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Let's Have a Conversation About Brand Names, Finance and Investing
Yesterday, I commented on Goldman's CMBS offering through the government's leverage program known as TALF. I was very nice and diplomatic, yet despite such I still received what I would consider inappropriate feedback. Okay, let's take the politically correct gloves off - they never fit me anyway. This deal probably flew because Goldman Sachs underwrote it. Goldman thrives off of brand name value primarily, other than that nothing really sets them apart. Contrary to mainstream media inspired belief, they are not better than everybody else at everything. I posit, they are probably not better at anybody else at anything other than marketing and lobbying which allows them the perception of being better than everybody else and the protection from the government to get away with things other banks can't (or are afraid to try). I want to delve further into that CMBS deal I outlined yesterday (so be sure to read through this, particularly if you're with an insurance company), but before I do let me try to dispel the Goldman myth once and for all...
Goldman is a bank, just like everybody else. They hire the same people who went to the same schools, taught by the same teachers to use the same models to do the same things as the other big banks. When Goldman hires a banker with experience, where do you think they hire them from? When Goldman loses a banker, where do you think they lose them to?
Think about it:
- Financial shares slumped, their stock fell - just like everybody else.
- The market turned on big broker/dealers, they had to run for government protection - just like everybody else.
- The market recovered, their shares recovered - just like everybody else.
- Goldman pays the vast majority of its net revenue out as compensation, not dividends! I haven't checked, but I would wager that they probably paid more than their outstanding market cap as bonuses since going public. What does this mean? It means that you are much better off working at Goldman than you are as a client or as a shareholder. Keep that in mind as we review the CMBS offering from an anecdotal perspective later on in this post.
From Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street:
Their stock is fraught with risk that the sell side never bothers to analyze, which is why they are considered superstars when they have good quarters. Adjust for risk, and Goldman actually underperforms - see "Who is the Newest Riskiest Bank on the Street?" where I break it down in detail, showing Goldman as the leader in leverage, cost of capital and VaR as compared to the decrease in Risk Adjusted Return. I addressed similar points in the previous year in Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street.
Goldman Sachs Equity Guidance Would Have Made You a Fortune on Lehman!
I have outran their equity analysts and asset management arm on practically every stock I covered and I have a skeleton staff. Now, to be honest, I am devoid of the massive conflicts of interests that run through that company, but that is the point! To this day, we still have institutions that buy financial widgets because Goldman told them to, regardless of the fitness or viability of said widget.
For those with short term, or worse yet, media induced brand name fever, let's rehash "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008) and Is this the Breaking of the Bear?. Then peruse Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!), Lehman stock, rumors and anti-rumors that support the rumors Friday, 28 March 2008 and Funny CLO business at Lehman Friday, 04 April 2008
The esteemed Goldman Sachs did not agree with my thesis on Lehman. Reference the following graph, and click it if you need to enlarge. Notice the tone, and ultimately the outright indication of a fall in the posts from February through April 2008, and cross reference with the rather rosy and optimistic guidance from the esteemed Goldman (Sachs) boys during the same time period, then... Oh yeah, Lehman filed for bankruptcy!!!
Does anybody think that Lehman was a "one off" occurrence? Well download Blog vs. Broker Analysis - supplementary material and you will be able to track the performance of all of the big banks and broker recommendations for the year 2008 for the companies that I covered on my blog. I can save you the time it takes to read it and just tell you that it ain't all its cracked up to be. Again, I inquire as to why these companies' clients do not wise up?
Now, back to that CMBS Offering
Pray tell, educate me as to where Goldman's clients actually think they get all of their money from? Let's take that latest CMBS offering that they hawked Monday. In Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off, I blogged about the 4% (unlevered yield) Goldman was able to get for their underwriting clients (Developers Diversified Realty, a REIT that came up in another blog post of interest - "Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!"). This was actually a big win for DDR for they got access to 4% money at a time when commercial real estate is in the crapper. It was also a big win for Goldman, for they moved a big CRE/CMBS deal through a government leverage plan when such deals really haven't moved much. Was it a good deal for the institutions that Goldman peddled the securities to, though? Yet, I query further, who does Goldman really work for? To whom do they have a fiduciary duty? Is that duty to their bankers, traders, and analysts to get the biggest fees, commissions, and spreads possible? Quite possibly, since they are on track to announce record bonuses. I don't see clients putting out press releases touting record returns from dealing with Goldman! Is that duty to the share holder? Well, it doesn't look like it from a risk adjusted return perspective (see "Who is the Newest Riskiest Bank on the Street?"). Is that duty to DDR to get them the lowest rate possible? Quite possibly, for 4% is pretty damn good, and they lowered the rate due to being oversubscribed (high demand). But wait a minute, If their fiduciary duty is to DDR (or themselves), then they can't have a fiduciary duty to the insurance companies and asset managers who they are pitching these CMBS to, can they? Buyers should want a higher yield to compensate for the risk, no? The Wall Street Journal reported that this was a low risk deal. Really!!!??? Let's look deeper into that assertion from an anecdotal perspective, shall we?
In the WSJ.com article, it was stated the collateral (the mall properties) was conservative because they were occupied by discount chains where shoppers flock during hard times. Then they go on to contradict themselves by saying that occupancy is in a material downtrend:
The deal reflects the high bar the Fed has set for loans eligible for TALF financing. The 28 shopping centers in 19 states securing the bonds have stable cash flow because they often are occupied by discount retailers that tend to attract business even in a recession. For instance, one of the properties is Hamilton Marketplace, near Princeton, N.J., a 957,000-square-foot property whose tenants include Wal-Mart Stores, Lowe's, BJ's Wholesale Club and supermarket ShopRite. According to Fitch Ratings, the property has maintained an average occupancy of 96.7% since 2006 and is 95.1% occupied.
Isn't 95.1% about 151 basis points less than 96.7%? Will this downtrend continue? Will it intensify? Do you see commercial real estate getting better in the next 5 years or worse? If you wanted buyers to perceive safety, you would quote an UPTREND in occupancy, would you not?
"It's a great execution for the borrower," says Scott Simon, managing director and head of mortgage- and asset-backed securities portfolio manager at Pimco, a leading bond house. "If other real-estate investors can borrow money at that rate, it would be a real game changer for the commercial real-estate market that has been so devoid of financing."
Mr. Simon declined to comment on whether Pimco would buy any of the Diversified Realty bonds. Bids for the securities are expected to come from many mutual funds, insurance companies and other institutional investors. Firms that are considering the deal include Babson Capital Management, the investment-management unit of Massachusetts Mutual Life Insurance Co. and Principal Financial Group, according to people familiar with the matter. Babson Capital declined to comment. A representative at Principal Financial didn't respond to requests for comment.
Institutional investors are attracted to the deal because it is viewed as a low-risk investment with relatively healthy returns when compared with five-year Treasurys, which are yielding about 2%.
Well, Treasurys don't have rollover issues (at least not yet), and CMBS do. There is usually a reason for higher yield, and that is often higher risk, actual and/or perceived. I will walk through why these CMBS buyers are getting twice the yield of treasuries in a moment, as well as explaining how they are so woefully under-compensated as to be tantamount to a crime (or is it a break in fiduciary duty?)
Investors buying the triple-A slice of the deal, totaling $323.5 million, can get an unleveraged return of about 4%, according to price information distributed to possible investors by Goldman late Friday and reviewed by The Wall Street Journal. If they finance their purchases with TALF funding, their returns can rise to about 6%.
I went into Fitch and its AAA ratings in "Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off". Anyone who believes Fitch's ratings actually mean anything should click that link scroll down to around the middle, then read tightly from a secure device. If you are carrying a pda, iphone, or notebook you may drop it from uncontrollable laughter!
The $400 million loan represents about half of the value of the underlying properties. By comparison, in the years before the financial crisis erupted in 2007, banks were willing to lend more than 70% of a property's value because the debt could be easily sold as CMBS. Even under a "stress" scenario, according to Fitch, the Developers Diversified properties would produce a cash flow of about 1.44 times what is required to service the debt. Back when credit was easy, the ratio for stress scenarios would even fall below one for many CMBS offerings.
This is the kicker, here. Loans can't get rolled over at 70%, 65% or even 60% LTV these days, and things are getting worse, not better. See Fitch's warning (that's right, the same guys that gave those very same tranches above AAA ratings) warning that Insurers Face $23 Billion Loss on Commercial Property.
The credit crisis has driven $138 billion worth of U.S. commercial properties into default, foreclosure or debt restructuring, according to New York-based Real Capital Analytics Inc. Commercial real estate prices have plunged almost 41 percent since October 2007, the Moody’s/REAL Commercial Property Price Indices show.
So, let's do a little simple math here. Goldman's salesman talks a good game (as the pimp) to the sweet little investor looking for yield (as the little girl just getting off the bus from a small town in the midwest looking for fame and stardom in the big city). They say, hey, I'll write these CMBS for this conservative CRE portfolio at only 50LTV. What could go wrong? This happens in October of 2007. In November of 2009, you find that your collateral is now around 89LTV (due to the 41 percent drop up to October in a rapidly decreasing asset value environment) and still dropping fast, with the LTV rapidly approaching 100, wherein you start taking guaranteed haircuts on your Fitch AAA rated (you can just imagine me cracking up in the background) tranched CMBS. Boy, those 400 measly basis points don't look like much compensation now, does it? You also see why Treasuries are yielding 2%, don't you? You are at risk of losing significant principal, for according to the WSJ article, the only deals getting done are at 50 LTV. Who the hell is going to cover that 390 point spread? You call your Goldman rep for help, but you can't reach him because he is in the Mediterranean with those TWO (that's right, not one but two) bad ass Italian chicks 
testing out his new Azimut 86S he just bought in a recession with YOUR commission dollars and the vig (oops, I mean spread) from your deal which is currently underwater! 
If this deal would have went down this time, next year would GS have been in breach of their fiduciary duties: Dodd bill would make reps fiduciaries
A better question I know all of you are pondering, will this actually happen to the DDR deal? Well, let's bring back the chart of the week for the Japanese perspective from the "Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?" post. 
You tell me if these CMBS aren't worth more than 4 points?
Now, don't get me wrong. I have nothing against Goldman Sachs. It does rather irk me when everybody, and I mean everybody truly believes that their sh1t doesn't stink, though. I actually have to bring my kids to school, so I will finish this post up with what it means to insurance companies who buy things such as this DDR CMBS deal from Goldman later on today or tomorrow. I'll include tidbits of what my subscribers know about the insurance industry, and I will also release some sneak peaks of the upcoming REIT research to subscribers as well.
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Good post! It's nice to read it. You are working hard on this. And please update the post! job |advertising|discount mattresses
I didn't handle this bear rally well either. I'm Austrian school and didn't believe they'd be able to push it up so far. I though maybe a 10 to 20 rally at most, then it would head back down. I covered no shorts in March unfortunately. I'm adding shorts now.
I shorted those fuckers in 2007 at $175. Shalom ran it up to $250 after. I covered at even-$175. That fucker dropped down to $50. Oh Well. One my favorite quotes of all time was by the legendary Jimmy Rogers. That stupid bitch on Bloomberg, Carol Masser was rubbing in how he was wrong for shorting Fannie Mae. She said that short wasn't working out too well for him. He said, "I wish it would keep going up so I can short some more." That's fucking classic. Don't let these stupid fucks criticizing you bother you. They're fucking plants. You know you are onto something when fucks feel so threatened that they have their workers trolling bear sites spouting propaganda. Stupid fucking idiots.
Trust me, anyone who couldn't understand what is behind this post would not be able to get to me - those who insult are peons, at best. My results for the years in question are impeccable and if anyone truly had any doubts it is very easy to check them - yet I am very, very disappointed at how I handled this engineered bear rally and I am the first to admit it. It looks as if fundamentals are returning to the forefront, and on a global scale though. That's when I do my best work.
As for Goldman, it was one of the biggest homeruns of the year. I was going to short at $225, but I let my little circle of associates talk me out of what was a gut intutition - they were blinded by the brand. I had my team dig in to confirm my suspicions, but we didn't finish until it was in the $190s where I dove in heavily. I covered at $135 $120 and $75 (or there abouts), and have been nitpicking at it ever since on its rise back up. I doubt very serously if it will remain elevated at this levels. Those who worship Goldman are not following the numbers. See below:
The Goldman trade pushed my sortino, J's alpha and sharpe rations through the roof, and I believe I was the only one publicly screaming a Short on Goldman at the time. That time may very well be returning, I just haven't had the time to revisit them as yet.
I also note that they are short the very same banks that I am. They must subscribe :-)
"Trust me, anyone who couldn't understand what is behind this post would not be able to get to me - those who insult are peons, at best."
That is actually the point. We can't get you because you don't know how to communicate. You could be the best researcher/trader in the world, yet I have no idea what you are saying.
Its because you haven't either read enough or written enough. Regardless, watch who you are calling peons.
You can't fool all the people all the time, and fooling people is your game.
Shame on ZeroHedge
In residential RE when a deal is rewrote now the value is based off of the current appraised value. Did not the underwriter have the property values reappraised or even valued on a current cash flow basis?
+1 Thank you, Reggie.
......Say Wha? I understand the Italian chicks on the boat though. Say if I did understand it all would it help my trading like buy SRS. Hope it helps your guys trading and makes you enough $ to procure those I-tal-yen chikitas.
Im buying SRS good luck to you studs...er I mean studies.
Excellent Analysis Reggie.
One of your best was The empty condo photo show Nothing like a little picture of reality to make people see what's behind the statistics they throw around.
Or
The lies they are throwing around.
Green shart, why insult my math? Can't we all make mistakes? Apparently you made one since you are calculating LTV of a property in late November using numbers ending in October while depreciaqtion is increasing. Are you assuming that the property depreciation somehow ended last month or you are just anxious to point out that I was off by a couple of points, even though I was probably not? and if I was, would it be worth commenting on?
As for extend and pretend, that is not the same as rolling the debt. Extending the terms is simply ignoring the creeping solvency issues. if the debt is rolled market value losses must be recognized.
Carry on, Reggie. Nitpicking by readers does not invalidate your entire post!
"Only the mediocre are always at their best."
-Jean Giraudoux
Hell yeah! +10
The graph of GS vs. the other IB's alone makes your case. It's all the same trade, just pick your beta!
What case was that again?
Was it this?
"I have outran [Goldman Sach's] equity analysts and asset management arm and I have a skeleton staff."
My laughter is outranning my lungs currently.
this is true, "pretend and extend" DOES NOT = rolling over debt. banks REFUSE to recognize cre losses.
in a lot of cases in SoCal, foreclosed cre properties owned by banks are taken off the market (100% vacant) and are literally just collecting dust.
Banks are rolling over loans so they dont have to book a loss, they are hoping that someone with 40% "equity" will be able to come up with an alternative way of financing so the bank can continue to reduce CRE exposure while not having to recognize a loss. Remember, a bank doesn't want to roll any CRE right now.
So, let's do a little simple math here. Goldman's salesman talks a good game (as the pimp) to the sweet little investor looking for yield (as the little girl just getting off the bus from a small town in the midwest looking for fame and stardom in the big city). They say, hey, I'll write these CMBS for this conservative CRE portfolio at only 50LTV. What could go wrong? This happens in October of 2007. In November of 2009, you find that your collateral is now 89LTV (due to the 41 percent drop up to October) and still dropping fast, with the LTV rapidly approaching 100
You need help with the simple math. Original LTV is 50, i.e. 50 loan divided by 100 value. Value drops 41%. New value is 59. Now LTV is 50/59, which is 84.75%, not 89%.
Loans can't get rolled over at 70%, 65% or even 60% LTV these days
Could somebody in CRE comment on that assertion? It seems ridiculous to me. Banks, now with encouragement from their regulators, are using extend and pretend to roll over CRE loans at LTVs of 100% and higher without writing down the loans provided the borrower can make interest payments. I would think banks would be delighted to roll over CRE loans at 60% LTV.
Say what you are going to say, say it, then repeat in summary.
WTF is this post about? Why should I invest ten minutes of my time to read it?
Ironic that you posted that.
Normally, that sentence starts with an "It's" and the sentence you wrote is just as, or more confusing than Reggie Middleton's third grade essay about whatever, with graphics included illustrating whatever.
In turn, it's really ironic that you express yourself like that.
However, I can understand that come to Reggie's defense. You both can't express yourself clearly.
Which gets to the next point: I can understand your idiocy posting as a guest, but Reggie Middleton as a contributor?
Where is the quality control? Put yourselves up for sale ZeroHedge, let someone else manage for value creation.
I can understand your idiocy posting as a guest, but Reggie Middleton as a contributor?
Where is the quality control?
Amen. His posts are silly, rambling, incoherent, link filled self promoting infomercials.