5 reasons not to bet against Goldman

1) They’ve been in tricky situations before and managed to get out. They navigated the financial crisis better than other big banks and paid TARP funds back faster.

2) They are smart. Very smart. This is not to say that smart people don’t do stupid things, criminal things, or stupid and criminal things that get them caught. But if anyone is likely to have a CYA excuse, it’s this bunch.

3) It emerged today that the SEC actually had a split vote of 3/2 to take enforcement action, indicating that the case is anything but a slam dunk.

4) It’s hard to imagine a fine that’s both big enough to get through the courts and also big enough to make a material difference in Goldman’s medium-term outlook.

5) Tomorrow’s earnings results are likely to be great.

None of the above mitigates the fact that the charges are serious, that the SEC might win, or that there could be long-term damage to Goldman’s reputation. It’s also obviously quite possible that this will fuel the passage of financial regulatory reform (which could hurt long-term profits) or get lots of people to hate Wall Street more than they do already.

I’d put some money on a scenario that includes Fabrice Tourre resigning, some other upper rank changes, and a settlement in the hundreds of millions of dollars range. But is all that enough to stop this machine from generating fist fulls of cash and a rising market cap? I doubt it.

When the stock went into free fall last Friday I jumped in and went long at $159, which mostly proves that no matter how many times I tell myself to stop trying to pick individual stocks, I don’t listen. “Myself,” I should be saying to me, “you just never seem to learn.”

So 6 months from now if I’ve lost money on this buy, I’m going to sit myself down and have a serious talk with me.

But for now, I’m rooting for ol’ GS to shake it off and keep those profits chugging.

5 responses to “5 reasons not to bet against Goldman

  1. A friend who works in the financial services industry (whose employer frowns on staffers commenting on blogs) sent me the following and asked me to post anonymously:

    Another reason that I think things won’t be too bad for GS…if the outcome is too harsh, then there is potential to pull the whole financial system into another disastrous vortex. Do you think the SEC really wants to do that? It was noticeable that they only charged them with CIVIL violations, not CRIMINAL. Criminal charges (true or not) would destroy GS, and the rest of Wall St with them. It would be a very shallow victory for the SEC.

    On top of that, I actually think GS has a pretty good case. The client was aware of product and chose to buy it anyway. The fact that someone was betting against it happens all the time. Why should the client have been surprised? Every time someone buys a CDS contract, they are betting against bondholders…does that really need to be disclosed? I don’t think so…

  2. The earnings were, in fact, stellar. But apparently that was built into expectations, because the stock closed flat. We shall see what lies ahead…

  3. And where is the stock today?

  4. @black swan: doesn’t look good so far! But like I said, I’m giving it 6 months.

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