Category: market sectors

Goldman bailing out Chicago bank?

As Blankfien & Co defend numerous lawsuits including the Federal kind it appears that one of President Obama’s Chicago banks is having a few problems.

Goldman Chief Executive Lloyd Blankfein has discussed the Wall Street bank making an investment in ShoreBank Corp. with Federal Deposit Insurance Corp. Chairman Sheila Bair, according to people familiar with the situation. He has also telephoned other bank executives as ShoreBank tries to raise $125 million it needs to forestall a possible takeover by the FDIC.

Looks like the Goldman boys pony up $20 million in order to repay the Washington crowd who saved the firm in late ’08 by making them a bank holding company.

Nice work Lloyd!

Bill Laggner interviewed on Eric King’s radio program again, discusses Goldman Sachs

Bill was on Eric King’s online radio interview broadcast, “King World News” again last Saturday, May 1st, 2010. Here’s a blurb from the site:

In this interview Bill discusses the stock market, corruption inside our banking system and government, the king player in the derivatives world, latest charges against Goldman Sachs, Ponzi schemes gone bad, latest antics of the Federal Reserve and more.
The blurb is the same as the last interview Bill gave because Eric and Bill are continuing their discussion about this theme. It’s generated a lot of interest for the Fund and we’ve had a lot of people checking out the Bearing website over the weekend so if you get some time, give it a listen. Better yet, share it with friends, family members and other sophisticated investors you know.

The interview is available on the King World News website, where you can stream it or download it to your iPod or other MP3 device: Bill Laggner’s latest interview at King World News.

Opening Pandora’s box

On Friday Goldman Sachs was charged by the SEC with fraud regarding a real estate structured finance transaction during the height of the credit bubble in 2007. Like any fraud the various players jockey for position and in this case it appears the other players involve John Paulson, ACA and potentially other industry participants. First thought that comes to mind is how this coincides with the upcoming financial reform bill headed by Chris Dodd which goes to a vote in less than two weeks. Second, we really have limited information about the suit although readers of this blog are more than familiar with the underlying fraud that built the greatest credit bubble in history.

Questions we would like to see answered:

1) Was Goldman creating custom products for John Paulson while trading against other clients?

2) Were clients intentionally misled about what was being sold to them in order to reward other clients?

3) Were these and other transactions done at arms length?

4) How did Goldman and other banks emulate Lehman regarding repo transactions via off balance sheet entities at quarter end?

5) Did Paulson get access to other questionable custom Goldman products, specifically Greek CDS? If so, were these products fraudulent?

6) How were these various products assembled and were there known fraudulent activities within raw material? For example, did Goldman know about fraud at the mortgage origination level? Where did these mortgages originate? I mention this because WAMU executives were on Capitol Hill last week admitting to mortgage originations containing fraudulent documentation.

7) Knowing the plethora of global derivative allegations does the blueprint used by JP Morgan on Jefferson County, AL ultimately open Pandora’s box?

8) Since this is a civil suit do we have to rely on the criminal fraud trial beginning next month in Italy to finally receive the juicy details on this sham?

9) The four largest banks in America are also some of the largest mortgage servicing entities so are they privy to mortgage payment information which could or could not be shared with some of the entities creating structured credit?

10) Does Goldman employees’ $1 million contribution to Obama’s campaign coupled with over $344 million in lobbying efforts last year insulate the firm from criminal charges in the USA?

11) Is this material? “Head of allegedly Goldman buyer ACA is married to Goldman deputy general counsel”?

12) How many other derivative dealers have been front running their clients?

My comments: Slowly the details emerge on the greatest fraud perpetrated on the American people. As we discussed on numerous occasions the public wants blood so let’s see if the rule of law still exists in the United States.

The Goldman case: Can the political class investigate itself?

The SEC’s press release charging Goldman Sachs with fraud begins:

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

The political cynic might ask, “Why go after Government Sachs?”

  • Damage control – give the Tea Partiers a scalp and hope it satisfies them.
  • Grease the wheels for Financial Regulation and the November mid-term elections.
  • Raise taxes on hedge funds.
  • Create a diversion. Try to pin the Great Credit Bust on a 31-year old French-born rogue trader and deflect blame from the government (the Fed, Fannie/Freddie, Community Reinvestment Act, etc.)
  • Goldman became a political embarrassment. Teach the unruly child a lesson.

Of course we know the real agenda is to always preserve the political class and increase its power. More taxes and regulations on market capitalists like most hedge funds end up benefiting the larger and more established players… like Goldman Sachs.

However, the government may be unwittingly opening a can of worms. For starters, the SEC appears to have a case, even though this is like going after the mafia for jay walking. More cockroaches are likely to come out of the closet, despite the exterminator’s incompetence. Second, this puts a cloud over the head of the leading Wall Street success story and favorite of the bulls. Third, this will certainly open Goldman to civil lawsuits and fines, higher borrowing costs, and reputational risk. If (we suspect) Goldman has considerable exposure to the current Global Stimulus Bubble, this suit could turn their virtuous money making machine into a vicious run on the bank. Fourth, the SEC announced this suit on the morning of a day when options on Goldman expired, a gift to the shorts (what few remain). This is out of character for the political class to reward its detractors; could it represent a waning of Goldman’s political power? If we’re correct that their secret sauce consists largely of access to friends in high places, could a power struggle imperil their business model?

Finally, this asset bubble was becoming increasingly stretched and vulnerable to the slightest pin prick. The Goldman suit may well do the trick.

The irony here is that the SEC and the entire notion of financial regulation is a form of fraud, giving investors a false sense of security. In fact, the U.S. government has been guilty of a confidence game which constantly understates risks to investors. For example, did the Bush administration assure investors that the economy was sound and everything under control? Is constant credit expansion by the Fed giving investors the illusion of plenty of upside with little downside? Did government policies regarding housing do the same? How fraudulent is the federal government’s own bookkeeping in hiding the true extent of its debt? And how complicit are the investment bankers in helping them do so, witness Greece?

Abby Cohen sees S&P 500 at 1250-1300

Isn’t it funny how the same talking heads who were wrong at the top of the credit bubble are back again, as bullish as ever. Abby Cohen just made these predictions at the Barron’s Roundtable:

We see a range of 1250 to 1300, and the market might not be at the high end at the end of the year if economic growth starts to slow in the second half. We might not see multiple expansion. Instead, stocks will move higher on the basis of profit and revenue improvement. We’re forecasting S&P 500 earnings of $75 to $76 this year, and $90 next year. But it is too soon to be paying for 2011 earnings. Importantly, revenue will increase this year, by about 10% to 12%. Another thing that will distinguish 2010 is a decline in volatility.

Remember, this is what Abby said on CNBC on July 31, 2007, right at the top of the credit bubble:

We get paid to look around the corner and into the future, and over the next several months and quarters we think that the equity market looks to be in good condition. We don’t see an economic recession, we think that corporate profits continue to grow at a moderate pace, and importantly valuation – we think – is not at all stretched in the equity market. Indeed, the S&P 500 is currently trading at under 16 times earnings. Normally when inflation is under 3% the average P/E multiple is 18 ½ times. So we’re below where we normally would be on a P/E ratio basis. Using the more sophisticated dividend discount model, or discounted cash flow models, we believe that the appropriate year-end value for the S&P 500 is about 1600, or about 10% above where we are now.

We believe that many of these companies in the financial services industry are still in very good condition. What we know, for example, is commercial banks have been applying very good lending standards and the problems seem to have existed among those lenders who may or may not be part of the S&P 500 who relaxed those standards too much.

Ouch. And this is what she at the end of 1999, less than 3 months away from the top of the tech bubble:

I used to be a superbull. Now I’m just a bull… What we’re telling our portfolio manager clients is that technology deserves to be a core holding.

Keep in mind, Abby Cohen is Senior investment strategist at Goldman Sachs, the same company that somehow manages to always “dance between the raindrops.” Yet their most conspicuous research spokesperson is now going for a rare hat trick: being duped at the top of the three greatest bubbles of all time in a period of ten years (if we include the current sovereign debt bubble). These are the smartest guys on Wall Street?

AIG: America’s Insolvent Guarantor

Since the Fall of 2008 the US government has committed over $11 trillion in new credit and or credit backstops to prevent the collapse of our modern day banking system. Closer examination of various TARP and other bailout recipients reveal the extraordinary demands of American International Group (AIG) which after Monday surpassed the $173 billion level. Hard to imagine when AIG had assured shareholders just one year ago that “excess capital was $14.5-19.5 billion”. At the same time we were commenting on how credit default swaps would follow sub prime lending as disaster du jour with AIG leading the charge. Of course as a taxpayer and reluctant current shareholder of AIG I have to ask how did we get here and how high does this bailout number get over the next several years?

If we rewind the tape back to the Summer of 2007 most market participants envied AIG, the world’s largest insurance company. How could you not after hearing statements like this from one of their top brass:

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

~ Joseph J. Cassano, a former A.I.G. executive, August 2007

Just 12 months later the shadow banking system was imploding and former Treasury secretary Hank Paulson called Goldman CEO Lloyd Blankfein and several other counterparties to discuss implications of AIG’s swap exposure. Unbeknown to many at the time was Goldman’s counterparty importance to AIG, specifically both credit default and interest rate swap exposure. Unfortunately 70% of the derivative market trades under-the-counter so specifics on CDS and interest rate swaps is difficult to decipher, until now. After reporting a quarterly loss of $61 billion last week, the largest quarterly loss in U.S. history, AIG’s largest shareholders demanded details on where the bailout money was dispersed. The list of culprits comes as no surprise.

Goldman Sachs Group Inc and a parade of European banks were the major beneficiaries of $93 billion in payments from AIG — more than half of the U.S. taxpayer money spent to rescue the massive insurer. Revelations that billions of U.S. taxpayer dollars were funneled through AIG to Goldman Sachs — one of Wall Street’s most politically connected firms — and to European banks including Deutsche Bank, France’s Societe Generale and the UK’s Barclays could stoke further outrage at the entire U.S. bank bailout.

It doesn’t to me seem fair that the American taxpayer has got to bear the 100 percent of the downside,” said Campbell Harvey, a finance professor at Duke University. “A hedge is not a hedge if you did not factor in the counterparty risk. And the U.S. taxpayer should not be obligated to make people whole for hedges that were not properly executed.”

My Comments: In a little over 12 months the largest insurer in the world has now become part of the zombie gang joining other former leveraged high fliers such as Citigroup, Fannie Mae and Freddie Mac. Latest disclosure documents from AIG put potential CDS exposure north of $500 billion. When adding interest rate swap exposure to the mix the total derivative book exceeded $1.5 trillion! Are derivatives becoming a problem now that the asset inflation game has come to a grinding halt? Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their “current” net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31, 2008 . Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

As the shell game continues we get closer to the real players in this collapsing fraud, primarily the insolvent TARP recipients who require yet another open ended capital conduit. Is it any surprise that the AIG bailout money flows through to politically connected zombies such as Goldman, Merrill (now Bank of America) and Deutsche Bank? Or that Bernanke makes a 60 Minutes infomercial Sunday night assuring the American people that money center banks will not fail based on his “new”reflation experiment?

Finally, we look at the Obama administration where Turbo Tax Timmy Geithner is assigned to the AIG bonus scandal hoping the distraction preoccupies most of main street. Unfortunately this too shall backfire since many of these potential bonus recipients know where all of the counterparty skeletons reside in this open ended bailout sham. Note to the administration: Be careful what you wish for.

Oil supply and demand: The tide has turned

Two weeks ago, Investor’s Business Daily ran on op-ed titled “The Ship Turns” which made the case that dramatically higher crude oil prices are changing the supply/demand equation.


According to data from a variety of sources, world oil output has jumped by 11%, or 8.5 million barrels a day, since 2002, to 83 million barrels a day.

Contrary to the predictions of petro-paranoids, private oil companies are producing flat out — even though government entities such as the Organization of Petroleum Exporting Countries and the U.S. Congress work to keep prices high.

Fueled by the high prices, new sources of oil are being discovered. They include the 33-billion-barrel bonanza recently found off Brazil’s coast and other huge finds in the Caribbean and Asia. The U.S. itself has 656 trillion cubic feet of natural gas and 112 billion barrels of oil on federal lands alone — there for the taking if only Congress would allow it.

But even without it, we’re going gangbusters. As the American Petroleum Institute recently noted, “an estimated 4,577 (U.S.) oil wells were completed in the first quarter of 2008, up 12%” from last year and the highest rate since 1986. U.S. oil companies are going back to tapped-out wells and pumping oil that wasn’t economically recoverable at $25 a barrel but is at $100.


U.S. fuel demand in the first three months of 2008 was down 1.4% from a year earlier — the third straight quarterly year-over-year decline in a row.

Gasoline consumption has risen about 1.5% a year since 2000. But Energy Department data showed demand in the first quarter edging down for the first time in more than two decades.

In short, the tide has turned.

The New York Times notes that U.S. car buyers have suddenly gone ga-ga over small cars. One in five purchases is now a compact or subcompact, while SUV sales are off 28%. “It’s easily the most dramatic segment shift I have witnessed in the market in my 31 years here,” said George Pipas, Ford Motor’s chief sales analyst.

Meanwhile, Market Vane‘s Bullish Consensus is 86% on crude, showing extreme optimism. T. Boone Pickens was interviewed on CNBC this morning and expects $150/bbl oil. And now crude oil for 2016 delivery is higher than spot prices, a rare event and sure sign of speculation. This contango situation in the futures markets is all the more notable considering the onset of peak driving season is days away. The spot contract is saying there is plenty of oil available at these prices, perhaps a sign that demand destruction has, in fact, occurred.

AIG becomes the other shoe

As we pointed out last Fall the credit crisis would eventually lead to the CDS reality TV show. Today, AIG reveals a small discrepancy in their “internal valuation models” regarding CDS:

AIG shares have dropped 11% today after the company said its credit derivatives portfolio lost $4.88 billion in market value in October and November — far greater than the company’s previous estimate of $1.15 billion in losses.

The company insures collateralized debt tied to subprime mortgages and other risky investments, but the positions they’ve taken in this market are hurting them now due to declines in valuation and other reasons.

“Although there is no immediate sign of defaults on these senior tranches, spreads are considerably wider and accounting for that means mark-to-market losses hit the balance sheet,” says Tim Backshall, chief credit derivatives strategist at Credit Derivatives Research in Walnut Creek, Calif.

My comments: This is the first of many “price discovery” stories unfolding on the derivative front. As I pointed out last year many of these auditing firms don’t want to be the next Arthur Anderson. Have we learned anything from the Enron era?

Is commercial real estate the next shoe to drop?

Recent performance of commercial mortgage backed securities indicate a similar path taken by the subprime asset-backed market earlier this year.

Commercial real estate is a full-blown bubble that feels very much at a bursting point,” said Christian Stracke, an analyst in London at CreditSights Inc., a fixed-income research firm. “There’s a fairly toxic mix of factors at work.”

Based on the latest derivatives which track the performance of commercial markets Markit Group says prices have doubled indicating one of the worst commercial real estate environments since the Great Depression. The seven-year rally in offices and retail properties ended in September when prices fell an average of 1.2 percent, according to Moody’s Investors Service. Banks worldwide are holding $54 billion of unsold commercial mortgages, according to data compiled by New York-based Citigroup Inc. that includes fixed and floating-rate debt.

Lenders are struggling to sell loans to investors after losses on debt backed by subprime mortgages to people with poor credit caused financial markets to seize up in July and August. Bonds with AAA ratings secured by properties ranging from the Sears Tower in Chicago to trailer parks in Delaware yield about 203 basis points more than similar maturity Treasuries, up from 92 basis points on Oct. 12, according to Morgan Stanley indexes.

Evidently the appetite for this type of paper has evaporated. So much for excess liquidity.

More than 75 have been withdrawn because banks aren’t lending, and that estimate is “probably conservative, because not all deals that blew up were well-publicized,” White said.

”The commercial real estate market is imploding,” said James Ortega, who manages $150 million at Saenz Hofmann Fund Advisory in Sao Paulo. Ortega has set trades to profit from a decline in property companies’ shares. “We’re about to experience a very significant correction.”

My comments:

  1. Over 80% of commercial mortgages are interest-only. Unlike the residential bubble most of the 2004-2006 vintages were non recourse loans, i.e. heads the borrower wins, tails the lender loses.
  2. After bingeing on cheap credit a la the Greenspan/Bernanke Fed from 2002-2007, lenders are paying the piper for lavishing funds on marginal homebuyers, corporate acquirers, and speculators in the financial markets, commodities and commercial real estate.
  3. The inevitable bust is well under way, with nearly all cylinders firing, and still in the early innings.

REITs taking it on the chin

As Bloomberg reported, Blackstone’s purchase of Sam Zell’s office REIT appears to have rung the bell for the commercial property bubble:

The 128-member Bloomberg REIT Index returned 78 percent with dividends in the two years prior to its Feb. 8 peak, the day before New York-based Blackstone Group LP bought Equity Office Properties Trust for $23 billion, or $39 billion including debt, the real estate industry’s biggest leveraged buyout.

Since then, the index has fallen 16.5 percent after dividends as commercial mortgage rates climbed as much as 2 percentage points above the 10-year Treasury note. The last time the REIT index declined more than 10 percent in total return was in 1998 when investors were diverting funds to high-flying Internet stocks.

REITs outside the U.S. also declined. The 40-company Tokyo Stock Exchange REIT Index, led by Nippon Building Fund Inc. and Japan Real Estate Investment Corp., is down 28 percent from its high last May. The 14-member Bloomberg Europe Real Estate Index, led by Unibail-Rodamco SA, is down 33 percent from its February peak.

Even red-hot markets like SF and NYC are beginning to cool:

The U.S. office vacancy rate increased to 9.8 percent at the end of September from 9.7 percent in the second quarter, and rents in Manhattan and San Francisco climbed at the slowest pace in more than a year in the third quarter, according to real estate brokers Cushman & Wakefield Inc. and Studley Inc. in New York and Chicago-based Grubb & Ellis Co.

And the prop from takeovers is being pulled away:

Takeovers fell 72 percent in the third quarter from the prior quarter, data compiled by Bloomberg show. While the pace of deals slowed, the value of U.S. REIT acquisitions totaled $59 billion in 2007, up from $7 billion in 2005, according to New York-based industry research firm Real Capital Analytics Inc.

This year’s transactions include the buyout of Chicago- based Equity Office; the $22.2 billion purchase of apartment REIT Archstone-Smith Trust of Englewood, Colorado, by Tishman Speyer Properties LP and Lehman Brothers Holdings Inc.; and Morgan Stanley’s $6.5 billion takeover of Crescent Real Estate Equities Co., the Fort Worth, Texas-based office, residential and resort REIT.

My comments:
  1. Interesting how Wall Street – Blackstone, Lehman, and Morgan Stanley – bought at the top. Shades of buying subprime lenders a year ago?
  2. If commercial real estate is going down the same path as residential, the banks are in serious trouble.

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