With the Goldman fraud suit rocking Wall Street, the big question is how far will this spread to other banks. My view on this is that the damage will be limited. The SEC had several and motivations for moving aggressively against Goldman, including to repair their image that was badly damaged following the Madoff and Stanford ponzi schemes, to ease they way for financial reform regulation, and to address public outrage, which has already singled out Goldman as a focal point of what went wrong in the financial meltdown. This is why Goldman apparently didn't know about the filing last Friday and wasn't given the opportunity to settle the charges, as would typically happen. The additional benefits of filing cases against other financial institutions will diminish quickly and could produce a backlash against financial reform. There is however the strong possibility that the UK and other government authorities will take action against Goldman for similar reasons to the SEC, and because Goldman is an easy target for fiscally strapped governments due to public opinion and the smoking gun email from the trader in the middle of the deal. Goldman may also be subject to civil suits from the parties who lost money in the CDO transactions, though you would think if they had a strong legal case they would have already filed. Other possible fallout, reported in the WSJ this morning, is that money moving out Pulson's and other mortgage hedge funds, which could cause them to sell assets and drive down prices. However this damage should be limited to a few funds and limited number of stocks and bonds.
Its also interesting that even as Greek CDS spreads expanded to historic wides this week, the CBOE Volatility Index has dropped and is at 15.7, its lowest level since 2007. This would indicate that US investors are complacent about the possibility of further macro shocks from a Greek default, or possibly that the VIX is a poor indicator for sovereign risk.
Apple had a remarkable quarter, which earning over $3 billion dollars in net income and doubling iPhone sales in the quarter immediately following the holiday season, and before they sold they first iPad, and with a national unemployment rate of 10%. This, combined with stronger than expected comps at retailers, indicates that discretionary spending is rebounding. Apple is in a classic growth ramp for their business and at this rate could be on its way to become the largest tech company by market cap. With a market cap of $221 billion, it has already passed Google, at $177, IBM at $168, and Oracle at $131. Am I being US centric here? What about Japanese powerhouse Sony? $96 billion. Or German giant SAP? Only $58 billion. Apple is also bigger that some other familiar companies: Wall Mart ($204 billion), GE ($202b), Bank of America, ($186b), JP Morgan ($182b) and Citi ($142b). Steve Jobs must have Microsoft is his cross hairs, currently at $275 billion market cap.
Bank earnings are strong, even after factoring in easy comps from 2009. This is a reminder of how Wall Street analysts can get it wrong. In 2008, as brokers were merging with banks or becoming bank holding companies, bank analysts explained in convincing detail how it would be much more difficult to make money in the new environment, with higher capital ratios and lower leverage, and the demise of the mortgage securitization money machine. This story seemed logical to me and I believed it. Yet in the first quarter of 2010, major banks including Bank of America (Merrill), JPM (Bear), and Citi (even after selling half the brokerage operation to Morgan Stanley) are reporting strong earnings, and Goldman doubled earnings for the quarter. While earnings were primarily driven by strong capital markets in a rebounding economy, this demonstrates that the ability of companies to adapt to changing economic and market conditions is difficult to predict.
