Can Goldman Sachs profit from the banking cleanup?

There are recent reports circulating that Goldman Sachs (NYSE: GS, Stock Forum) was the largest trading partner of AIG (NYSE: AIG, Stock Forum). The implication was that Goldman could continue to suffer from AIG's problems. GS has countered with statements suggesting that AIG exposure is not an issue.

It is a good bet that a company the size of AIG did a sizeable amount of business with GS.

Yet I believe that the real story here is not Goldman's AIG exposure, it is the expertise GS has in mortgage-backs and derivatives, and the knowledge GS brings to the banking crisis.

GS recently announced that it would convert to what will become the fourth-largest bank holding company in the U.S. The commercial banking landscape is currently littered with scores of banks that have problems in their portfolios. Who is in a better position to understand mortgage-backed tranches and their derivative cousins than GS? Since GS bankers and traders have undoubtedly worked in mortgage-related securities, they can value and assess them as well as or better than anyone else on the Street. Some of the other major investment banks that created a lot of mortgage-backed problems, like Bear Stearns or Lehman Brothers, are now gone. That leaves a very small number of players intact that have a depth of knowledge about the assets that are causing so many problems in the financial system. GS, along with Morgan Stanley (NYSE: MS, Stock Forum) is one of the few remaining players around that has created and/or traded these problem assets. What does that mean? It means that GS and MS can do better due diligence on the commercial banks they want to buy and even possibly profit from some of the same instruments they created.

As the banking crisis moves on, look for GS and MS to take advantage of cheap banks or the assets in their portfolios. Also look for them to focus on corporate banking businesses as bricks and mortar branches are expensive to operate and may not give them the return on equity they desire. The damage to the commercial banking sector has been done and the strongest and most opportunistic players will profit from the current situation. There's a good chance that GS will be one of those players.

ABOUT THE AUTHOR

Steve Gear -- Stockhouse Equity Analyst

Steve Gear is currently the Director of Capital Markets for Stockhouse, Inc. Prior to joining Stockhouse, Steve spent more than 24 years in the securities industry in a variety of capacities which includes positions in institutional sales and research. Since 1992 Steve has advised numerous institutional investors on small capitalization equity issues. Since 1998 Steve has maintained a special focus on software and Internet companies and has issued research coverage on companies such as MapInfo, Hoovers, and Pinnacor. Steve joined Stockhouse in his current capacity in January 2007.

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