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Strategies & Market Trends : Value Investing
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To: Jurgis Bekepuris who wrote (42619)5/12/2011 10:41:10 PM
From: Spekulatius  Read Replies (1) of 78627
 
re GS -
>>The problem with GS is that I am not sure they have enough internal controls for some trader not to flush the company down the toilet.<<

I agree unfortunately, lot's of fat tail risk with GS.

For me the risk of something really bad for the shareholder to happen could be estimated like this:

1) Probability that some at GS did something really nefarious. Estimated probability: 0.75 (75% LOL)

2) Probability that above nefarious thing will be uncovered: 0.5 (50%)

3) Probability that above uncovered nefarious dealing will be prosecuted using criminal charges (a few Billion $ fine does not count) 0.25 (25%)

So, the risk of self destruction for GS: 0.75x0.5x0.25= 0.094 (9.4%). That is pretty substantial but probably acceptable. The problem is that once 1) and 2) are given it takes a long time (year?) for 3 to play out. I assume of it get's to #2 with a serious outlook for #3, the shareprice would be a whole lot lower.

FWIW, "criminal charges" are a "death sentence" for a financial entity since it pretty much prohibits many customers from doing business with them. of course I could be well wrong with above probability, you can do your own guesstimates and come to your own conclusions, which may differ from mine.

The issue with GS business model, is that it is constantly at the bleeding legal edge of screwing someone else and I think it is becoming more and more obvious that what has been tolerated for years or decades may not stand up in front of regulators or the court any more (see the Galleon trial). So in my opinion, Wall Streets current business model is essentially broken. Maybe they should move to China - the downside is that when found guilty, the verdict may get the bullet and the relatives have pay for it.
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