Uncle Sam Lines Up Massive Deals for This Investment Bank

The government usually doesn't make things easy. Take tax forms. Or consider the Postal Service. But rules were made to be broken. Washington's latest pronouncement is turning the difficult task of making money in a recession into a walk in the park -- at least for one company.

The Congressional Oversight Panel, the body created to monitor the $700 billion Troubled Asset Relief Program (TARP), says the nation's smaller banks need to raise between $12 billion and $14 billion in capital to counteract the toxic assets on their balance sheets.

This isn't necessarily bad news for banks. After all, selling shares may dilute the stock, but it's better than having banks go under. And the government action forcing all these stock offerings will mean huge profits in another area.

 

Underwriters.

The firms whose job it is to actually bring these shares to market -- investment banks like Goldman Sachs -- are going to make a killing.

"Underwriter fees in the U.S. are typically about 6% of the deal value," the Wall Street Journal's James Mawson reported on August 14, "but 9% isn't regarded as excessive among bankers."

The math is no more difficult than this: 9% of $14 billion is $1.2 billion. That's a big pile of money, and the fees will be earned by a very small group of investment bankers. They've been playing musical chairs lately. Bank of America now owns Merrill Lynch, J.P. Morgan scooped up Bear Stearns. Morgan Stanley is limping along, though Lehman Brothers didn't get a seat when the music stopped and died.

That leaves the king: Goldman Sachs (NYSE: GS).

Goldman Sachs' recently released second-quarter earnings show the firm is utterly gobsmacking the competition. It dominates its industry. Goldman had $13.8 billion in quarterly revenue. Underwriting stock offerings made up 21% of its $3.4 billion profit.

As hard as it may be to believe in a rough economy, the quarterly profit and the underwriting business set records. Goldman ranked first in financing mergers. It's the No. 1 deal maker in the world.

And now Uncle Sam is lining banks up outside Goldman's office. Talk about stimulus! That's the awesome power of the regulatory reach of the U.S. government. And you can bet Goldman, and its shareholders, will be thanking their lucky stars for it.

Raising $14 billion in bank equity in the coming months is going to mean more business, more deals and more profits for Goldman. Its shares are already above their year-ago close, a feat the S&P 500 hasn't been able to muster. And since Jan. 1, GS shares have gained +92%, far ahead of the pack. They're trading at 35 times earnings, a clear sign that Wall Street expects Goldman to continue to release its scorching-hot profit reports.