No One Can Say I Didn’t Warn Them About Goldman Sachs, Several Times…

Reggie Middleton's picture

Anyone who has followed my blog for any significant amount of time
knows that I have been bearish on Goldman ever since 2007. I have also
been quite the contrarian, not because I wanted to be different, but
because nearly everybody else was sucked up by the name branded, best of
breed mantra that Goldman marketed. So much so that professionals, who
really should have known better, read the marketing material before they
read the actual numbers. It is one thing to have John and Jane Doe fall
for the Goldman runs the world hence can do no wrong BS, but those who
are allegedly schooled in investment and analysis really should have
known better.

GS May 18 2010

GS july 150 puts, may 18 - 10

I warned readers and subscribers regarding Goldman valuation several
times starting in 2008 (reference Can
You Believe There Are Still Analysts Arguing How Undervalued Goldman
Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look
and A
Realistic View of Goldman Sachs and Thier Lastest Quarterly Results
I also want to make it clear that I thoroughly warned on ethics in
dealing with the customer (see
When the Patina Fades… The Rise and Fall of Goldman Sachs???
Goldman customers power the bonus pool through the losses they
accumulate both by doing business with Goldman and following Goldman’s
investment advice as Goldman takes the other side of the trade. This is
now only starting to come out in the mainstream media, although I harped
on this topic throughout 2008, see Blog
vs. Broker, whom do you trust!

And in Bloomberg: Goldman
Sachs Hands Clients Losses as Seven of Nine `Top’ Trade Ideas Flop

Now there’s a big surprise! Listen, everybody makes mistakes, and no
one is perfect (except for Goldman’s prop desk, but we’ll get to that
point shortly). I will never criticize anyone for having a bad month,
quarter or year. The thing is this is not about Goldman having a bad
month, day or year, it is about their taking advantage of their clients.
Excerpts from the afore-linked article:

May 19 (Bloomberg) — Goldman
Sachs Group Inc. racked up trading profits for itself every day last
quarter. Clients who followed the firm’s investment advice fared far

Seven of the investment bank’s nine
“recommended top trades for 2010” have been money losers for investors
who adopted the New York-based firm’s advice, according to data compiled
by Bloomberg from a Goldman Sachs research note sent yesterday. Clients
who used the tips lost 14 percent buying the Polish zloty versus the
Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8
percent trading the British pound against the New Zealand dollar.

…“This says that Goldman’s guys are
only human,” said Axel
, who oversees $500 million as president and chief investment
officer of Merk Investments LLC in Palo Alto, California. “No one is
always right. There are a lot of cross currents in this market.”

This my dear friend, is what we in the industry refer to in technical
parlance as BULLSHIT!!!! Goldman literally had a perfect trading quarter recently, with not
one day losing money. Yes, the guys at Goldman are only human, but they
are front running humans!

, a spokeswoman for Goldman Sachs, declined to comment.

Of course!

… Goldman Sachs’s trading profits
come from capturing bid- offer spreads when its traders act as
intermediaries for clients, Gary
, the firm’s president and chief operating officer, said last
week in New York. Proprietary trading isn’t a main driver of earnings,
he said.

The trade advice for customers is
distributed by Goldman Sachs’s global markets economic research group.
It tracks the performance of the trades in a daily research note. The
time period of the recommendations is 12 months.

The performance this year is a
reversal from 2009, when nine of Goldman Sachs’s 11 trading
recommendations made money. Investors saw a 22 percent return
owning Chinese stocks and a 12 percent gain buying the British pound
versus the dollar, according to a Goldman Sachs note on Dec. 1.

Goldman Sachs analysts made eight
trade recommendations for this year in December, including telling
clients to buy the British pound against the New Zealand dollar. On
April 1, Goldman Sachs added a ninth “top” trade, telling clients to buy
Chinese stocks listed in Hong Kong and predicting the Hang Seng
China Enterprises Index
would rise 19 percent to 15,000.

… Since then, the gauge has slid 9.4
percent to 11,426.18. The Shanghai Composite index has entered a bear
market, losing about 21 percent this year. That’s the third biggest
decline in the world after Greece and Cyprus. The decline accelerated
this month on concern Greece, Spain and Portugal will struggle to
finance their budget deficits and dismantle the euro. The Chinese stock
recommendation was made by a group led by Dominic
, a senior Goldman Sachs economist in New York. Wilson cited
inexpensive valuations and “robust” economic growth. He also said
investors have already factored in the risk of higher interest rates in

Wilson wasn’t available to comment
because he was out of the office traveling, according to an e-mail.

This should  show everyone what I have been decreeing for some time
now. At best, following the analysts and traders of the big banks will
simply deliver unlevered beta. These guys got their asses handed to them
in 2008 and early 2009, both the prop trading desks (from Reggie
Middleton vs Goldman Sachs, Round 2


… and the alleged “advice that was given to customers…


Exit Calls

“Emerging markets appear superior to
the developed world, but the market isn’t trading that relationship,”
said Eric
, who manages Van Eck Associates Corp.’s G-175 Strategies
emerging-market hedge fund. “It may be that some assets are mispriced,
but if the market starts to discount the end point of the game, such as
the collapse of the euro, it’s not that mispriced.”

Analysts at Goldman Sachs recommended
investors exit two trades in February, one involving interest-rate swap
rates in the U.K. and another advising clients to buy credit-default
swaps in Spain and sell similar contracts in Ireland. The first trade
had a potential loss of 24 basis points and the other had a return of
2.9 percent, according to figures issued in the appendix of the research
note in February.

Or you could have been following BoomBustBlog which had this European Sovereign thing down pat since early January
with option returns in the deep three digits and still
running strong!
I bet the Goldman trading desk had the same
positions that I did. Why didn’t they recommend them to their
clients???? Probably because they needed someone to sell their trades

std sep 17 10 put

… Goldman Sachs makes more money from
trading than any other Wall Street firm. In the first quarter, the
bank’s $7.39 billion in revenue
from trading fixed-income, currencies and commodities dwarfed the $5.52
billion made by its closest rival, Charlotte, North Carolina-based Bank of
America Corp.
In equities, Goldman Sachs’s $2.35 billion in revenue
was about 50 percent higher than its nearest competitor.

told investors at a May 11 conference in New York that the firm lost
money on only 11 days in the last 12 months. He said that uncanny streak
of success refutes suspicions that the bank depends on proprietary bets
with its own money. “It is implausible that a proprietary-driven
business model could be right 96 percent of the time,” Cohn said.
Instead, he said the “simple answer” is that the firm makes money by
capturing bid-offer spreads when acting as an intermediary for client
trades. Goldman Sachs executives have grappled before with questions
about whether they’re better at making money for the firm than
for their clients, according to an internal e-mail dated Sept. 26, 2007,
that was released by a U.S. Senate subcommittee last month.

Oh, now there goes a hard question if I ever hear one!!!

U.S. Lawsuit

The e-mail to Chief Executive Officer
from Peter Kraus, who was then co-head of the company’s
investment- management division, explains that individual investors,
unlike institutional clients, occasionally make “comments like ur good
at making money for urself but not us.”

The U.S. Securities and Exchange
Commission filed a lawsuit against Goldman on April 16 accusing the
company of misleading investors in a mortgage-linked asset. Goldman
denies those allegations and said it will fight the charges.

The NY Times has chimed in on this as well:

As the housing crisis mounted in
early 2007, Goldman
was busy selling risky, mortgage-related securities issued
by its longtime client, Washington
, a major bank based in Seattle.

Although Goldman had decided months
earlier that the mortgage market was headed for a fall, it continued to
sell the WaMu securities to investors. While Goldman put its
imprimatur on that offering, traders in the same Goldman unit were not
so sanguine about WaMu’s prospects: they were betting that the value of
WaMu’s stock and other securities would decline.

Goldman’s wager against its
customer’s stock — a position known as a “short” — was large enough
that it would have generated at least $10 million in profits if WaMu
collapsed, according
to documents recently released by Congress.
And by mid-May,
Goldman’s bet against other WaMu securities had made Goldman $2.5
million, the documents show.

WaMu eventually did collapse under
the weight of souring mortgage loans; federal regulators seized it in
September 2008, making it
the biggest bank failure in American history

Goldman’s bets against WaMu, wagers
that took place even as it helped WaMu feed a housing frenzy that
Goldman had already lost faith in, are examples of conflicting roles
that trouble its critics and some former clients. While Goldman has
legions of satisfied customers and maintains that it puts its clients
first, it also sometimes appears to work against the interests of those
same clients when opportunities to make trading profits off their
financial troubles arise.

WaMu is not the only Goldman client
the firm bet against as the mortgage disaster gained steam. Documents
released by the Senate Permanent Subcommittee on Investigations show
that Goldman’s mortgage unit also wagered against Bear
and Countrywide
, two longstanding clients of the firm. These documents
are only related to the mortgage unit and it is unknown what other bets
the rest of the firm made.

Goldman also bet against the American
International Group
, which insured Goldman’s mortgage bonds, and
National City, a Cleveland bank the firm had advised on a sale of a big
subprime mortgage lender to Merrill

Well, I was short WaMu and Countrywide in 2007 too (Yeah,
Countrywide is pretty bad, but it ain’t the only one at the subprime
party… Comparing Countrywide
), as well as Bear Stearns in January of
2008 (Is
this the Breaking of the Bear?
:) but I wasn’t trying to sell
WaMu/Countrywide/Bear Stearns shares or mortgages long to my subscribers
either. Come to think of it, I may even go to jail if  got caught doing
such a thing… Actually, I was doing the exact opposite, suggesting that
short was the way to go in direct contravention to the advice of
Goldman. Let’s reminisce. On December 8th of last year, I penned “Reggie
Middleton vs Goldman Sachs, Round 1″
wherein I challenged all to
take a critical look at exactly how much money was lost by Goldman
Sachs’ clients.

The mainstream media jumps when
Goldman’s sales and
marketing staff
analysts make a recommendation or prediction,
despite the fact that no one really bothers to look back to see how
profitable the GS sales
and marketing staff
analysts have been for their clients vs the
risk-adjusted profitability for their bonus pool shareholders. One example that I have
used in my previous posts was Lehman Brothers, who I became
increasingly bearish on in early 2008 (if you’re a regular reader,
please bear with this rehash):

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 above, 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!!!


Reggie Middleton vs Goldman Sachs, Round 2,
we rehash some
critical valuation aspects of Goldman which show that the company was
grossly overvalued from the get to.

In Reggie
Middleton Personally Congratulates Goldman, but Questions How Much
More Can Be Pulled Off,
I detail what will be the next big item in
the news regarding investment banks – and that is the scam that is
being perpetrated with REITs and commercial real estate. On that note,
up next is Morgan Stanley.

Subscribers can reference our valuation of Goldman via this link: GS 4Q09 Final Review and Updated Valuation GS 4Q09 Final Review and Updated Valuation 2010-02-01 03:04:55 528.52 Kb

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AnAnonymous's picture

If the guy does not self promote, one could wonder who will do the job for him.

RockyRacoon's picture

He who tooteth not his own horn findeth his horn untooted.  Ye horn needeth not be a tuba; verily, a picollo shall suffice.

mtguy's picture


Good job, but what I'll really be impressed with is if you take them down, like we'd all like to do. (I'm not being recorded, am I?)

Leo Kolivakis's picture

Anyone read Jeremy Siegel's article on why Goldman is the wrong target. PUKE! Academics have become guns for hire!

williambanzai7's picture

I am shocked at these truly spurious allegations...How could God's firm commit such transgressions?

Panafrican Funktron Robot's picture

Allow me to break it down for you simpletons complaining about the promotional tone of Reggie's posts:

1.  Reggie provides free content that has monetary value.

2.  Reggie gets free advertising in exchange for providing that free content.

It's really that simple.

RockyRacoon's picture

With the subtlety, however, of a sledge hammer.

Leo Kolivakis's picture

Steve Dorfman, a value investor from Thunderstorm Capital, was on Bloomberg radio yesterday saying he dipped his toe into Goldman (1% stake) as he sees the selloff as an opportunity to own a "jewel" in investment banking. He may be right, but I am not nibbling.

jal's picture


GS had feeder funds! ...

Gee! Is that where Bernie got his model for his ponzi?


JohnKing's picture

Thanks Reggie, never mind the haters, they remind me of a Monty Python script.."But I want to be a lion tamer..", they are just accountants in the borg.

Rick64's picture

Reggie excellent analysis. You have been proven right time after time. You deserve a pat on the back especially when the opinion contradicts the market and all its pundits.

The Alarmist's picture

Wow, I'm having a better year recommendation-wise than the Squid.  Now, where do I go to collect my mega-bonus?

doomandbloom's picture

did i see that right?? Gia Moron.?!

Goldman is mocking us...with a spokesperson like that....

Goods's picture

Oh Reggie you are so smart. Teach me how to be like you!@

dcb's picture


no need to keep telling the world how great you are. I'm telling you as a medical professional it shows pathology.

second point is depending on where you put in your short on goldman you have lost a lot of money on this trade the past year. so someone can have been right all along, but unless the trade is at the right time. ugh

you do great work, great analysis, but the self pats on the back all the time are making me not read your posts as often as I used too. hence it is a destructive behavior pattern.

Ripped Chunk's picture

dcb,  what kind of pathology does it indicate? I am interested.

Also, if you don't mind me asking 2 questions:

1. What is your opinion of the US health insurance industry?

2. Do you think that industry's long standing ant-trust exemption has pushed health care costs in the USA well above those of all other developed nations?

Please respond.

Also, don't feel bad about identifying yourself as a health care professional on this blog because as they say: "it's too late now".



Ripped Chunk's picture

Must have had a surgery scheduled?

winks's picture

dcb, I share your sentiment 100%. This guy Reggie is so afraid that we won't notice it is him that does the research he won't let it speak itself. As a result if you want to read his stuff, you have to endure his constant "look at me" references.  I gave up reading his blogs because of it.

snowball777's picture

You have to understand that it's part of the performance.

Reggie's the finance world's version of Smoove B from The Onion:,16670/

Hate the game, not the playa!

RockyRacoon's picture

Reggie is great.  He has the charts to prove it.  Would that I could produce such great graphics to prove my own superiority.  The fact that Reggie can create the artwork that I cannot depresses me.  There is nothing more pathetic than a depressed coon.

MsCreant's picture

Depressed coon pic is so cute!

What I am wondering is if you have been a bad Rocky.

The Alarmist's picture

No doubt that his charts and self-promotion are great. But for the lack of an Ivy-League education, Reggie would have been in-da-G(las)S-house rather than outside throwing stones at it.

anony's picture

If I were as right as you have been, I'd have woody all day long.

Well done.

RockyRacoon's picture

That's the best tool for 18 holes.

imaginalis's picture

Goldman Sachs - King of the Bungle