Why Goldman's stock valuation looks better and better
One common method of stock valuation is to value a stock is to look at its P/E ratio. That's where you take the price of a single share of a stock and divide that by the "EPS" or earnings per share.
In spite of all we've been reading about the recession and financial crisis, Goldman Sachs stock seems to be doing just fine. And it seems there really are earnings to back up their stock valuation. What sort of earning? Apparently record earnings.
Why are they earning so much? Well, part of it has to do, ironically, with the current recession and financial crisis. You see, one source of Goldman's income is fees they earn in assisting the government sell U.S. treasuries. Guess what? The U.S. is issuing record amounts of treasuries.
And, oh that's right, Lehman Brothers and Bear Stearns, who used to compete for this treasury dealer business, no longer exist. And so Goldman's fees skyrocket.
But there's more to the story. As you must have heard by now, Goldman announced that this year they'll be paying out record bonuses. Imagine, paying record bonuses out to employees during a severe recession! And announcing it out loud - almost like a kind of brag.
What can we make of this? Didn't you think that Wall Street banks like Goldman would no longer be paying out those big old bonuses anymore?
The bonuses will hit a record because Goldman's paying out half of their record earnings in bonuses. Notice their shareholders are not benefiting from any of these earnings.
Next, the fact that short-term windfall profits like this go to employees encourages risk-taking on the part of employees. After all, if the risks taken lose money, the employees don't have to pay back shareholders. And if they work, the employees seem to be getting all the benefit.
What about the company itself? Well, if Goldman is one of those "Too Big To Fail" companies, they know the government (remember: government = us) will back them up. They won't be allowed to fail. So the company can't be too worried about their employees taking big risks, can they?
So I guess I can understand why Goldman's stock valuation stays strong these days.
And, oh, what about all those rumors that Henry Paulson, former CEO of Goldman, took care of his buddies during the recent financial crisis, when he was Secretary of the Treasury - especially when he went along with the demise of Bear Sterns and Lehman Brothers?
Ya think?
In spite of all we've been reading about the recession and financial crisis, Goldman Sachs stock seems to be doing just fine. And it seems there really are earnings to back up their stock valuation. What sort of earning? Apparently record earnings.
Why are they earning so much? Well, part of it has to do, ironically, with the current recession and financial crisis. You see, one source of Goldman's income is fees they earn in assisting the government sell U.S. treasuries. Guess what? The U.S. is issuing record amounts of treasuries.
And, oh that's right, Lehman Brothers and Bear Stearns, who used to compete for this treasury dealer business, no longer exist. And so Goldman's fees skyrocket.
But there's more to the story. As you must have heard by now, Goldman announced that this year they'll be paying out record bonuses. Imagine, paying record bonuses out to employees during a severe recession! And announcing it out loud - almost like a kind of brag.
What can we make of this? Didn't you think that Wall Street banks like Goldman would no longer be paying out those big old bonuses anymore?
The bonuses will hit a record because Goldman's paying out half of their record earnings in bonuses. Notice their shareholders are not benefiting from any of these earnings.
Next, the fact that short-term windfall profits like this go to employees encourages risk-taking on the part of employees. After all, if the risks taken lose money, the employees don't have to pay back shareholders. And if they work, the employees seem to be getting all the benefit.
What about the company itself? Well, if Goldman is one of those "Too Big To Fail" companies, they know the government (remember: government = us) will back them up. They won't be allowed to fail. So the company can't be too worried about their employees taking big risks, can they?
So I guess I can understand why Goldman's stock valuation stays strong these days.
And, oh, what about all those rumors that Henry Paulson, former CEO of Goldman, took care of his buddies during the recent financial crisis, when he was Secretary of the Treasury - especially when he went along with the demise of Bear Sterns and Lehman Brothers?
Ya think?
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