Sunday, May 02, 2010

Goldman Sachs (GS) Richard X. Bove

Andrew Mellon and Goldman Sachs 813.909.1111
rbove@rochdalesecurities.com
SYM/EXCH Current Previous Highlights
Rating Buy Buy
Target Price $200.00 $200.00 Andrew Mellon was the longest serving Treasury Secretary in the history
Normalized Earnings $23.00 $23.00 of the United States. He held the position almost 11 years through the
Stock Data (03/10) Harding, $00.00
Coolidge, and part of the Hoover Administrations. He was also
Current Price $145.20
reputed at one point to be richer than Rockefeller, Carnegie, or Henry
52 Week Low/High $119.34 $193.60 Ford.
Est. 2010 Earnings Per Share $18.72 7.8x He helped found and he owned meaningful positions in Gulf Oil, Alcoa
Est. 2010 Rev per share/P:RPS $80.50 1.80x (AA/$13.43/NR), Carborundum, the Mellon National Bank, and
Book Value/Price:Book $111.84 1.30x
numerous other enterprises. He owned a significant amount of real
Tangible BV/Price:TBV $101.70 1.43x
Dividend/Yield $1.40 1.0%
estate across the nation.
Shares Out/Mkt. Cap (mil) 590 $85,668 In 1933, President Franklin D. Roosevelt decided to make Mellon the
Income Statement (mil)/ Percent of Revenue (03/10) object of 00.0%
his campaign against crooked industrialists – industrialists who
Principal Transactions $9,195 72.0% caused the Depression. Therefore, against the advice of the IRS, the
Investment Banking $1,184 9.3% Attorney General of the time, and a grand jury that refused to indict
Investment Management $978 7.7% Mellon, he demanded that the Department of Justice pursue a tax
Net Interest Income $1,418 11.1% evasion case against Secretary Mellon.
Operating Revenues $12,775 100.0%
Personnel Costs $5,493 43.0% Homer Cumming, the Attorney General, then issued the following
All Other Expenses $2,123 16.6% statement: “… financial crimes which have been committed in high
Pretax Income $5,159 40.4% places growing out of banking irregularities …” required the Department
Balance Sheet (mil)/Percent of Assets (03/10) of Justice 00.0%
to pursue a tax evasion case against Andrew Mellon.
Cash $ % Thus, against all knowledgeable advice the President pursued Mellon.
Segregated cash & securities $ % He pursued him even after Mellon donated his extensive art collection to
Fed Funds & Repos $ %
the nation to create what is now the National Gallery of Art. He
Securities Borrowed $ %
Receivables $ %
continued to pursue Mellon even after the industrialist died. He was
Trading assets $ % forced to stop his pursuit only when the court system exonerated
Other $ % Mellon.
Assets $881,000 % It has been suggested that President Roosevelt felt no animosity toward
Deposits $ %
Secretary Mellon. He even met with Mellon in the Oval Office near the
Collateralized Borrowings $ %
Payables $ %
end of Mellon’s life to discuss the National Gallery of Art. The President
Trading Liabilities $ % attacked and kept attacking Secretary Mellon even after Mellon died
Borrowings $ % because he needed a symbol of industrial evil that had to be eliminated
Other Liabilities $ % from the system. Secretary Mellon was that symbol.
Long Term Debt $180,410 20.5%
It appears that President Obama needs a symbol of financial evil that
Preferred Stock $6,957 0.8%
Common Equity $65,987 7.5% must be expunged from the system. That symbol is Goldman Sachs.
Tangible Common Equity $60,004 6.8%
Key Ratios (03/10) Note: The tables in this report have been prepared by Rochdale Securities from sources believed
3-Year RPS CAGR 0.2% to be accurate. However, accuracy cannot be guaranteed.
3-Year EPS CAGR 4.4%
Tier One Common 12.4%
Return on Equity 21.0% 2009 2010 2011 2012
Return on Assets 0.39% Mar $3.39 $5.59 $5.37 $5.63
Jun $4.93 $4.24 $5.48 $5.75
Sep $5.25 $3.91 $5.27 $5.55
Dec $8.20 $4.99 $4.65 $5.13
Year $22.16 $18.72 $20.77 $22.06

Previous $22.16 $18.04 $20.12 $22.23

Consensus $22.16 $19.46 $20.66 $21.87

P/E Multiple 6.6x 7.8x 7.0x 6.6x

TSource: Trade Station

© 2010 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT THE END OF THIS REPORT.
 Sunday, May 02, 2010
Political Attack
If this view is correct, Goldman Sachs is jousting with issues that are far larger than whether the company is guilty of imprudent
actions in the Abacus suit. It is dealing with the need of the United States government to harm the company in order to make it an
example of all of the evils in the financial system that caused the “Great Recession.”
Evidence of the fact that this is threat coming at Goldman Sachs is plentiful:
The SEC suit seems to be based on, what are at best, fanciful conclusions.
The Senate held hearings on the company were not designed to elicit information. They were held to allow the Senators to
make a blatant attack on the company. In many instances, the Senators refused to let the Goldman witnesses answer key
questions.
The Justice Department leaked the fact that it might be investigating Goldman Sachs when there was no rational reason,
other political frenzy, to make this information public.
A group of Congress people have now requested deeper investigations into Goldman.
Multiple lawsuits are being formulated.
Sources indicate that Goldman is attempting to settle these issues with the government but the government is unwilling to settle.
Some have said the government will not even hold meaningful talks with the company – although that may have changed by now.
Goldman’s Defense
I have felt from the start of the SEC case, actually well before the start of that case, that Goldman’s approach to the charges was
inept to the point of being counterproductive. The company’s devastating appearance at the Senate hearings is the best example of
what I mean. Goldman’s witnesses went in with one goal. That goal was to say as close to nothing as possible. While the Senators
had no desire to hear anything Goldman had to say; Goldman had no desire to say anything, either. Wall Street liked Goldman’s
performance pushing the stock higher for a few days. The Administration did not and came back with the Justice Department leak
smashing the stock.
The problem with Goldman’s defense, from two standpoints, is:
The company has been reacting to attacks and has not been proactive.
Its reactions are the classic ones, which is to avoid giving the other side any information that can be used against the
company.
The net result is that the stock is now down $41.21 per share from its high on the day the SEC suit was released. Goldman has
simply been outclassed at every step and there is no sign that the company knows how to deal with the current situation.
What Should the Company Have Done?
Goldman Sachs should have done the following to avoid its present dilemma:
At the outset of the financial crisis, the company should have attempted to redefine the debate as to what caused the crisis.
The fact is that this crisis was not caused by greedy bankers playing casino games with fraudulent products. It was caused
by production cost imbalances; a massive and continuing trade deficit; the buildup of massive cash hoards; the need to
invest that cash; and the lack of enough acceptable investment opportunities.
Goldman should have immediately attacked the concept that derivatives are bad (as well as any other false statements). In
fact, derivatives are good because they provide liquidity in multiple markets; they lower risk; and they allow the economy
to function more smoothly. Stated very simply, a loaf of bread costs less than it otherwise would have if there were no
derivatives. Warren Buffet owns derivatives because he does not believe that they are “instruments of mass destruction.”
There are supposedly $600 trillion in derivatives outstanding, not because this is a big casino game, but because derivatives
meet defined needs in the global financial system and economy.
At all levels the company should have argued forcefully that it was providing a service to the economy. It should have
provided facts and figures showing what it has done from aiding the United States in funding its deficit down to providing
numbers concerning how many people have jobs on “Main Street” due to Goldman’s fund raising activities.
In sum, it should have understood the size and enormity of the forces being brought against it. It did not. Thus, its
responses were weak and ineffectual. The classic in my mind is Lloyd Blankfein, CEO, indicating that it is beyond his field of
competence to understand that some investment portfolios cannot buy less than AAA securities. It was Goldman’s
intention to obfuscate and this obfuscation brought the wrath of the Administration against it.
© 2010 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT THE END OF THIS REPORT.
 Sunday, May 02, 2010
What Now?
Goldman is going to have to pay a high price for its ineptitude in handling this issue. Its shareholders already have. The company is
likely to experience the following:
High level executives are going to have to be removed from their positions both in the management suite and from the
Board of Directors.
The legal team will have to be replaced with one having greater skills and Washington know how.
A fine will of at least $1 billion will be required.
A new mission statement will be developed and produced.
The company must start to redefine the financial crisis discussion; it must get proactive in its defense. It must do this to support its
defenders not to change the views of its detractors. Releasing a point by point defense of the SEC charges is useless and should be
done only in the courts.
The Stock
I refuse to sell the stock. The company is likely to be supported even more strongly by its clients. These clients are likely to be
incensed by the actions of the government and may now feel that Goldman is the rallying point to stop the government from
running roughshod over all of what is conventionally called “Wall Street.” Someone must start the fight in the other direction at
some point. Despite its political naiveté, it is still the best trading company in the world and the world needs to trade.

© 2010 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT THE END OF THIS REPORT.
 Sunday, May 02, 2010

Rochdale Securities LLC

750 E. Main St., 7th Floor
Stamford, CT 06902
Main 203.274.9100

Management Trading

Dan Crowley Kevin Cassidy Kris Talgo Hal Tunick

President Senior Vice President Senior Vice President Senior Vice President
djc@rochdalesecurities.com Chief Operating Officer Trading Co-Head Trading Co-Head
203.274.9101 kjc@rochdalesecurities.com klt@rochdalesecurities.com ht@rochdalesecurities.com
203.274.9116 203.274.9125 203.274.9124

Analyst Team Merger Arbitrage and Special

Situations

Richard X. Bove Jaison Blair, CFA Hayley B. Wolff Barry D. Kaplan

Vice President Equity Research Sr. Equity Research Analyst Sr. Equity Research Analyst Merger Arbitrage and
Financial Sector Retailing Consumer - Leisure Special Situations
rbove@rochdalesecurities.com jblair@rochdalesecurities.com hbw@rochdalesecurities.com bdk@rochdalesecurities.com
813.909.1111 203.274.9161 203.274.9160 203.274.9121

Institutional Sales

Keith Arnott Trey Bauer Richard Bennett Joseph Bove

jka@rochdalesecurities.com tbauer@rochdalesecurities.com rbw@rochdalesecurities.com jab@rochdalesecurities.com
732.758.6981 203.274.9137 732.758.6982 813.963.2999

Patrick Burke Pete Doehla Allen Jordan Andy Massey

prb@rochdalesecurities.com pkd@rochdalesecurities.com anj@rochdalesecurities.com apm@rochdalesecurities.com
203.274.9127 203.274.9128 203.274.9120 813.963.2888

David Miller Niall Morrissey Richie Oddo John Ratkoski

dmiller@rochdalesecurities.com nmm@rochdalesecurities.com ro@rochdalesecurities.com jratkoski@rochdalesecurities.com
203.274.9131 203.274.9130 732.758.6988 732.758.6986

Kristen Talgo Hal Tunick Jeff Wicker

klt@rochdalesecurities.com ht@rochdalesecurities.com jdw@rochdalesecurities.com
203.274.9125 203.274.9124 925.253.1030

Fixed Income Division

Michael Glover Brandon Dunn Craig Bonder Brett Houghton

msg@rochdalesecurities.com btd@rochdalesecurities.com csb@rochdalesecurities.com bth@rochdalesecurities.com
212.205.5080 212.205.5080 212.205.5080 212.205.5080

© 2010 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT THE END OF THIS REPORT.
 Sunday, May 02, 2010
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Rochdale Securities LLC ("Rochdale") is an institutional brokerage firm that does not make a market in equity securities and does not engage in
investment banking. Rochdale and its affiliates, including its principals, may own securities of the companies which are subject of this report but do not
own 1% or more of any class of common equity securities of any subject company.

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solicitation of an offer to buy or sell securities or other financial instruments.
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RR RATINGS DISTRIBUTION
RATINGS FOR STOCKS
BUY 23
HOLD 48 Buy Company has demonstrated that it is a value creating concern; the
SELL 29 return on capital (as adjusted) exceeds its cost of capital. Stock is
currently trading in a range that does not exceed its intrinsic value. Stock
ANALYST CERTIFICATION is expected to out-perform the market over the next twelve months.

I do not hold any securities of the company covered by this report. Hold/Neutral Company either is not creating value (i.e., its costs exceeds
its return on capital) or it is trading at a price equal to or in excess of its
I certify that with respect to each security or issuer that I covered in this intrinsic value. Expectation is at best stock will perform in-line with market.
report; (1) all of the views expressed accurately reflect my personal views If not currently held, stock should be avoided.
about those securities or issuers; and (2) no part of my compensation was,
is, or will be, directly or indirectly, related to the specific recommendations Sell Company's cost of capital exceeds its return on capital; and the
or views expressed by me in this research report. company has no intrinsic value or is trading at a significant premium to its
intrinsic value. Expect stock to under-perform the market over next twelve
-- Richard X. Bove months.

HISTORICAL RATINGS
PRICE TARGET
$250.00

$200.00

$150.00

$100.00

$50.00

$0.00
03/24/2009

04/13/2009

04/13/2009

04/14/2009

06/02/2009

06/30/2009

07/07/2009

07/14/2009

07/28/2009

08/05/2009

08/19/2009

09/26/2009

10/15/2009

11/11/2009

12/15/2009

12/21/2009

01/26/2010

02/05/2010

02/10/2010

03/02/2010

03/04/2010

03/30/2010

04/07/2010

04/16/2010

04/20/2010

04/24/2010

05/02/2010
04/11/2009

05/11/2009

11/03/2009

11/16/2009

11/27/2009

DATE

RATING NeutralNeutralNeutralNeutral Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy

© 2010 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT THE END OF THIS REPORT.