Goldman Sachs GS

1. Goldman Sachs (GS) Cici Cao, Sofia Hou, Uggi Lee, Charles Li

2. A little history Glass-Steagal Act of 1933 Separated commercial banking from investment banking Parts were repealed by 1999 Gramm-Leach-Bliley Act Gramm-Leach-Bliley 1999 Allowed consolidation of commercial banks, investment banks, securities firms, and insurance companies

3. Obama�s �Volcker Rule� Volcker wants to restrict banks� abilities to make speculative investments that do not directly benefit customers (i.e. for the firms� own profits) No bank will own, invest in, or sponsor a hedge fun or private equity fund or prop-trading that is unrelated to serving customers Similar in spirit to Glass-Steagal

4. Effects on Goldman Out of all the major finance firms, Goldman would be hardest hit Approximately 10% of revenue derived from prop-trading Profit would be affected more because prop-trading has high profit-margin, low overhead However, this is assuming that the law would have the intended effect

5. Likelihood Just a proposal, bill still needs to be written Recent events make it seem very unlikely that �Volcker Rule� will be enforced

6. Mass. Special Senate Election Dem. Martha Coakley lost in an upset to Rep. Scott Brown (blew 30 point lead in month and a half) Was Dem. Ted Kennedy�s long-time seat, so election of Republican might represent public repudiation of Obama�s policies No more supermajority for Democrats, so much more difficult to pass important legislation

7. Recent Supreme Court Case January 21 Citizens United V. Federal Election Commission Congress can no longer limit corporations from spending money on Presidential and Congressional campaigns Which companies have the most money to spend?

8. Senate Hearing Paul Volker spoke in front of the Senate this week His ideas for reform were heavily opposed in Congress Support for his reform dwindle, but popular support is also likely

9. Methods of Circumvention Very difficult to define �operations unrelated to serving customers� Firms can always claim that its operation are somehow related to benefiting customers Reclassify transactions Prop-trading would be ok if internal hedge funds allowed outside clients to invest Also, banks make proprietary investments to offset risk of other deals.

10. Circumvention, cont. If a bank�s own employees invested in an internal hedge fund, this would meet the requirement of benefiting customers while being closed off to outsiders Rumor has it that Goldman is considering this approach (no comment so far)

11. Unlimited campaign spending and loss of Democratic supermajority combined with already considerable Wall Street lobbying power, seems improbable that anti-Goldman legislation will be passed On the off chance that something is passed, it is difficult to properly define and enforce exactly what Obama is proposing Firms can find loopholes

12. P/B ratio comparison

15. Multiples Analysis Projected 2010 Book Value: Competitor Average 1.11 Sector Average (upper bound) 1.29 Lower Bound 0.93 Average book value growth of 22% over past 5 years

16. Multiples Analysis, cont. Assuming a conservative book value growth rate of 10%, price range $131.77 - $181.39 For optimistic growth, $154.55 - $214.37 Assuming average book value growth, target price of $173.65

17. Conclusion Political risk due to �Volcker Rule� is negligible Democrats no longer have supermajority Corporations have increased lobbying power Solid book value growth Decision: Hold