We opined that Morgan Stanley would probably shop itself to some bank. Thinking Wachovia too weak, Chase already struggling with the remnants of Bear Stearns, Citigroup in near-fatal condition itself, I suggested that maybe Wells Fargo would be a buyer. As I write this at 5:30PM on Wednesday afternoon, the online Wall Street Journal reports that Mack has been talking to several banks, Wachovia being the only one actually named.
But the real shocker, in the opinion of my partner and I, will be Goldman. We haven't seen anything in the media yet about our expectation of its endgame.For reference, see the nearby, Yahoo-sourced price chart for Goldman and the S&P500 Index over the past six months. While the S&P has fallen only about 10%, Goldman's equity has rocketed down nearly 30%!
In terms of actual price, it's gone from around $180/share in early June to $114.5/share yesterday.
This does not, in our view, alter the fact that Goldman remains the class of the class of investment banks, public or private.
So, when everyone else is selling equities, what should the best equity house on Wall Street do?
Buy, of course.
We believe that, while John Mack's weakened Morgan Stanley runs for cover at a large, mediocre commercial bank, Lloyd Blankenfein and his management team will, in conjunction with selected private equity investors, tender to take Goldman Sachs private again.
It makes sense. Goldman's risk management has held up well while all their publicly-held competitors are finally driven from the field. Why should the best managers in investment banking cast their very desirable pearl before the....ah....well, you know....sell to a commercial bank and work for its probably-dimmer CEO?
As I wrote here in March of this year,
"Specifically, I would expect fewer separate publicly-held, regulated entities such as commercial banks, investment banks, and brokers. Instead, I think you will finally see the integration of these functions into fewer, larger and more diversified European-style universal banks, with larger shares of more financial services businesses.
Of course, with this 'bulking up' will probably come even more anemic, inconsistent total return performances. Again, just like that of European universal banks.
Seen from a more distant vantage point, does this not all make some sense? We had a concentration of financial capacity and risk taking among lightly-regulated firms specializing in peddling ever-more opaque, complex products to investors. When the value of these complex 'structured finance' instruments became difficult to discern, and the concentrated risk came home, capital shrank as losses among commercial and investment banks caught holding these instruments had to account for the newer, dramatically lower values.
Risk and capacity are likely to be further concentrated, but, in exchange, more tightly overseen and regulated.
A natural consequence to this will probably be even more smart financial services people migrating back to the privately-financed arena. Just like consumer goods merchandising has the 'wheel of retailing,' whereby new entrants compete at the low-cost end of the market, as existing players migrate upwards in terms of quality, service, selection and price, so, too, it seems, will financial services now have its own version of this 'wheel.'
Only in financial services, the 'wheel' is between publicly- and privately-held concentrations of capital and risk management. Again, viewed from afar over decades, the story of commercial and investment banking for the past forty years has been a gradual selling of transactions, asset and risk management businesses at their 'tops,' as formerly-private banks of both stripes went public, followed by managerial ineptitude, decline in risk management, and excesses in pursuit of growth via more risk.
Now that the public is absorbing the brunt of the losses, via equity ownership of these firms, the logical next step is for the better executives to join the early-adopters in forming new, or joining existing private equity and hedge fund shops.
And the wheels continue to turn...... "
Yes, indeed, the wheel turns.But look at the nearby price chart for Goldman Sachs since its public offering in 1999. Yes, less than ten years ago!
It went public at around $75-80/share, peaked last year near $250, and is now at about $115. By the time the firm issues its tender, it may only have to pay $100/share.
How sweet is that? The probable, intrinsic value of the firm is way north of its current price. Much closer to $200 than $100.
So for borrowing public funding for a decade and more than doubling the firm's value, the remaining partners and their backers- folks like Blackstone, TPG, KKR, and some hedge funds- will get all that value at only a 20% premium, before inflation, to the original IPO price.
That's my- our- prediction. It just seems too obvious that when Goldman's price has been unrealistically depressed, due to near-term market conditions, far below its long-term intrinsic value, those who know it best- Goldman's managers- will do a leveraged buyout.
You read it here, if not first, early.
And that will be the finish of the 30+ year-long cycle of Wall Street going public, shearing its clients, then selling the wreckage either to other investment banks, commercial banks, or back to itself. Investment banking will have ceased to be an independent, publicly-held market function.
I'll even predict that, with time, the private investment banks will out-maneuver and -compete the commercial banks which bought the remnants of the poorly-run, remaining publicly-held investment banks. And we'll be back to a de facto version of Glass-Steagal, with a few commercial banks half-heartedly trying to compete with their sharper, better-paid privately-held competitors.
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