Goldman Sachs Beaten, Buffett Down $2 Billion
Warren Buffett is down a cool $2 Billion already on his Goldman Sachs (GS) investment in about 6 weeks [Sep 23: Warren Buffett Finally Decides to Start Buying Distressed Assets]. Maybe he can make himself into a bank holding company (Bank of Buffett) and access the Fed window if things really get bad? That seems to be the cool thing to do nowadays.
A few readers have emailed me about Goldman and I have no idea what is wrong - the rumor mill is on overdrive. Big losses from Volkswagen debacle [Oct 30: Volkswagen Saga Continues] - prime brokerage business suffering - hedge funds leaving - their own hedge funds stinking it up. Goldman is now almost the same price as it was at IPO in the late 90s. The problem with these companies is much of their business is a black box - without faith you have a hard time valuing the company since you can't see behind the curtains. That is fine in good times, but in bad times - uncertainty leads to bad outcomes. I wrote a piece in 2007 on this specific to Goldman [Oct 16 2007: Goldman's "Blowout" Quarter]
In February I wrote a piece using a Bloomberg story about how, effectively, we are suckers for subsidizing the Investment banks in a great transfer of wealth - this was pre Bear Stearns blowup [Feb 11: Investment Banks - Are you Dear Investor.... the Sucker?]
- The private partnerships that once dominated Wall Street guarded their capital, used less leverage and limited their risk to trading blocks of stock for clients and shares of companies in mergers, said Roy Smith, a finance professor at New York University's Stern School of Business and a former partner at Goldman Sachs Group Inc. Since raising money from the public, many of the biggest firms have abandoned that caution.
- ``If you're betting with other peoples' money, you're more willing to take risk than if it's your own,'' said Anson Beard, 71, who retired from Morgan Stanley in 1994 after 17 years at the New York-based company, where he ran the equities division and helped with the initial public offering in 1986. ``You think differently if you're paid in cash and not in ownership. It's heads you win, tails you don't lose.''
Whatever the case, it does appear Goldman is out there trying to quietly raise more funds.... and dilute Warren.
- Persistent rumours — and some more hard evidence - of deepening difficulties at Goldman Sachs are fuelling debate over whether the investment bank will attempt another fund raising ahead of its fourth quarter results next month. The shares hit a five-year low, down 8.5 per cent to $71.21, on Monday after analysts at Barclays became the latest to forecast a Q4 loss for Goldman, citing in part its exposure to private equity.
- Now, we hear in Tokyo that Goldman executives recently approached Nippon Life, one of Japan’s biggest institutional investors, and separately, Mizuho Bank, about whether they would invest in the bank. Mizuho apparently went as far as taking a (half-hearted) look at Goldman’s books but quickly lost interest. Nippon Life didn’t call back, we gather.
- CNBC’s David Faber said Monday morning that he doesn’t believe that Goldman has plans for a secondary. But Barclays cut to estimates on Goldman can’t be helping either.
- Goldman recently received an additional $10bn from the Treasury Department’s capital purchase program, handing over another tranche of preferred stock. Goldman’s market cap is just $8 billion more than the total amount of new money it has taken in since September.
- Among steps it is taking as it adjusts to its new persona, after converting from being a broker-dealer to a bank holding company, is a move to cut back the number of its hedge fund clients. While Goldman traditionally reviews its client list every year to winnow out, in the FT’s words, “the least profitable and leverage-dependent relationships,” this year, for the first time, according to the head of a prime brokerage at one competitor, “a flurry of clients are telling us Goldman has asked them to move off their platform”.
Last, from the Department of Sick and Wrong & All is Fair on Wall Street, the LA Times reports that
Goldman Sachs advised clients to short California bonds
.... the
same bonds it received fees to bring to market
Typical. Not illegal but in our "free market system" (on the way up, socialism on the way down) we enjoy our gray areas and "wink wink" at conflicts of interest. We'll toss this one under the "
" rule and call it a day - remember, self regulation is best! Regulators only stifle innovation! Keep repeating until the entire system crumbles around you, and then place the entire blame on subprime borrowers.
- Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.
- The giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California's deepening financial misery. In Sacramento, officials said they were concerned that Goldman's strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers. An increase of a single percentage point on a $1-billion bond issue would cost taxpayers an additional $10 million a year in interest.
- Some experts said the investment bank's actions, while not illegal, might be inappropriate. "That's not a good way to do business," said Geoffrey M. Heal, professor of public policy and business responsibility at Columbia University. "They've got a conflict of interest and they're acting against the interest of their customers. . . . You act in the interests of your clients. You don't screw them, to put it bluntly."
- Goldman stood to profit from several aspects of California's borrowing, which involves the sale of bonds to investors. First, it collected millions of dollars in fees for bringing the bonds to market and finding buyers. Then it marketed a financial instrument known as a credit default swap that is essentially an insurance policy against a bond default. (oh my favorite instrument: Oct 26: 60 Minutes - the Bet that Blew Up Wall Street)
- The firm advised "shorting" -- that is, betting on a price decline -- in markets for corporate junk bonds, European banks, the euro and British pound currencies, and U.S. municipal bonds. Goldman recommended making the short bets via credit default swaps, a market in which it played a major role. (how convenient - we advise you to short this product we just brought to market - by the way, we have just the instrument to do it!)
- Indeed, what some traders found perplexing about the push for a market in municipal credit default swaps was that muni defaults almost never happen. (but that's ok - most of Wall Street is used card salesmen with better suits and MBAs - if they can find something... anything to sell... and make fees - they'll push it)
- "Goldman Sachs has a reputation as behaving in a responsible manner . . . and I don't think this is consistent with their traditions," he said.
- In any case, there are signs that the muni swap index has been a bust. Tom Graff, managing director of Baltimore-based Cavanaugh Capital Management, said that by the end of August the index had failed to attract much business. It was destined "for oblivion," he said, in part because muni defaults were so rare. (well, they gave it the old college try - can't fault the used car salesmen for effort)
Disclosure: No position other than horror at what goes on behind the scenes everyday in financial markets
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This article has 8 comments:
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Lockstep Investing
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53 Comments
My Website
Nov 11 04:58 PM-
curbs-in
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402 Comments
Nov 11 05:20 PMTime to dust off that old McDonald's uniform and apply for the fast food job on the corner.
After all...
Sacred cows make the best burgers.
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Buprestid
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16 Comments
Nov 11 06:50 PMOn my trading screens goldman preferred shares have not dropped in value nearly as much as the stock.
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jepittman
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Nov 11 08:45 PM-
venividivici
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Nov 11 09:19 PM-
ozcutty2
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My Website
Nov 11 11:34 PM-
investor88
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Nov 12 08:12 AM-
Shepard
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Nov 12 10:45 AM