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Daily Archives: October 25th, 2009

The New York Times reported Goldman Earns $3.19 Billion, Beating Estimates and this on a Tier-1 capital ratio of 14.5%. Goldman has the second highest Tier-1 capital ratio after State Street. Most banks are now in the 10%-12% range with US Government assistance. This is a far cry from the original Basel II requirement of 4%, and Tier-1 capital ratios of 14.5% would have been considered insane in the pre-2007 days.

Goldman Sachs is sending important market signals:

1. Well managed banks can make good profits in spite of “insane” Tier-1 ratios.

2. My guess is that Goldman Sachs is expecting a second asset value collapse soon as this firm has been steadily increasing its Tier-1 ratio and its risk adjusted capital since 2008. See my post  Quant Error! Goldman Sachs Success.

What does all this mean? Well lets look at all the facts.

1. A total of 106 regional banks failed in the United States this year, a figure not seen since 1992.

2. 15.1 million people are unemployed and counting coupled with a jobless recovery. That means prime mortgages are defaulting at unprecedented rates.

3. Many banks are in denial about their current viability and are resorting  to giving incorrect information to their customers. In particular:
3.1 These banks’  credit card operations are telling their customers that they are not part of the banking business and therefore did not receive TARP, when the banks did receive TARP.
3.2 Some banks are telling their customers to take out loans on the other collateral they have and use it to pay off their existing loans.
3.3 Other banks are telling their customer that they have no access to TARP funds or any government assistance and therefore have to foreclose on their customers’ properties.

Points 1, 2 & 3 by themselves just show that the mortgage mess is pretty bad. But add that to what Goldman Sachs is doing – Tier-1 of 14.5% – then that, in my opinion, suggests that Goldman Sachs does not have much confidence in the economy. I hope I’m wrong but it is better to be aware of the downside risk then to walk around in rose tinted glasses.

Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.