World's Scariest Stocks: Goldman Sachs

What else is stewing in our cauldron of evil? Prepare yourself before proceeding to the rest of our world’s scariest stocks.    

Now, it may seem funny that I'd single out Goldman Sachs (NYSE: GS  ) as my pick for the world's scariest stock, since just more than a week ago I fingered Goldman as the bank I'd be most interested in buying.

Am I completely contradicting myself? Hardly. Something can be scary and attractive all at the same time. (Lady Gaga, for instance.)

Goldman may not be lighting up the music charts with catchy tunes, but it's been lighting up the earnings picture with massive profits. The company's apparent prowess in navigating the dark alleys of the trading world gives it a unique attractiveness in the financial industry. As long as the markets are trending up, it's hard to doubt that Goldman will continue to churn out cash.

At the same time, Goldman's business chills me to the bone. It may be the company most representative of one of my favorite topics -- the lack of change in the world of finance following the recent crisis. Goldman may even be scarier than the much-derided duo Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) .

The cloak of darkness
When we talk about lack of transparency in the banking sector, we could just as easily be talking about JPMorgan Chase (NYSE: JPM  ) , Morgan Stanley (NYSE: MS  ) , or Citigroup. But of the entire sector, Goldman is probably the bank that most typifies massively profitable cloak-and-dagger trading operations.

Take the company's most recent earnings report, for instance. Goldman reported more than $12 billion in net revenue and $3 billion in profits during the quarter. Where did it all come from? A mere $1.9 billion of Goldman's revenue came from its investment banking and asset management businesses -- operations that are somewhat easy to understand.

For the $10 billion that came from trading and principal investments, we get shrouded statements like "strong performances in credit products and mortgages" and "strong net revenues in derivatives." They might as well say, "We did something that we're not going to tell you about, it worked out well, and we made a lot of money." I'm not holding my breath for a more detailed rundown.

Transparency is far less of an issue when it comes to nonfinancial companies like Wal-Mart (NYSE: WMT  ) or Research In Motion (Nasdaq: RIMM  ) . We can easily understand trends in purchasing at Walmart stores, or the competitive environment that RIMM's BlackBerries are facing.

But what of Goldman's opaque trading operations? What exactly are its brokers doing to make those massive sums? Is the profit it's pumping out sustainable? Is it even legal? Now that we've seen how horribly wrong shenanigans in the financial world can go, a teeth-chattering reaction to Goldman's secrecy is much more understandable.

If you're Edgar Allan Poe, fear of the unknown is a great thing. But if you're an investor in one of the world's largest financial companies, it's far less desirable.

Blood money?
Closely tied to those opaque trading operations are the huge sums that Goldman Sachs employees are paid. During the third quarter, the company set aside $5.4 billion for compensation, which works out to almost $155,000 per employee -- for that quarter alone.

I don't have a problem with good employees being paid large sums for value-added contributions to the business, but do we even know that's the case? Does Goldman really have an eye toward building long-term value for shareholders? Or is it simply rewarding its people for making as much money as possible right now -- regardless of how they make it.

This quarter's compensation line works out to about $620,000 per employee for the whole year. That's an awful lot of money, and I'd bet that there are a lot of people who would do a lot of scary things to get their hands on that kind of cash.

Conspiracy theorists unite
And I'd be remiss if I skipped over the immense political connections at Goldman Sachs. We could, of course, look at this from the perspective that the company would prefer: It's a civic-minded business that encourages its employees to take government positions after they leave the company. But can we really overlook the huge benefit that government-employed alumni give the company?

Goldman alums include former Treasury Secretary Hank Paulson; former Treasury Secretary Robert Rubin; current Treasury Secretary Timothy Geithner's chief of staff, Mark Patterson; Geithner advisor Dan Jester; Paulson advisor Kendrick Wilson; former TARP overseer Neel Kashkari; Undersecretary of State for Economic, Business, and Agricultural Affairs Reuben Jeffery; President of the Federal Reserve Bank of New York William Dudley; former George W. Bush Chief of Staff Joshua Bolten; World Bank President Robert Zoellick; and the list goes on and on.

Savvy moneymaker or scary specter?
Has Goldman Sachs unjustly been vilified, or is the company more frightening than a real-life version of the Saw movies? Jump down to the Motley Poll below and make your call.

Warning: We’ve rounded up more scary stocks. Click if you dare.

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Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy thinks Matt should keep more of a poker face when discussing his attraction to Lady Gaga.


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  • Report this Comment On October 30, 2009, at 3:45 PM, TMFDiogenes wrote:

    For the $10 billion that came from trading and principal investments, we get shrouded statements like "strong performances in credit products and mortgages" and "strong net revenues in derivatives." They might as well say, "We did something that we're not going to tell you about, it worked out well, and we made a lot of money." I'm not holding my breath for a more detailed rundown.

    Haha, well said, Matt.

  • Report this Comment On October 30, 2009, at 3:52 PM, TMFKopp wrote:

    I'd like to see them actually say that in their next earnings release. Or maybe just skip all of the other useless verbage and just have the press release say:

    "We made $X billion this quarter. If you're an investor, go ahead and celebrate cuz we're awesome. If you're a detractor, well, suck an egg cuz we're still awesome."

    Matt

  • Report this Comment On October 30, 2009, at 3:55 PM, ikkyu2 wrote:

    I don't think I care too much about how they made the money. But as a shareholder of GS common, I would want to take a close look at where it's going.

    Those earnings aren't being made available to common, either through dividend or buyback. They're being paid out to employees. Common "share" holders are not being permitted to "share" in Goldman's success. The risks, however, are still all on common shareholders. The stock should be valued accordingly.

  • Report this Comment On October 30, 2009, at 4:40 PM, TMFKopp wrote:

    @ikkyu2

    Good point on sharing the wealth. The employees that are getting those massive paychecks really aren't taking much risk. You could argue that their jobs are on the line if they perform poorly, but most could find new jobs elsewhere if they make a big bet that goes wrong -- the old "trader's option."

    However, I'd disagree about the transparency issue. As a shareholder you should want to know where the money comes from. Not from any sort of moral perspective, but so you can know how sustainable the company's earnings are. How can you put a value on a company when you have no idea what to expect from quarter to quarter?

    Matt

  • Report this Comment On November 02, 2009, at 12:33 AM, jrmart wrote:

    THIS IS A FAIRY TALE STORY FROM MY VIVID IMAGINATION ABOUT A HEDGE FUND CALLED GOLDEN SLACKS.

    IT STARTS LIKE THIS. ONE PART OF GOLDEN SLACKS HEDGE FUND SOLD LOADS OF BAD PAPER INVESTMENTS WORLDWIDE DURING 2008, WHILE ANOTHER PART OF GOLDEN SLACKS HEDGE FUND SHORTED THE MARKET AND MADE BILLIONS IN PROFITS DURING THE LAST QUARTER OF 2008. ALL DURING THAT TIME, LOTS OF GOLDEN SLACKS' ANALYSTS WERE DOWNGRADING COMPANIES WITHOUT PROVIDING ANY DOCUMENTATION BECAUSE THEY SAID IT WAS PROPRIETY INFORMATION. AT THE SAME TIME THE TRADERS AT GOLDEN SLACKS WERE SHORTING THE MARKET CREATING ONE OF THE BIGGEST FINANCIAL DISASTER SINCE THE GREAT DEPRESSION.

    THE FAIRY TALE STORY CONTINUES IN LATE 2008 WHEN LOTS OF GREEDY INVESTORS SHORTED ONE OF GOLDEN SLACKS' BIGGEST COMPETITORS, PUTTING THEM OUT OF BUSINESS. SHORTLY THEREAFTER ANOTHER LARGE GOLDEN SLACKS' COMPETITOR WAS ALSO ALLOWED TO FAIL.

    THIS FAIRY TALE STORY STILL GETS BETTER. A COUPLE OF MONTHS AGO IN 2009, GOLDEN SLACKS REPORTED THAT SOMEONE STOLE A GOLDEN SLACKS COMPUTER PROGRAM. WHEN IT HAPPENED GOLDEN SLACKS SAID THAT THIS PROGRAM COULD ACTUALLY CONTROL THE STOCK MARKET. WOW, CAN YOU IMAGINE THAT?

    TO MAKE MATTERS MORE INTERESTING, THIS HEDGE FUND CALLED GOLDEN SLACKS HAS BECOME A BANK. BY DOING SO, IT GETS ALL THE PROTECTION OF THE US GOVERNMENT AND IS GUARANTEED A BAILOUT BY ALL THE UNKNOWING DUMB TAXPAYERS.

    BOY, IF THIS GOLDEN SLACKS' FAIRY TALE WERE TRUE, IT WOULD MAKE BERNIE M. LOOK LIKE A PENNY ANNIE CROOK. THANK GOD IT IS ONLY A FIGMENT OF MY VERY CREATIVE MIND.

  • Report this Comment On November 10, 2009, at 10:53 AM, hudsondusters wrote:

    Warren Buffett evidently has some confidence in the transparency of the numbers, since he invested and he hates things that he cannot understand, but he may be privy to more info than we are, and he also got a sweetheart deal. Nevertheless, even preferred shares have some risk, so he either changed his mind after bailing on Salomon Smith Barney, or GS simply isn't that opaque.

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