Is It Now Common Knowledge That Goldman’s Investment Advice Sucks???

It’s official, the mainstream media has turned on those “doing God’s work” and come to the side of BoomBustBlog.

I must admit, I was shocked when I first read this headline and saw
the accompanying cover. After all, Bloomberg was the organization that
published a story lavishing adulation upon a young Goldman analyst that
had a 38% win rate throughout the credit crisis and (faux) recovery. I
see those results as mediocre at best, and downright horrible from a
realistic perspective. To make matters even worse, I believe I ran
circles not only around that analyst, but the entire firm, see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
The next thing you know, this heavy nugget of truth is dropped, and all
I can say is…. Damn. Let’s excerpt some juicy tidbits from Blankfein Flunks Asset Management as Jim Clark Vows No More Goldman Sachs:

On Jan. 2, Jim Clark, a founder of
such technology icons as Netscape Communications Corp. and Silicon
Graphics Inc., was at home in Palm Beach, Florida, when he got an e-mail from an executive at Goldman Sachs Group Inc.’s
private wealth management division. Goldman was offering Clark a chance
to invest in the closely held social-networking company FacebookInc.
The deal — through a fund overseen by Goldman Sachs Asset Management —
was being offered to other Goldman investors at the same time, Bloomberg
Markets magazine reports in its March issue.

The firm would levy a 4 percent
placement fee on clients, plus a half percent “expense reserve” fee. It
would also require investors to surrender 5 percent of any profits,
known as “carried interest,” according to a Goldman Sachs document.

Clark turned Goldman down. In June,
2009, he had yanked most of the roughly $400 million he had invested
with the firm due to what he considered bad advice and poor performance,
including a big hit from GSAM’s Global Alpha hedge fund. This offer, he
says, just irked him further. A few months earlier, he had purchased a
stake in Facebook through another firm for a lower price, he says, and
without the onerous carried interest.

“I don’t think it’s reasonable,” Clark says. “It’s just another way for them to make money from their clients.”

Jim Clark is a smart man, and I don’t think he needs me to assure him
of that. For those who may not be as hip to fees and valuations, I
published The
Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug
The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our
Models which clearly demonstrated that this offering was
primarily for Goldman’s bonus pool integrity and basically a ripoff for
clients. In the following post, I declared “Here’s
A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores
The SEC & Peddles Private Shares To The Public Without Full
Disclosure“. As excerpted:

What type of revenues, profits and growth
justify a $50 billion valuation for a very young, private company
with sparse net cash flows? The type that are marketed by those who
are doing God’s work! now, let’s build on Mr. Howlett’s and Dignan’s
ideas the BoomBustBlog way. We shall begin with the $1.5 billion
dollar fund that Mr. Howlett alleges GS is creating around the
Facebook cash injection. Yesterday’s BoomBustBlog rticle, Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
clearly detailed why and how many of these private equity and client
funds routinely gut investors (we’re talking up to 92% in losses!) while
Goldman (and other GPs) still walk away with profits (see Even With Clawbacks, the House Always Wins in Private Equity Funds). I have posted the model that illustrates this bank wins, investor loses phenomenon as a live spreadsheet online for all paying BoomBustBlog subscribers
to use at will. It’s quite the comprehensive model and allows for the
user to run a myriad of their own assumptions using any inputs they
please. As subscribers will see, it is nearly impossible for Goldman to
lose money on their Facebook private fund, no matter how badly
Facebook shares perform. Please beware that is unlocked and fairly
complex, so please do not make any formulae changes to it for it
corrupts the experience for other users. Here is an excerpt for those
who do subscribe to our research and services, YET!

Even with the fund taking 45%+ losses
and the LP (limited partners, ex. Goldman’s clients) losing every last
single dime, Goldman easily pulls a 33% return. God forbid Facebook
share actually do well, Goldman’s numbers look… Well… Damn near
illegal! Almost as if they can pump up a price without any fundamental
justification or public disclosure of financials and still sell it
retail to the public. Of course, such a thing could and would never
occur – not with the every vigilant SEC to take our backs. Excuse me
while a cough a up a lung from laughter…

I feel your pain, Mr. Clark. Back to the Bloomberg article…

Clark isn’t the only investor unhappy
with Goldman Sachs Asset Management. GSAM (often pronounced gee-sam)
managed most of the $840 billion in assets Goldman oversaw in December, a
figure that dwarfs the money managed by brand-name firms such as Legg Mason Inc. and Franklin Resources Inc.
Yet the evidence shows that the behemoth inside the 141-year-old
investment bank is generating subpar returns for investors and is a
persistent headache for Chairman and Chief Executive Officer Lloyd Blankfein.

Again, go through Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? and review the evidence presented therein. Here is one quick example of many…

Reggie vs Goldman Sachs

Why didn’t Wall Street read my post on Lehman being a yellow lying lemon? See “Is Lehman really a lemming in disguise?”
and realize that this post was made on February 20th, when Goldman
Sachs had a recommended price of about $55 while this blog warned that
Lehman may be done for. This very similar to when I warned about the
potential demise of Bear Stearns in January, when the rest of the
Street had a “buy” at about $130 per share. See Is this the Breaking of the Bear?. ⁷ We all know how both of these stories ended. Please click the graph to enlarge to print quality size.

⁸

If you look into my original post on performance (see “Performance!“),
you can see when I recommended strong shorts on Morgan Stanley and
Goldman Sachs, both highly contrarian views at the beginning of the
year, and both returned way over 100% and in the case of Goldman, is
still pushing profits.

Back to the Bloomberg piece:

In March 2008, Peter Kraus, co-head
of the investment division that oversaw GSAM, resigned after incentive
fees — the 20 percent that hedge and other funds slice off profits —
plunged 81 percent in fiscal 2007 and Global Alpha lost 40 percent,
according to investors.

Co-head Ed Forst took over. He was
one of a cadre of Blankfein confidantes known as Lloyd’s Boys, according
to former employees. Forst, now 50, left after three months to take a
job at Harvard University, and investment management became the job of
Marc Spilker, a former co-head of U.S. equities, and Timothy O’Neill, a
former senior strategist.

They were the seventh and eighth Goldman investment heads in eight years.

…O’Neill and Spilker didn’t do much
better than Kraus, now 58. The division’s 2009 net revenue of $3.97
billion accounted for about 8.8 percent of Goldman’s total revenue and
was down 12.8 percent from fiscal 2008 as both management and incentive
fees declined.

A big chunk of GSAM’s assets are its separate accounts — pools of money invested for institutions and wealthy individuals. EVestment Alliance LLC,
an Atlanta-based research firm, tracks about $300 billion held in the
accounts and finds that Goldman trailed its peers in 73.8 percent of the
categories EVestment looked at during the five years ended on Sept. 30.
Chicago-based financial publisher Morningstar Inc.
tracks Goldman mutual funds and found that the 338 fund share classes
it looks at trailed the average return of their respective peers in
every broad category, including U.S. diversified equity, non- U.S. stock
and taxable bonds, over the 3-, 5- and 10-year periods ended on Dec.
31.  Yet investors have not only stuck with GSAM; they’ve added tens of
billions of dollars to its assets since 2000.

Goldman is able to attract so many billions of dollars on top
of such subpar performance because it is the best in the financial game
at marketing. I explained this in detail in “For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks”Tuesday, February 23rd, 2010 and Let’s Have a Conversation About Brand Names, Finance and Investing Thursday, November 19th, 2009. Anybody
who has any doubts that Goldman markets better than they advise their
clients best take the time to thoroughly review these two links!

Bloomberg goes on to elaborate:

Marketing Muscle’ … “Given the golden reputation of Goldman, it’s amazing,” says Anton Schutz,
founder of Rochester, New York-based Mendon Capital Advisors Corp., an
asset management firm that specializes in financial stocks and doesn’t
own Goldman Sachs shares. “What we thought was investing acumen has
turned out to be a tribute to the firm’s marketing muscle.”

The sales prowess of the Goldman
franchise lost some of its luster in the deal for Facebook, run by
26-year-old Mark Zuckerberg. Goldman had planned to sell as much as $1.5
billion of the Palo Alto-based company’s stock to clients through a
GSAM-affiliated fund known as a special-purpose vehicle.

Instead, Goldman on Jan. 17 halted its offering to U.S. investors due to the copious press the deal garnered.

“Goldman Sachs concluded that the
level of media attention might not be consistent with the proper
completion of a U.S. private placement under U.S. law,” the firm said.
Securities laws forbid investment firms from advertising such offerings
to the general public.

And I was forced to ponder, Did Blogs Exercise Enough Influence To Alter Goldman’s Facebook Plans Or Did The SEC Decide To Get Serious?

2012 Facebook IPO… Analyst Josh Bernoff of Forrester Research Inc.
in Cambridge, Massachusetts, expects a Facebook initial public offering
in 2012. Bundling Facebook shares into a GSAM special-purpose vehicle
might have helped Facebook avoid a U.S. Securities and Exchange
Commission requirement that any company with more than 499 investors
meet SEC financial reporting requirements. Such moves are a common
practice in the venture capital industry. Goldman and the funds it
manages, including GSAM hedge fund Goldman Sachs Investment Partners,
invested $450 million in Facebook before the bank began recruiting
investors. Digital Sky Technologies, a Russian investment firm, bought
$50 million. On Jan. 21, Facebook announced that Goldman had completed
an over-subscribed offering to its non-U.S. clients for a fund that
invested $1 billion in Facebook Class A shares.

The fact that Goldman’s offering was so oversubscribed is a testimony
to the market prowess of Goldman over the viability and prudence of its
investment advice. Those shares were priced for bonus pool expansion,
not investor performance. From “Facebook
Registers The WHOLE WORLD! Or At Least They Would Have To In Order To
Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of
Goldman HNW Clients Probably Wish They Read This Time Last Week!”and to wit:

To put the amount of optimism used in our analysis in perspective, there are 6,892,839,222 people in the world according to the US Census Bureau’s World Clock.
Facebook currently claims 9% of that world population. Take into
consideration a material percentage of that population are elderly or
very young, infirm, illiterate, poverty stricken or located in remote
rural areas and do not have iPhones and Androids, broadband connected
computers and Facebook accounts, and may not have these things for some
time, if ever. For the extremely optimistic benefit of the doubt, let’s
assume that all children down to the age of infancy, the infirm, the
illiterate and the Australian outback settlers all are frequent or
likely Facebook users. Even with this assumption, Facebook will have to
hit 65% of today’s total (as in the ENTIRE) world population (not
factoring in population growth/shrinkage) by c.2020 to justify anything
approaching a $50B valuation – and that’s assuming they captured 65% of
every single man, woman and child in the world along the way – not 65%
of those who have access to an internet connected computer.

Thus, it is highly unlikely one can
legitimately factor in the type of growth needed to justify the current
Goldman $50B valuation – particularly when you consider that
Facebook’s growth is already slowing!

More from Bloomberg:

Goldman is still dealing with the
fallout from its last run-in with the SEC. In April 2010, the commission
filed a civil suit accusing Goldman of fraud for selling a
mortgage-related security called Abacus 2007-AC1 to clients without
disclosing that bearish hedge fund Paulson & Co. helped pick some of
the securities linked to it — with the intention of selling the
security short… Goldman settled the suit in July, agreeing to pay $550
million, a record for a Wall Street firm, without admitting or denying
wrongdoing….

“Goldman repeatedly put its own
interests and profits ahead of the interests of its clients and our
communities,” said Senator Carl Levin, the Michigan Democrat who chaired
the subcommittee.

… Blankfein told the Levin hearing
that as a market maker Goldman had no obligation to tell clients about
Goldman’s own positions in the securities it was selling.

… Clients “are buying an exposure,” Blankfein told the committee. “The thing we are selling to them is supposed to give them the risk they want.”

Clark was particularly irked by the disclosures surrounding Abacus. He had met with Paulson & Co. founder John Paulson
in August, 2006 and been impressed by the hedge fund manager’s plans to
bet against the subprime-mortgage market. His Goldman brokers talked
him out of investing with Paulson, describing him as a bit player, Clark
says. Paulson generated a 590 percent return in his flagship credit
fund in 2007.

‘These Jerks’… “When it came out that
Paulson had the biggest payday in history, I got angry,” Clark says.
The fact that Goldman Sachs had such a close relationship with Paulson
incensed Clark further. “They just butter their own bread and charge
huge fees, these jerks,” Clark says.

…Sickly Mutual FundsAccording to
Morningstar, just 44.9 percent of Goldman’s U.S. diversified stock funds
managed to beat their peer average over the three years ended on Dec.
31. Just 34.7 percent of such funds beat their peer average over 5 years
and 28.3 percent over 10 years.

Only 11.5 percent of Goldman’s
foreign stock funds beat their peer average over 3 years, 6.7 percent
over 5 years and zero percent over 10 years. Similar stories play out in
both the taxable and municipal bond categories.

…“With just a few exceptions, these funds are chronic underperformers,” Morningstar mutual fund analyst Karin Anderson says.

… As for Goldman separate accounts,
EVestment looked at narrower categories — such as U.S. core high-quality
fixed income and Japan small-cap equity — and found Goldman Sachs
trailing more than two-thirds of its rivals over the 3-, 5- and 10-year
periods.

… Another possible culprit in GSAM’s
underperformance is expenses. Goldman’s diversified U.S. equity funds
sport an asset-weighted average expense ratio of 1.02 percent versus an
average of 0.79 percent for the U.S. diversified mutual fund universe as
a whole.

… Bove says GSAM may also be putting
an undue emphasis on marketing. “It could be that the focus of an asset
manager within a brokerage is more sales oriented than performance
oriented,” he says.

So why do investors keep their accounts at the New York firm? The prestige of the Goldman Sachs name is a big factor.

The Power of a Name

“A lot of wealthy clients like to
say, ‘I have my account at Goldman, blah, blah, blah,’” says Michelle
Clayman, founder of New Amsterdam Partners LLC, an investment manager
that owned 267,235 Goldman shares as of Sept. 30.

“I concluded that I don’t need these
hedge funds and I don’t want these Goldman Sachs managers,” he [Jim
Clark]  says. In 2009, Clark moved almost all of his money to Morgan
Stanley.

‘Nuff said!

More Reggie Middleton on Goldman Sachs:

1. The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again! Friday, January 14th, 2011
2. Reggie Middleton Takes The Challenge To Goldman Sach’s Apple Proclamation One Step Farther, Apple’s Closed System Risks Failure! Wednesday, December 15th, 2010
3. The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again! Friday, January 14th, 2011
4. Goldman’s
   $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct
   Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has
   Been More Right In The Past?
5. What Do Goldman Sachs and B.B. King Have in Common? The Thrill is Gone… Monday, August 9th, 2010

Comments

[Hook Line and S...]

Goldman is not so simple.

When the word gets out and actually penetrates the thick skulls of a relevant portion of the client population who, when and if, react in a statistically significant fashion, Goldman will casually start calling their market maker moves correctly for public consumption to engender a response extinction.

Back to square one and repeat.

Without rule of law, the manipulators outshine the sun.

Glory is Goldman's while they hail the self-induced simplicity and unwillingness of the supposedly intelligent investor class to imagine the depths of their sugar daddy's depravity.

[Thunder Dome]

It's common knowledge that the Ponzi is a fraud, also.  But nothing changes.

[Careless Whisper]

great analysis reggie.  this is why i read all your postings.

V

[Sudden Debt]

I think they are just great!!

They say "go long this..." and I short it

They say "short this..." and I buy calls :)

WORKS EVERY TIME!!

[linrom]

Who is Reggie Middleton? How much does ZH charge you for this self-adulation puff advertising?

[JW n FL]

by linrom
on Tue, 01/25/2011 - 10:42
#902637

Who is Reggie Middleton? How much does ZH charge you for this self-adulation puff advertising?

***************************************************************************

You are an insect, know your place in the world.

[homersimpson]

Well, if you don't like his analysis, ignore it and make a living off of your own website commentary. Besides - it's not bragging if you can back it up. Regardless of what you think, his analysis is dead on.

[I am a Man I am...]

Facebook is way overvalued at $50B right now x 10 probably, but what Reggie is saying what it will take to get there can't be accurate considering google is worth close to $200B.  Also, if you are following his advice on apple you will have your ass handed to you.  Isn't that right Reggie??

[JW n FL]

+++++++++++++++++++++++++++++++++++++++++++++++++++

[JW n FL]

Is It Now Common Knowledge That Goldman’s Investment Advice Sucks???

simply put... Yes... and your hard work and dilligence made it possible...

You are fantastic!

Thank You Reggie, JW

[Mercury]

I'm tempted to open up shop right next to them on West Street and hire the head marketing guy from Apple to go toe to toe!

Do you think you could get away with calling the firm Golden Slacks?  I f so you could borrow this stunt as a marketing idea too:

http://www.youtube.com/watch?v=AwzN4633mpI

Mr. Blankfein is not amused.

Can't Touch This.

[kiloton]

Son, if your ass is making a laughing sound you best see a doctor

[topcallingtroll]

Goldman has varying levels of advice, and quality is based on price. Their free advice given days or weeks after goldman and their higher paying clients have taken positions, is merely designed to help their higher paying high net worth clients. What a wonderful scam to quietly invest in a position, then publicly trumpet that position to the masses.

[topcallingtroll]

also goldman offerings are demand driven for fee income.   This is why some goldman investments don't make any sense. If there is sufficient demand for a specific investment goldman will provide the investment opportunity and make fees off of it and quietly short it.

[rocker]

Bloomberg reports this morning that earning's beats are a "rigged game."   Who would of thunk.  Yep!  "Rigged Game".

[Arch Duke Ferdinand]

""Bloomberg reports this morning that earning's beats are a "rigged game."  ""

Banksters should be made to jump off this tower...one at a time...

(if you are afraid of heights, don't watch this video...)

http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/01/banksters-should-be-made-to-jump-off.html

[Hephasteus]

Bahh. I just started cracking up reading the title. I'm not even going to read this shit till my ass stops giggling.

[Sarah Conner]

How is it that Global Alpha was so exposed to housing and the firm's own book wasn't really??? Any chance the firm's exposure was exited via Global Alpha, and if so, isn't there a story in that?