. For example look at SRE energy and metal trading business they were making 20% on equity but only when backing from RBS was available for the huge sums. Once RBS bailed out, those very profitable business were sold (to another bank - JPM) at book value and the rest is barely braking even. SRE is no lightweight financially but they are BBB+ rated and would have to borrow LT money at 6% probably. that would probably eat away most of the profit. Anyways to get back to GS -their trading business has several hundred B$ financed with debt at 0.6% rates - what were GS profits, if the interest rate were a more normal 5% (reasonable for an A-rated company). I am sure you can do the math? Will that happen? I don't know but the financial legislation will make it more likely. but here is the other angle of that equation - all this financing at Libor is short term and need to be rolled over daily or monthly. Now when indeed criminal charges are pressed how many institutions will want to lent them money for a measly 0.6%. many will not be allowed to do interbank lending or other business because of their bylaws, others will decide that it's not worth it. Without access to that cash, GS will be on life support within 2 weeks, I'd venture to guess. Then the FED will come in and do an AIG with them. Could this happen? I think so. Is it likely? I think not - maybe a 10-20% chance. i think a settlement is more likely but somehow In believe that GS will not be left off the hook that easily (same may apply to MS). Just something to think about over the weekend. Well I leave my GTC order open for GS @125$ but I am aware of the risks.

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