RCM Comment: Goldman Sachs continued…
Cracks in the foundation of the “better than expected” Q1 numbers from GS. The first story below highlights the rather dubious decision by GS to change its fiscal year, which helped reduce the impact of an awful December. The second story is perhaps even more troublesome as it attacks the very root of Goldman’s “successful” quarter. We wrote at length on April 1st that “AIG was responsible for banks’ profitability” and we explained that this would cast a specious light on the EPS numbers. Well, now the regulators have jumped into the ring. Neil Barofsky, the chief watchdog of the U.S. financial rescue program, has launched an investigation into the AIG unwind.
The Baseline Scenario: “…the quarter-over-quarter comparisons left out December. Because Goldman just changed its fiscal year end, its previous quarter ended in November and its latest quarter ended in March. December was reported separately and – surprise, surprise – Goldman took a net loss of $0.8 billion. So if they had mashed December into Q1, they would have had a four-month “quarter” with $1.0 billion in profits.”
ZeroHedge: Legislators want to know if AIG offered less to retire the contracts and whether there was any review about banks’ ability to sustain losses on the derivatives.“To what extent did AIG pay counterparty claims at 100 percent of face value and was any attempt made to renegotiate and close out these claims with ‘haircuts?’” Barofsky wrote. “Questions concerning whether AIG paid more than necessary to counterparties and whether Treasury adequately monitored such payments are clearly relevant.”
RCM Comment: Another piece to the Q1 EPS puzzle has snapped into place. As I explained yesterday, we anticipated “better than expected” EPS numbers from the big banks but worse than expected numbers from the smaller banks. These smaller banks are not involved in the AIG unwind, so will not get the false boost to EPS. They are not privy to select government information, so they cannot set up proprietary positions that benefit from government action. The story below details the EPS pre-announcement of a California bank. Get used to this type of report, you will be reading more like this in the weeks to come.’
SVB Financial Group: Color on pre-release (20.89 ) : Friedman Billings notes that yesterday night, SIVB pre-released 1Q09 EPS of ($0.28) to ($0.36), well below the $0.23 consensus est. They note primary drivers of this shortfall are credit deterioration in its Shared National Credit (SNC) portfolio, material NIM compression due to holding new deposits in lower-yielding securities, and valuation declines in its investments in VC funds (held in SVB Financial Group’s securities portfolio). They remain cautious near term as they expect similar headwinds at SIVB moving forward in ’09, which will likely keep valuation compressed. They believe the discount it trades at is warranted given their near-term concerns surrounding credit quality in its loan portfolio and risks of further securities losses related to its investments in VC funds.
