Goldman Sachs: Back in the Crosshairs

What is going on over at Goldman Sachs, whose shares are down 10% or so today at $70 apiece? John Carney says that the market fears Goldman might be lining up yet another secondary equity offering -- after raising $10 billion in September.

That would explain the share price falling on a day when the news of AIG's second bailout would seem to be supportive for Goldman -- after all, Goldman is by all accounts AIG's biggest CDS counterparty, which means it's probably holding a good number of those CDOs which AIG wants to buy at an inflated 50 cents on the dollar. On the other hand, maybe the markets are worried that Goldman will have much less money to play with if it loses all the collateral that it's forced AIG to put up.

More generally, it seems to me that Goldman is pretty much impossible to value. The bulk of its earnings have historically come from proprietary trading operations, and it's not clear how much latitude Goldman will have to continue on that road now that it's a bank operating under the aegis of New York State regulators. Meanwhile, its investment-banking deal pipeline has got to be looking pretty barren these days.

A quarterly loss when Goldman reports its fourth-quarter earnings might at this point be priced in to the stock, and it's astonishing how little time it's taken to reach the point at which Evan Newmark can say that Goldman trading below book value is "unsurprising". (It was trading at $169 in early September; its book value is about $100.)

I'm actually more constructive about Morgan Stanley than I am about Goldman Sachs right now. Yes, Morgan Stanley has a higher probability of being wiped out entirely -- but Treasury has made it clear it won't let that happen. But it's also easier to see Morgan Stanley functioning as a bank than it is to see Goldman changing its spots. Both of them are going to have to shrink dramatically, but I get the feeling that John Mack, who has looked into the abyss and survived to tell the tale, is more likely to embrace that destiny than anybody at Goldman Sachs, which for most of this crisis looked as though it was escaping largely unscathed. Given that Morgan Stanley is trading at a market capitalization of just $15 billion, compared to Goldman's $27 billion, it might be the better buy of the two.