Category: Goldman Sachs

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.

Goldman’s secret sauce?

The October 5 issue of Grant’s Interest Rate Observer had this interesting tidbit about Goldman Sachs, et al.:

How is it, Jim Chanos had asked, that the big broker-dealers can show consistently high returns on equity when their own star alumni, once transplanted at hedge funds, so often struggle to earn a half or a third of what their alma maters manage to produce, “no matter how leveraged they are or what bets they have on?”

There seems to be a remarkable difference between the public and private sides of Goldman Sachs. Very bright people work in both, yet the results of the former are mediocre while the latter are stellar, bordering on statistically improbable. Is it possible that their secret sauce is friends in high places and an opacity that allows them to trade on inside information? And does the SEC enforcement of insider trading laws for the rest of us give them a further unfair advantage?

If our hypothesis is correct, Goldman’s private investment/trading strategy amounts to “don’t fight the Fed” with the advantage of knowing the Fed’s next move(s). Such a strategy worked to maximum benefit in August and September. It will become less effective as the credit drug wears off. In fact, during a bursting bubble (a likely scenario) the best strategy is “fight the Fed.” In that event, Goldman’s goose would be cooked, regardless of how many friends it has in high places. Echoes of Enron?

Were friends of the Fed tipped off?

According to an article on Bloomberg today, a phone call from none other than Robert Rubin to Ben Bernanke in early August set in motion a series of private sector conversations that culminated in the surprise discount rate cut on August 17:

The Federal Reserve’s Aug. 7 decision to keep interest rates unchanged set off a chain of high-level discussions with Wall Street executives, money managers and cabinet officials that culminated in Chairman Ben S. Bernanke’s public about-face 10 days later, according to records of his schedule.

Starting with a phone call from former Treasury Secretary Robert Rubin the day after the August rate meeting, Bernanke’s appointments included Lewis Ranieri, founder of Hyperion Capital Management Inc., and Raymond Dalio, president of Bridgewater Associates.

Of course, Bernanke also consulted with Hank Paulson:

Bernanke was also in frequent contact with Treasury Secretary Henry Paulson, who said in an interview last month that he meets the chairman regularly.

Hmmmm. Let’s establish a time line here, keeping in mind Rubin and Paulson are ex-Goldman Sachs CEOs in direct communication with the head of the Fed…

Aug. 7 – The Fed stands firm, keeping rates unchanged.

Aug. 8 – Rubin calls Bernanke.

Aug. 9 – Bernanke calls some Wall Street bigwigs including Ray Dalio at Bridgewater Associates, the 4th largest U.S. hedge fund with $32 billion under management (Dalio is personally worth $4.0 billion according to latest Forbes 400). The WSJ reports, “the Fed twice entered the market today to pump a total of about $24 billion of liquidity into the system, more than its typical daily open-market activities.”

Aug. 10 – A Goldman Sachs “quant” hedge fund, Global Equity Opportunities, suffers a brutal week, losing about 28% of its value to $3.6 billion. Its North American Equity Opportunities fund and Goldman’s flagship, Global Alpha, are also taking significant losses.

Aug. 13 – Goldman Sachs injects $2.0 billion into its Global Equity Opportunities fund. The company is joined by a group of big-name investors, including AIG’s Hank Greenberg and Eli Broad, who pony up $1 billion. (Greenberg, 82, is worth $2.8 billion; Broad, 74, is worth $7.0 billion.) Goldman reportedly cuts its fees to entice investors.

Aug. 16 – In a wild day, the Dow rallies back to unchanged in the final hour to 12,846 after being down nearly 400 points intraday.

Aug. 17 – Before the market opens, the Fed drops the discount rate by 0.50% to 5.75%, timed on an option expiration Friday for maximum bullish effect. The Dow rallies 233 points to 13,079. Global Equity Opportunities rises 12% for the week.

Aug. 31 – Global Alpha loses 22.5% in August, its worst month ever. Year-to-date, the fund has lost a third of its value. According to Bloomberg, “Investors last month notified… Goldman, the most profitable securities firm, that they plan to withdraw $1.6 billion, or almost a fifth of the fund’s assets as of July 31… Global Alpha will have to return 80 percent before the managers can resume collecting 20 percent of investment profits from clients who were in the fund at the beginning of last year.” Global Equity Opportunities finishes the month down 23%.

Sep. 14 – Global Equity Opportunities is reportedly down 1.9% so far for the month. Global Alpha is down 2.8% (and off 46% from its March 2006 peak). “People aren’t going to keep suffering losses,” said Brett Barth, a partner at New York-based BBR Partners, which invests in hedge funds. “These funds are supposed to do well with risk management. Something has gone badly awry.”

Sep. 18 – The Fed surprises the market with 0.50% cuts in both the fed funds and discount rates. The Dow rockets 336 points, its best day in 5 years, to 13,739.

Sep. 20 – Goldman reports much better than expected 3rd quarter results. Trading and principal investments revenue was $7.6 billion, up 21% from the 2nd quarter and up 73% from a year earlier. “The numbers are great,” Glenn Schorr, an analyst at UBS AG in New York, wrote in a note to investors today. The earnings demonstrate Goldman’s “ability to not only navigate choppy waters, but make a ton of money doing so,” he said.

Oct. 3 – Goldman Sachs stock hits an intraday high of 230.63, up 46% from its mid-August lows and within 2% of its all-time high.

It is no secret that Goldman Sachs has plenty of friends in high places. It is no secret that the company, as well as the rest of Wall Street, was on the ropes in August. In mid-August, politically-connected Hank Greenberg wrote a big check and a week later he was 12% in the black. By the end of August, the firm reported its second best trading results ever. All along, those friends seemed to be doing everything in their power to rescue them.

Is it a stretch to imagine this is more than mere coincidence? Was Goldman and some of its cronies privy to what is essentially inside information? Where is the outrage?

Lew Rockwell is right: politics – especially when applied to finance – is a rich man’s game.

Goldman Sachs analyzed…

by Shenendoah Capital.

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