Goldman Sachs common (GS)
A repost from pecuniary.wordpress.com:
Goldman Sachs trading below book value is too good to pass up. I’m making it a four percent long position at around $130 per share. The market seems to be pricing in a fairly high probability that the company will go bankrupt, which is a distinct possibility in the case of such leveraged financial institutions that borrow overnight, and one which faces potentially significant legal liabilities. I believe that Goldman Sachs did pass off its mortgage exposure to clients in a way that could be considered fraudulent. But I don’t think the legal penalty from this will be a coup de grâce. If Goldman gets shut down, it will probably rather be due to the reflexivity involved with a “bear raid.” (Short sellers may push the shares down or the CDS up to a point where the ensuing fear of clients causes them to pull capital from Goldman.)
This risk cannot be ignored, but I think it is overblown. For one thing, the circuit breakers established last month will prevent the stock from declining too far. Secondly, Goldman Sachs has very loyal clients in pretty much every division of its business. And finally, Berkshire Hathaway will likely provide the firm with further capital in a worst case scenario.
I think GS shares have a 5% probability of going to zero, a 40% probability of being worth around 1.2x book value ($168) due to regulation that will restrict profitability of the trading division, and a 55% probability of being worth at least 1.5x book value ($210). The mathematical expectancy is very attractive.
GS shares are likely to have a very low correlation to general market fluctuations, and so I have categorized this investment as a workout though it does not meet the traditional criteria.
