Treasury Secretary Hank Paulson stated that his objective in driving the $700 billion bailout package was to counter systemic risk within the US financial system. But rather than employing tax-payer dollars to get on with their business after lowering leverage levels in their balance sheets, the bailout targets appear to have been granted a license to revisit the financial marketplace to seek new types of opportunities altogether.

On Wednesday, investment banking purists were shocked by reports that Goldman Sachs (GS) was considering launching an Internet banking operation or buying a full-scale banking operation in an effort to establish a deposit base. The fact is the Goldman’s core business model is intact, albeit with some substantial de-leveraging. If anything, the demand for equity and bond underwriting, merger and acquisition funding, corporate finance advisory consultancy and market price-making is already gathering momentum once again. The issue for Goldman remains one of substantial revisions in asset valuations and realistic credit ratings, not of the volume of potential business itself.

This writer had previously called for Goldman shares to be priced below $30 in view of the adjustments in leverage ratios. Now, if this drive for deposits reflects a substantive change in Goldman’s business model, its shares may not be worth much more than $15. The latest market capitalization number of $27 billion (based on 395 million outstanding shares) borders on the ridiculous. From where will Goldman generate revenue and profits to support a dividend-yield forecast of even 2.5% p.a.? Remember the debt service commitments of Goldman to government agencies and to Warren Buffett!

When committing $5 billion in preferred shares in late September, Warren Buffett declared, quite correctly, that Goldman Sachs is an exceptional institution. It has an unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance. Mr. Buffett was certainly not talking of Internet banking where a number of high-profile players are much more advanced, at least in technical terms, than Goldman can hope to be in the space of two or three years. Also, if Mr. Buffett was interested in a traditional deposit-to-loan banking model, there were many choices which would have qualified as better bets than Goldman Sachs.

The assumptions governing systemic risks, utilized by Secretary Paulson, may well be credible. But the way to curtail, preferably eliminate, systemic risks, is not to provide government money and guarantees in order for banks, investment banks and insurers to go out and look for new business classes. The entire umbrella of systemic risk is pretty accurately defined by fair value measurement guidelines in SFAS No. 157. More specifically, systemic risk emanates from Level 2 and Level 3 asset classes which cannot be marked to active markets. Goldman’s Level 2 and Level 3 assets were last valued at $410 billion (as per last quarter 10-Q filings). So, if Hank Paulson and Neel Khashkari were intending to attack systemic risk, a comprehensive re-statement of Level 2 and Level 3 assets should have been undertaken and, regardless of FASB dictates, a highly conservative de-leveraging methodology should have been implemented.

But rather than adjusting its elite business model consequent to revisions in its asset valuations, Goldman appears to be headed along the route almost all bailout targets are adopting: since, with time, the overwhelming proportion of Level 2 and Level 3 assets will come good (hopefully), let’s see what else we can with tax-payer dollars in the interim.

That route poses huge risks of a systemic nature. If economic conditions worsen in 2009, as this writer thinks they will, those Level 2 and Level 3 assets will be further impaired. In that case, even $15 per share will not withstand serious scrutiny.

www.quoteplatform.com