Friday, October 10, 2008

"Roubini Misreads Goldman"

From Forbes:


Nouriel Roubini offers no evidence to support his curious assertion that most of Goldman Sachs' (nyse: GS - news -people ) lines of business are losing money ( "Next: The Mother Of All Bank Runs?" Oct. 2, 2008). As a result, we're left to assume that it's a gut reaction. Unfortunately, it appears that Mr. Roubini did not look at our recent earnings release, which shows that we reported a quarterly profit in a very difficult environment. In fact, we've reported a profit in each quarter since the credit crisis began more than a year ago.

Mr. Roubini does not distinguish between the differing performances at various firms. As a result, he fails to acknowledge that the difference in performance is clearly a function of different business models, risk management practices and decision making.

For example, Bear Stearns had a narrower business model, concentrated in fixed income, particularly in mortgage-related businesses. Lehman Brothers (nyse: LEH - news people ) also had a business model more focused on fixed income and had a real estate portfolio that was very significant in relation to its capital.

Both had very different funding and liquidity profiles from Goldman Sachs and Morgan Stanley (nyse: MS - news people). He also doesn't explain why Merrill Lynch (nyse: MER - news -people ) decided to merge. His readers might have been interested to know that, in addition to significant concentrated exposure to the mortgage market, the firm had a large amount of debt to be refinanced this year.

Mr. Roubini asserts that Goldman Sachs needs to raise more capital. Has he looked at any of the relevant capital metrics that demonstrate that Goldman Sachs has one of the strongest balance sheets in the financial services industry? Has he compared the quality of our balance sheet to those of the banks with whom he thinks we should merge?

Insightful opinion plays an important role, particularly in disrupted markets, but Forbes readers deserve more than a "fire, aim, ready" approach.


Lucas van Praag 
Managing Director 
Goldman Sachs & Co. 
85 Broad St. 
New York, N.Y. 10004 


  1. What Roubini said:

    That’s a point economist Nouriel Roubini, who first “called” the subprime crisis and has consistently been right on since then, has been hammering home for months. “First it was Bear Sterns in March, then it was Lehman Brothers, and Merrill Lynch. I don’t think even Morgan Stanley or Goldman Sachs will be able to remain independent,” Roubini said after the bloodbath earlier this week.

    The reason, in Roubini’s estimation: “The entire business model for all of them is fundamentally flawed.” There are several problems with independent broker-dealers, he adds. “The fundamental problem is that all of them borrow short-term in the repo market, leverage like crazy and then invest in the long term.”

    If mainstream banks, even solvent banks, faced such a mismatch problem, there would have been a run on them. The problem, in his estimation, is worse with broker-dealers because, unlike banks, they don’t have depository insurance and have only limited access to the lender of last resort (the US Federal Reserve).

    Secondly, says Roubini, now that they have access to the Fed’s support, if they have to be regulated like banks —in terms of setting higher liquidity and capital levels and lower leverage — “how are they going to make money?”

    Given that fundamental flaw, these broker-dealers “cannot survive as they are,” he reckons. “They have to become part of a larger financial institution, with a commercial banking arm and a stable base of deposits. Otherwise, in my view, they’ll all be gone.”

  2. The ratings agencies and the stock market appear to agree with Roubini over GS Managing Directors on this one.

  3. From

    "Asked about Goldman’s response, Mr. Roubini told Dealbook that he meant to say that Goldman “will” lose money in the future. He went on to say that their profits were down across the board from the same time last year and that “the only reason Goldman didn’t go bust” was because of the “direct and indirect support from the Fed.”

    Mr. Roubini contends that this support is unsustainable and that even though “Goldman may be better managed” than many of its peers, it could not survive by itself given the fundamental changes in the market. “Look at Morgan Stanley,” he said. “They are teetering on the edge. Goldman is no different — it depends on the same model to make money.”

    Mr. Roubini, whom The New York Times has called “Dr. Doom,” predicted in February that every major, independent broker-dealer in the United States would fall because of business models that depend on using lots of short-term leverage to finance illiquid, long-term assets.

    In one sense, he has already been vindicated: Bear Stearns and Lehman Brothers have disappeared, and Merrill Lynch it set to be sold to Bank of America. The last of the independent broker-dealers — Goldman Sachs and Morgan Stanley — changed to bank holding companies last month.

    While the firms said this change would make them more financially stable, Mr. Roubini says he still believes that Goldman and Morgan are vulnerable. His advice to both banks: Merge with a foreign bank as soon as possible."


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