The Great Financial Illusion.

Goldman Sachs reports a blow out quarter, but cuts there dividend, and just like I stated in yesterdays post, they filed for a $5 Billion secondary offering. So the mainstream clueless press/media (CNBC/WSJ) reports that Goldman cant do no wrong, great quarter, premier institution. Correct?

Absolutely Wrong!

Lets take a closer look into the Goldman Quarter. Hold on...I have to get my glasses.

Goldman Sachs reported 3 month (JAN-FEB-MARCH) earnings of $3.39, which handily beat consensus of $1.60. The headline number made the stock jump about 4 bucks and the futures the same amount when it was announced after the close.

Something immediately smelled fishy to me? How can Goldman pull off a quarter like this? How can they be on the right side of every trade this quarter? How come they go to making all of this money, after the disastrous quarter they had last time? How are they doing it? Do they have some sort of crystal ball that portents market behavior?

All I had to do was listen to the muttenheads on CNBC wax poetic about the Goose, to realize that something was missing. This is what I found out - They took a page right out of Wells Fargo's Playbook...good old fashion Smoke, Mirrors, and Illusions were on tap last night. Was David Copperfield part of the TARP package they received? Did Houdini finally get loose from that chest, and suddenly appear at Goldman headquarters?

Not quite.... Goldman Sachs as you all remember converted to a bank holding company late last year, as per that conversion, they are required to report earnings on a calender year basis going forward. So...they legally were only required to report JAN-FEB-MARCH period results to the street. There former fiscal year quarter would have included the month of December, was omitted from the results. The December month was a total disaster for everyone involved including Goose, as they posted a consolidated loss of close to a $1 Billion or $2.15 per share for that month alone, which was much worse then anyone predicted. They took writedowns, but took them in the December quarter instead, so that they would not have to include them in the consolidated results. The writedowns totalled $1.6 Billion of Fixed Income and $800 Billion in Principle Investments. The trading environment was more friendly in Feb and March, thus the earnings results were better. I am wondering, when Goldman and Morgan converted to bank holding status, they must have been aware that December would be horrible? But they can absolve themselves accounting wise, by converting to calendar year reporting period. Genius Move. Ahhh...also being able to borrow money from the Treasury, and strong-arming AIG into handing over Tax Payer bailout money to offset collateral payments in their CDS portfolio, also was a shrewd move. How can we forget that?

But why did they not include December figures?

They didn't include that figure, because they didn't have to, padding the last 3 months. If we take into account the loss from December, the earnings still look good, not great there ROE would really be around 4% instead of the 15% reported. The stock like I said it would is down 6% currently at $122. GS like all Financials in general are too hot and have run up too fast, and a normal pullback is expected, a larger pullback will happen, if investors don't warm up to quarterly numbers from JP, C, MS, and BAC. But the trend has been set...Phony Illusionary Profit Reports from all of the banks are on tap, when will investors wake up to this scam? Have they not learned anything from Bernie Madoff? Enron? Global Crossing? Adelphia? You see when stocks/markets go up, no one cares or asks questions, they just enjoy the ride, only when people get hurt, is there talk of regulation, rules, and Congressional Oversight. This time will be no different. The Stock Market Investor deserves everything they are hit with over the next few years as we sink deeper into this recession coupled with inflationary pressures.

The thesis on the financials have not changed. The only thing that has changed is the FASB ruling on Mark to Market accounting which the banks are using to overvalue the toxic securities on their balance sheets, which in turn they are using to take less reserves for future potential losses. Its all smoke and mirrors to put out an illusionary recovery to the investment public.

Remember Wachovia more then doubled from its lows to the low 20's when things seemed to get better, before it was ultimately auctioned off to Wells Fargo. Indy Mac's stock price also doubled, before its was taken down by the FDIC. Washington Mutual also rallied feverishly before it was seized by the government and deposits sold to JP Morgan. We have seen this type of action before, when there is a sliver of hope out there, these stocks have surged only to make new lows as more and more people figure out its just one big scam perpetuated by bank executives.

The people running the banks know very well that the FASB ruling doesn't change fundamentally what is wrong with bank balance sheets, that its all an accounting trick. They can price the securities to what ever price they want, it wont sell at that price in the marketplace, but what they do know is that the market is short term minded, if they can finagle the quarterly results here and there, they can hope to survive for another 3 months, until the next Geithner Plan is developed. They have this strange idea that they can earn their way out of this mess? How can they? Can the banks collectively earn $8 Trillion after tax over the next few years? That is the total loss figure if you take into account the following losses:

1-Commercial Real Estate
2 Home Equity Line OF Credit
3-Auto Loans
4- Credit Cards
5-Hybrid Securities
6-Monoline CDS Insurance

The financials are in a catch 22 situation. The FASB ruling allowed them to mark up securities, take less reserves, thus padding short term earnings, but what does this mean when they actually go out and try to sell these same securities at the prices they have internally set? Its not going to happen. They are just delaying the inevitable. No hedge fund, or bond fund is going to purchase these toxic junk at the prices the banks have them marked to. Its a joke...pure and simple. This just bides them time.

This begs the question? Why in the world does the Treasury still backstop all of these losses? Why subsidize declines in bank mortgage books? Why the need for TARP? TALF? Public/Private Partnership? If the general investment public only cares about the illusionary quarterly earnings reports from these financials, why not just totally get rid of mark to market? Have the FASB just come out and give the banks free reign over all accounting matters, because at the end of the day, that is all that people care about anyway. Investors want to be told that earnings beat expectations...That's it! Don't care how we got there...who cares as long as the stocks go up. Business as usual. Until the next batch of earnings reports come out.

All of this could have been avoided if FASB just came out in October. It would have saved the Taxpayer Trillions!

When thinks go south, people scream bloody murder! We need more oversight! More regulation, but that is simply absurd. If the SEC, Congress, NASD, and other regulators just did their jobs, we would not be in this mess. Pure and Simple.