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
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
Merk, 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!
Moron, a spokeswoman for Goldman Sachs, declined to comment.
… Goldman Sachs’s trading profits
come from capturing bid- offer spreads when its traders act as
intermediaries for clients, Gary
Cohn, the firm’s president and chief operating officer, said last
week in New York. Proprietary trading isn’t a main driver of earnings,
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
Wilson, 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…
“Emerging markets appear superior to
the developed world, but the market isn’t trading that relationship,”
Fine, 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
… 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!!!
The e-mail to Chief Executive Officer
Blankfein 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:
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
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
Stearns and Countrywide
Financial, 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
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
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):
- See “Is
Lehman really a lemming in disguise?” (Thursday, 21 February 2008)
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!)
stock, rumors and anti-rumors that support the rumors Friday, 28
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 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.
Subscribers can reference our valuation of Goldman via this link: GS 4Q09 Final Review and Updated Valuation 2010-02-01 03:04:55 528.52 Kb