Shorting GS - Goldman Sachs Group Inc.

Description

Goldman Sachs (GS) is a bank holding company, which operates as a global investment banking, securities and investment management firm. It provides a range of services to corporations, financial institutions, governments and high-net-worth individuals. Its activities are divided into three segments: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services.

Goldman Decides to Return Its TARP Funds

So Goldman Sachs (GS) recently decided to return all of its government TARP funds. Why, you ask? Maybe because they saw the taxpayer pressure on AIG to return its bonus money. No more thousand dollar shower curtains, corporate jets, and private island vacations. Goldman doesn't want to lose all that just yet. Their problem is, taxpayers are watching them not solely because of their money tied up in government funds, but because of their money tied up in commercial real estate and other assets. Things are going to get significantly worse before they get better.

Bear Argument

Despite the fact that Goldman Sachs (GS) beat earnings expectations today, it cut its dividend and issued more common equity, which will dilute value for existing shareholders. On top of that, the situation on the economic front isn't looking any better.

To be specific, the IMF (International Monetary Fund) now expects total global write-downs to reach $4 trillion. This paints a dire picture, considering that banks have to date only absorbed a quarter of this.  What's more, is that according to Meredith Whitney, nationwide home prices have another 30% to drop. In addition, the Fed doesn't seem to hide the fact that unemployment is still rising, and could easily reach 10% or higher by next year. And affecting the banks in particular is the fact that the brunt of commercial real estate and credit card loans have yet to hit the books.

Finally, the bulls might point out that banks have been posting profits. Needless to say, it would have been suprising had they not posted profits in these economic conditions. Why? Because with borrowing costs at zero, it's not hard for banks to post a profit. Anyone can post a profit by borrowing at 0% and lending out at a higher rate.

Bull Argument

On the other hand, there's a reason banks have been rallying the past few months. How much, you ask? Bank of American (BAC) quadrupled from its low just over a month ago. Citigroup (C) tripled, and Wells Fargo (WFC), on announcements of posting an unexpected profit, had shares surge 30%.

So why should you invest in banks now - Goldman Sachs (GS) in particular? There's several reasons, not the least of which being that the most famed investor of all time - Warren Buffet, is behind Goldman - having purchased shares himself for his Berkshire Hathaway empire. Another strong reason is that banks not only passed the government's stress tests, but exceeded expectations. In other words, balance sheets proved a lot healthier than anticipated. What does this mean? The government won't need to entirely take over a bank - which has been one of Wall Street's biggest fears. Finally, having seen nothing but write-downs lately, there will come a time when the write-ups return. When is anybody's guess, but with all the minds and manpower behind the efforts to get credit flowing again, it's going to happen at some point, and when it does - the short sellers better lookout!