Do People Really Think Wall Street Guys are that Smart???

Reggie Middleton's picture

I really wonder what possesses people to believe these sales pitches,
hook, line and sinker... Seriously, what the hell was this guy
thinking??? From Bloomberg:

Dec. 17 (Bloomberg) -- For California Treasurer Bill Lockyer, the offer from Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. was too good to refuse.

If California were willing to forgo competitive bidding for a $4.5
billion bond offering, the banks promised more orders from individuals
and a lower bill to the taxpayers. The firms insisted that by
negotiating with them, the state would benefit from its special
relationship with the Wall Street troika and wind up with what two
underwriters called a salutary “buzz” to boost demand for the debt.

When the October offering failed to sell as planned, California was
forced to accept 8 percent less money than it needed and to pay as much
as $123 million more in interest than the banks said was sufficient for
the market. And the threesome made $12.4 million on the deal,
contributing to record bonuses in the securities industry a year after
getting a total of $80 billion in a federal bailout.

“Just because someone earns a big wad of money doesn’t mean that they can do what they say they can do,” said Marilyn Cohen,
who watched the sale unfold from Los Angeles as president of Envision
Capital Management, which oversees $250 million in bonds for
individuals. “And shame on the state if they were drinking that

The California sale helped send
the municipal-bond market to its worst month in a year. It ended a
rally that had pushed borrowing costs for cities and states to a
42-year low, as measured by the Bond Buyer’s index of 20-year general obligation bonds.

 Mr. Lockyer, the next time someone promises you something, get it in
writing, reviewed by competent counsel and independent financial
advisors. Be sure to have the vendors supply a capital reserve to back
up their promises. Most banks probably wouldn't do that, which should
tell you something in and of itself.

Then there is "Goldman Sachs Driving Trucker YRC Into Bankruptcy, Teamsters' Hoffa Says":

Dec. 17 (Bloomberg) -- International Brotherhood of Teamsters President James Hoffa said Goldman Sachs Group Inc. is creating derivatives trades that would benefit from the bankruptcy of YRC Worldwide Inc., the trucking company trying to avert failure with a debt exchange.

The most profitable securities firm in Wall Street history “is actively
soliciting bond trades for clients and underwriting credit-default
swaps to benefit from a failed exchange and resulting bankruptcy,”
Hoffa, the union leader, wrote in a letter dated yesterday to Goldman
Sachs Chief Executive Officer Lloyd Blankfein.

YRC, the biggest U.S. trucker by sales, has faced opposition to its
plan to exchange $536.8 million of notes for equity from bondholders
who also own derivatives that pay out in a default, according to people
familiar with the matter. The Teamsters’ pressure comes as Goldman
Sachs is under fire from other labor groups over its role in the
subprime mortgage crisis.

Investors holding
75 percent of YRC’s debt agreed to the exchange, below the 95 percent
required by bank lenders, the Overland Park, Kansas-based company said
yesterday in a statement. YRC, which has posted more than $1.7 billion
in losses
in the past five quarters, must complete the exchange offer as part of
agreements with its bank lenders, the Teamsters and multi-employer
pension funds, according to a Nov. 24 regulatory filing.

YRC, which extended its exchange offer to 11:59 p.m. today in New York,
joins companies including Yellow Pages publisher Idearc Inc. and
newsprint maker AbitibiBowater Inc. that met opposition to
restructuring outside of bankruptcy court from creditors that hedged
their holdings with credit-default swaps. Such creditors will typically
get paid whether a borrower defaults or not, and sometimes can make
more in a bankruptcy.

Maybe it's time to make CDS more like real insurance by limiting the
upside of the contract to the loss of the underlying asset or exposure
- exposure of which you would HAVE to have directly and exlicitly in order
to benefit from the contract. Oh, how I can imagine the bankers are
hating me nowSealed.
Hate me or not, does this not solve half of the CDS problems? The other
half will be solved by clearing them through an exchange and demanding
reserves for selling the CDS, you know, just like that boring old
insurance industry. You don't see non-CDS sporting insurers blowing up
like cherry bombs and running to the government for TARP funds and bank
holding status, do you???

For those who really want to speculate, short the bonds and stocks of
the companies and accept your market risk like real men (and women, of
course). More from this story:

Union Opposition

The Teamsters aren’t the only union taking on Goldman
Sachs. Workers United, which represents 150,000 people in the
U.S. and Canada, sent letters on Dec. 14 to 10 state attorneys
general that urged them to investigate the role played by
Goldman Sachs in the subprime mortgage market. The union noted
that Massachusetts won a $60 million settlement from the firm
in May when it undertook such a probe.

Andy Stern, president of the 2.1 million-member Service
Employees International Union
, has led a letter writing
campaign to Goldman Sachs board members demanding information
on the firm’s part in the mortgage crisis and whether the
companies they’ve invested in are cutting jobs.

‘Too Much at Stake’

Hoffa wrote that “the relatively small benefit Goldman
would derive for itself in fees or for clients from such a
position is unconscionable given the fact that the 50,000
livelihoods could be ruined by a bankruptcy filing,” according
to the letter obtained by Bloomberg News.

Michael DuVally, a spokesman for New York-based Goldman
Sachs, confirmed the bank received the letter.

“Goldman does not have a position in the company, nor are
we making markets in the company’s bonds or credit-default
swaps,” DuVally said in a telephone interview yesterday

Goldman Sachs sent e-mails to debt investors at around 11
a.m. yesterday, after the deadline for the exchange was
extended, offering pricing levels on YRC bonds and credit-
default swaps, according to people familiar with the matter.

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Mark Beck's picture

So let me get this straight:

The Big Bank types said give me a fee up front, and I will assure you, California, that we can sell your debt. This is like the Wimpy and the Hamburger,

I will gladly sell your debt on Tuesday for a fee (hamburger) today.

Mark Beck

I need more asshats's picture

What's that song by the Isley Brothers?

Forever MAC'in...

MAC - $32.00 12/17@2:05pm

Anonymous's picture

Nope, they are neither smart, cunning, innovative, nor tough.

What a bunch of overpriced-self-promoted spanks.

Yep, ill kick anyones ass that thinks they are "best and brightest" turds in the ass.

Even gypsies are smarter than "Spank Street" losers.

Money does not make you smart.

gabeh73's picture

we are on the road to 3rd world country status...the sooner the better. Let GS have it's way, carbon taxes, universal health care...bigger ponzi schemes, more will all come crashing down. Then we can discredit the Keynsians and Neo-cons and start building a sound civilization again.

Anonymous's picture

Sometimes I think we're not that smart...then I go to the grocery store. Most people are just not that bright. Or I watch Congressional hearings. I don't mean that in the way of the old "Congress is dumb" jokes grandpa used to tell. I mean, they are actually not at all intelligent.

Anonymous's picture

If you limit CDS to only investors with an interest in the underlying security, who will take the other side of the trade? By definition, each trade needs a buyer and a seller, and only one of those participants will have an interest in the underlying. No Dealers, no risk-takers, = No Market.

Anonymous's picture

And what public benefit does this market serve? Absolutely none. It is merely a way to manipulate the the real markets, the goal of that manipulationg being to steal everything possible. Go to hell.

Reggie Middleton's picture

The buyers are restricted to only those with underlying exposure. Anyone who can post a reserve (with counterparty, concentration and correlation risk properly taken into consideration) will be allowed to sell them. On the ask side, its the reserve that's the key. On the bid side, its the insurable interest that's the key.

Of course a market is there. If there wasn't, we wouldn't have a multi-trillion dollar global insurance industry.

credittrader's picture

Given that reasoning, should we not immediately call for a ban on Equity Puts? They provide insurance BUT can also be bought by those with uninsurable interests? CDS are margined and collateralized just like equity puts are and are theoretically capable of being abused to bring a stock down? The CDS as Insurance argument is a tough one to make and be consistent with the rest of the world...the trouble with CDS as insurance is its much higher propensity for broad-based contagion - you dont see life-insurers actuarial studies pricing for a genocide in the US or an outbreak of killer-monkey-flu - it is mostly idiosyncratic factors that drive risk credit land, the business cycle leads to major clustering of events over time - SO...CDS market should stay as it is, ensure they adequately capitalized for a thru the cycle event, margining and collateralization undertaken, and credit event settlement/clearing to improve confidence - hhmm - seems like that is exactly what they are doing...

Reggie Middleton's picture

"Given that reasoning, should we not immediately call for a ban on Equity Puts? They provide insurance BUT can also be bought by those with uninsurable interests?"

Puts are cleared through and guaranteed by an exchange. CDS are not, and probably will never be if the industry has its way. Did you see the spread TD quoted for the YRC CDS? What selfish dealer in their right mind would give up that type of free money for the saftey of the free world??? :-)

"you dont see life-insurers actuarial studies pricing for a genocide in the US or an outbreak of killer-monkey-flu"

No, but you don't see life insurers going belly up that often either. I also didn't reference life insurers, but the entire insurance industry.

"it is mostly idiosyncratic factors that drive risk credit land, the business cycle leads to major clustering of events over time"

P&C insurers have been insuring against business risk, credit risk, and business cycle reisk for hundreds of years - and they all managed to do so profitbably for centuries without CDS. You ever wonder why?

When did the specialty lines P&C guys start dropping like flies? When they were able to skirt the reserve requirements of state insurance departments by insuring through CDS in lieu of traditonal contracts.

"SO...CDS market should stay as it is, ensure they adequately capitalized for a thru the cycle event, margining and collateralization undertaken, and credit event settlement/clearing to improve confidence - hhmm - seems like that is exactly what they are doing..."

Right.... So says AIG, MBIA, FGIC, Ambac Insurance (the term insurances is used very loosely) and all of those other insurers who forgot what insurance was... See point directly above.

Hey, I'm definitely not against CDS, but implemened as is they definitely do seem like tools to help the unwise bury themselves, and in the process take quite a few others down with them. It's not as if this has not been demonstrated already.

Anonymous's picture

Well, then, what service do CDS provide to American industry and workers? I see none. That is, it seems to me that American industry and workers did just fine from 1776 all the way up till the deregulation of banking a dozen years ago. If you're doing fine, and then you add something (CDS) to your formula and it almost kills you, would it not be wise to delete that something (CDS) from your formula?

But I guess it didn't kill us (so far) this time, and maybe it won't kill us next time, and maybe it won't kill us the time after that, and why should we worry about something so far in the future? "Manana" is the new American way. For now, let's all pretend that we are getting rich gambling with these CDS. Pretending to be getting rich gambling is also the new American way.

credittrader's picture

Tnx Reggie - s'all good...recovery is here, asset valuations are up, just don't look behind the curtain your stuff, was just being a beeatch on CDS

Cognitive Dissonance's picture


Thank you for using life insurance as an example. The only reason the huge life insurance industry can exist is to insist that the person taking out the life insurance on someone else has an insurable interest in that person. Meaning the person has an incentive for the insured to stay alive. This interest is assumed if you are insuring a spouse or child or even yourself, say because of a mortgage that would still exist after your death which you want paid off. The insurance company must have a reasonable expectation that people won't kill each other for the life insurance money.

The opposite is happening in the business world these days when it's in the best interest of someone holding the CDS (but who has no other connection to the company and thus no incentive to see the company stay alive) would benefit if the company failed/died.

Anonymous's picture

I would encourage people to post on the WSJ or other mass media in order to get the message out about GS. The fact that GS can use an implicit tax payer guarantee to support driving 50,000 people out of a job is truly shocking and if allowed to continue will see the US turned into a third world country while China becomes the next world super-power....

Anonymous's picture

Lockyer is bought. His swiss bank account is overflowing and not on the "audit" list ;-)

Crime of the Century's picture

Good stuff as always, Reggie. I wonder if Lockyer is now going to publicly fantasize about Blankfein, Dimon & Pandit meeting Bubba in a California penitentiary?

Vultures pick bones - film at 11:00

orangedrinkandchips's picture

Reggie...first you write beautifully in itself. Then add the content and it's really a one-two knock-out.

This GS stuff is truly unreal. Yet it has been in our grill forever. It's just when the Govt. stops supporting the market and it goes down in earnest is when you see the real damage.

Another great writer did put it in persepective about GS THESE DAYS.....before it was Standard Oil in the 20s-40s until they broke them up. I cant remember the other big conglomerates that really irked the fuck out of the public but in every era there is one.

Standard Oil was the same as GS back then. Cartoons showing them as an Octopus with the 8 hands into every corner of the world. Mainly into politicians pockets. That is why J.D. Rockefeller handed out dimes and nickles everywhere he curb the mass hatred of Standard Oil.

We have had two massive crashes in this decade we are eshewing out right now. ONE MORE BIG DROP and retail is getting the fuck out for good. Baby boomers - after this next crash- will be the ones hurting with nothing for retirement. Fool me once, shame on you, fool me 3 times...Im a fucking idiot.

deadhead's picture


I watch the banks closely (i ain't as good as you) and over the past 2 months or so the bid under PNC (piece of shit) has been hysterical.  Today JPM initiates with an Overweight.  Funny, funny stuff.

PNC still owes about 7.5 billion in TARP and currently has a P/E somewhere in the mid 30s. 


gookempucky's picture

Reggie thanks for bringing up YRC info--here in KC it is hush hush sweep under rug yet low and behold another carcass for GS to feast upon. Those that believe Hoffa's teamsters will not retaliate have not hunted coyote at bait. There will be more than second degree burns. Sgt Doom said it best

Knives come unsheathed

excellent as usual Reggie

Anonymous's picture

I don't think so...

Anonymouse's picture

With the deal Goldman, Citi, and JPM were offering (non-competitive), CA should have insisted on an underwriting rather than a placement.  If the syndicate were not willing to underwrite, that would have shown the emptiness of their promise.


It's like Michael Scott said, "I've made a lot of empty promises, but this was by far the most generous".

credittrader's picture

ever tried shorting bonds? ;-)

I need more asshats's picture

"Hate me or not, does this not solve half of the CDS problems?"

Apparently, he doesn't touch the stuff. Frankly, it's those who do not use them who think there is `a problem` with default swaps.

/reggie rant
Oooh, Oooh! We need immediate regulation or everything will blow sky high. More government. I love Obama. Oooh, Oooh! Big government is the answer!
/end reggie rant