Friday, April 10, 2009

Goldman Sachs Hail Mary

As many of you know, on the day Goldman Sachs hit $250/share, I labeled them the best short sale on the market.

Since then, there have been several media alerts that Goldman Sachs resurrection hopes have turned to prayers, and now they have trusted their investors' collective fate to a Vegas-style high-stakes roll of the dice. Using some or all of their $22.9B taxpayer welfare check, GS has placed yet another wildly irresponsible bet in a desperate bid to recover their investors' lost money.

Tyler Durden reported this interesting chart:

(Click to Enlarge)

It has since surfaced that Goldman is currently leveraged 42:1 above and beyond the "recommended amount" of leverage.

If it looks like GS is growing dealthly desperate, I beg to differ. They are probably more confident than ever in their ability to cheat their childish bet to glory. It isn't that we are risking more, they rationalize, it is that we are now worth so much less. In fact, as stated above, I am satisfied that GS's operating capital is enormously negative, nothing but an unpayable net liability, so the bar on that chart really should be infinitely tall even if they change nothing. It seems GS refuses to apply a tourniquet to their investors' losses by declaring bankruptcy and liquidating while they can still recover pennies on the dollar, like their broke but more responsible counterparts Bear Stearns and Lehman Brothers.

That brings me to the purpose of this post.

Competent traders NEVER throw Hail Marys like the Goldman Sachs clown act. Why? Because your business model, basic trading competence, is where your wealth resides, not on your balance sheet or income statement. If you have confidence in your own ability, you know you can produce consistent gains all the time, so an ultra-leveraged Hail Mary is NEVER worth the risk of losing everything, and more. It shouldn't even cross your mind; figure out the slowest way to win the race, and execute.

If, however, deep down you know you really suck at trading, you'll find yourself acting like Goldman Sachs, placing huge bets on a prayer just to recover previous losses. That is when you should hang it up before you hurt yourself.


  1. True, so True.... but they wont... they think they have devine intervention on their side!

  2. If the GS Hail Mary "fails", the government will just give them more money, because they're "special" and "too big to fail" or some BS like that.

    GS won't go bankrupt because the banker guys who are in control of the government don't want it to. If they did, GS would have gone the way of Bear and Lehman some time ago.

    Unless, that is, GS gets to the point where it's of no more use to those same people. Then it will be "allowed" to fail. But seeing how it seems to be a useful means of funneling money, I doubt it'll go away for quite some time.

  3. If only government had that kind of competence and power, the Dow would be above 14,000 like they've been promising since they first started trying to artificially prop the market in late 2007.

    As I posted on marketwatch recently:

    Government asleep = bull market
    Government action = bear market

    The same goes for individual companies, government intervention = doomed.

  4. someone thinks GS are up to no good ( really?)

  5. FDR,

    As per this story on Marketwatch, GS wants to repay the TARP funds it received from the Treasury last year.

    Do you think this is entirely posible?

    How can they expect to raise over $10 billion in capital if currency continues to evaporate all over the place?

    Do you think there are really investors (with the exception of Warrent Buffet) who will commit that much "currency" after looking at a chartlike this one?

    Finally, how do you expect "earnings reports" to be this upcoming week from banks JPM, C? I think they will definitely test this upper bound on the Dow at 8110.


  6. FDR wrote: "If only government had that kind of competence and power, the Dow would be above 14,000 like they've been promising since they first started trying to artificially prop the market in late 2007."

    Why would they do that? If they did that, everyone with an IRA, a brokerage account, mutual funds, etc. would be winning.

    These guys don't want the average person to win. They want to win at our expense, because they know that economics is a zero-sum game in the end.

    Either the "bust" part of the boom-bust cycle is intentional and these guys are behind it, and therefore they're competent, or the "bust" is unintentional and it's only through luck that these guys manage to make money going up and down.

    There's only one problem with the "stupid but lucky" hypothesis: luck runs out. These guys have been at this for *hundreds of years*. You don't continuously succeed for that period of time primarily on luck. That kind of long-term success requires all kinds of competence.

    Now you might point out that you're talking about the government, not the guys behind the scenes, but it's all the same. The government is just a puppet. A puppet does what it's told. If it's incompetent, it means that it tries *and fails* to do what it's told. The government hasn't failed in that way for quite a long time.

  7. "They want to win at our expense, because they know that economics is a zero-sum game in the end."

    Partly true...

    "Government-run economics" is way less than zero sum.

    U.S. Constitutional capitalism, with a tiny Federal government and expressly illegal Federal Reserve currency issue run for the profit of a few non-citizens, enjoys limitless prosperity.


The USA's political-economc system is best described as:

On Nov 2, 2010, I plan to vote (FOR or AGAINST) my incumbent congressman

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