Goldman Sachs, the perennial US Investment Bank, one of the few to survive the 2008 bust and actually come back stronger. Of course, they didn’t actually perform that much better: they were the recipients of TARP bailout money, Warren Buffett bailed them out with a further $5 billion and generally speaking, they very nearly went under.

The lines of business that they follow are diversified:

*Primary Dealer status
*Underwriter of Bond issues
*Underwriter of IPO’s
*Market makers
*Proprietary Trading
*Hedge Funds [in house]
*Trading Desk [trades firms capital]
*Analyst services [Macro/micro economic/stock/bond]
*Investment Banking [Merger & Acquisitions]

Their clients are Government, Institutional investors, Pension Funds, Mutual Funds, Corporations, Sovereign Wealth Funds, Hedge Funds, High Net Worth Individuals and Foreign Governments to name but a few.

So if you could become a client of Goldman Sachs, it would be a good thing? Would you benefit from all their connections and market savvy? As opposed to say a smaller boutique advisory or hedge fund.

Let’s examine their various lines of business, to see if we could as individuals, benefit financially from being a Goldman client.

Primary Dealers are purchaser’s of US government Treasury debt. The government, for whatever purpose, requires cash, thus will float Treasury paper: the Primary Dealers bid on this paper, and are assigned a dollar value based on their bid.

The current Quantitative Easing [QE II] sees the Federal Reserve repurchasing at a premium, this recently floated Treasury paper, creating Reserves at the Federal Reserve, which is money creation, as they monetise this US government liability.

For Goldman Sachs, this is a highly lucrative, low risk undertaking. Would you as an individual be able to partake? The short answer is no.

Goldman Sachs will underwrite Corporate debt. A Corporation will decide, for whatever reason, that they require debt capital and wish to raise it via the financial markets: Goldman Sachs will, for a fee, agree to sell this paper to the market, guaranteeing a certain price. Through their connections and reputation, the Goldman sales team now attempt to place this new Corporate debt with various Institutions looking for a specific yielding asset of a specific maturity, for example Insurance Companies and Pension Funds.

Again, would you, as an individual, be able to partake and profit from this line of business? The short answer, is again, no.

Goldman will also underwrite Initial Private Offerings, or IPO’s. Essentially taking a private business public onto the Stockmarket. Again, Goldman charge fees, and guarantee to place a specific number of shares at a specific offer price, thus allowing early investors and owners to sell out, or diversify their investments.

Here the individual could benefit. Potentially, Goldman will likely allocate a specific number of underwritten shares for their clients. In an IPO that is hot, this could definitely be a bonus to the individual, particularly if the company is high quality and in high demand. Of course, the individual can always purchase shares on the open market, although, if there is a first day pop in price, there may be a significant premium to be paid.

Goldman Sachs is also a significant market maker on the various US bourses, in stocks and in the debt markets that often trade by appointment. Market making is highly competitive and specialised, and would not be available to individuals.

Goldman also provides trading capital to various Proprietary Trading firms, Bright Trading being one example: Goldman provide the trading capital that allows the Prop Traders to utilise high leverage, a small sliver of capital supporting huge trades. Leverage of 50X is pretty common.

Would the individual client of Goldman benefit from this? Again, the short answer is no.

Goldman also trades their own firms capital: eat what you kill is their credo. This area of their business tends to be highly controversial, as, their trading desk has taken opposite positions to securities that Goldman have sold to clients: in the most egregious cases, taking opposing positions against securities that Goldman have created, packaged, and sold to Institutional clients. The famous example being the Mortgage Backed Securities [MBS] that Goldman shorted via derivatives.

Once again, the question, would you as a client, benefit from this? The short answer, again, no. The Goldman trading desk is notoriously secretive, with good reason.

Goldman Sachs Research:

Equity Research
Equity Research focuses on company-specific research and analysis. Industry and sector- teams analyze companies in the stock markets of the region to develop investment ideas. These sector teams also work with macro, quantitative and derivatives research teams to identify investment ideas.

Economic Research
The Economic Research group formulates macroeconomic forecasts for economic activity, foreign exchange rates and interest rates based on the globally coordinated views of its global and regional economists.

Strategy and Commodities Research
Strategy and Commodities Research groups provide market views, forecasts and recommendations on asset allocation and sectors and investment strategies. Portfolio and quantitative strategy teams contribute additional insight and analysis.

Credit Research
Credit Research analysts assess corporate debt and cover specific industry sectors to identify and communicate investment opportunities and make recommendations. Equipped with a fundamental understanding of trends and issues, research teams analyze companies within the context of their particular industry.

Global Markets Institute
The Global Markets Institute is the public policy research unit of Goldman Sachs Global Investment Research. Its mission is to provide research and high-level advisory services to policymakers, regulators and investors around the world. The Institute leverages the expertise of Research and other Goldman Sachs professionals, as well as highly-regarded thought leaders outside the firm, to offer written analyses and host discussion forums.

So let’s take a look at some specific Goldman research, I have used this document as a source:

We identified five key themes from 2Q earnings conference
calls: (1) Uncertain economic outlook; (2) Focus on margin
improvement; (3) Disciplined hiring practices; (4) Use of large
cash balances; and (5) Mitigated impact of dollar weakness.
High unemployment and weak consumer confidence made
firms reluctant to hire new workers and invest for growth.

Expanding on one of these five themes:

Large cash balances used for buybacks and debt reduction

Free cash flow generation has been strong and boards are authorizing fresh repurchases. Many previous authorizations have been exhausted. Debt reduction has been more prevalent than in prior quarters.

Expanding again:

August 11, 2010
United States: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research

Theme 4: Use of large cash balances

Corporate balance sheets remain flush with cash. Managements remain committed to returning cash to shareholders and are showing an increasing willingness to invest for growth. In 2Q companies continued to pay down debt, raise dividends, and buyback

stock and direct money to pension funds. The desire to expand margins and capture limited growth opportunities in a slow growth world has also spurred some spending on capital investments and advertising. Free cash flow generation has been particularly strong and many boards are authorizing fresh repurchases. Anecdotally, debt reduction seems more prevalent than during previous quarters.

Ford (F) expects to have net positive cash by end of next year

It’s clearly a really positive development because we’re managing our uses of cash, and we’re looking at the overall business environment, and it appears to us, with all of our fundamental assumptions, that we’re going to be able to continue to improve the balance sheet and pay down the debt. And that’s why we’re very pleased to give the guidance that we’ll be in a net positive position in cash at the end of next year.

Caterpillar (CAT) comments on priorities for its cash balance

…priority number one being to grow the business, has not changed, and we may have more opportunities, based on one, just the playing field that’s out there today, and two, some valuations. So, we’re looking in every corner, and all of our businesses are concentrated on that today where we can do that. Secondly, our pension plans, thirdly our capital, and then finally, dividends and share buybacks…General Electric (GE) expects to hold more cash than in the past

You know, I would say clearly we’re going to have more cash in the future than we had pre-crisis, but with $25B we’re going to have substantial flexibility to do the things we want to do to grow the company.

The entire report carries on in pretty much the same way. There are some recommendations scattered along the way, but the overall impression is one of a fairly shallow analysis. There is nothing really that the individual could take away and apply to his own portfolio.

Which leads into the Goldman Sachs Hedge Funds. Goldman run a number of funds, everything from infrastructure to stocks and commodities. I don’t know the fees on these funds, nor the minimum amount required to invest, but I’m willing to guess both are fairly substantial.

In conclusion, Goldman, probably does not serve the smaller individual investor as well as a smaller, more individual advisory or Hedge Fund, as their lines of business are so divorced from the smaller investor, and I suspect their research papers only give very limited information, as Goldman will, due to their other lines of business be constrained by inside information limitations.

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