Now I know why the A-Train hates Goldman Sachs so much … looks like all the Goldman alums in guv-mint decided to give them a bigger break than they gave Morgan Stanley in determining worst-case scenarios in the recent stress tests performed by the Federal Reserve.
Why did the stress tests treat Goldman Sachs better than Morgan Stanley?
In the worst-case scenario used to determine bank capital needs, the government posits that Goldman might be two and a half times as profitable as its main rival this year and next.
In the period, the Treasury and bank regulators are saying Goldman will have $18.5 billion in “resources other than capital to absorb losses.” This number primarily reflects how much in earnings, excluding provisions and securities marks, a bank can generate. For Morgan Stanley, the government has a much lower $7.1 billion.
As a result of Thursday’s stress test, Morgan Stanley raised $4 billion in common stock. That shareholder dilution might not have been needed if the authorities had come up with stronger earnings generation for Morgan Stanley.
Were the tests’ assumptions “stacked in Goldman Sachs’ favor?” asks Michael Hecht at JMP Securities. He notes that the $7.1 billion for Morgan is 62% below Goldman’s figure, whereas Morgan’s actually-reported net revenue has, on average, only been 22% below Goldman’s over the last five years.
The government documents don’t give enough detail to explain the large gap. One has to hope that the stress-testers weren’t placing too much emphasis on Goldman’s strong outperformance in the first quarter, when Morgan’s revenue was 68% lower — partly because it reined in risk.
Few would argue that Goldman isn’t the stronger of the two, and the government may have its Goldman projections right. But the numbers appear to bake in the idea that Goldman is savvier at making money from taking risk. The government had better be right.