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Reggie Middleton vs Goldman Sachs, Round 1
- AIG
- American International Group
- Asset-Backed Securities
- Bear Stearns
- Collateralized Loan Obligations
- Commercial Real Estate
- CRE
- CRE
- Deutsche Bank
- ETC
- Goldman Sachs
- goldman sachs
- Lehman
- Lehman Brothers
- Main Street
- Merrill
- Monkey Business
- Mortgage Backed Securities
- Real estate
- Reality
- Reggie Middleton
- Regional Banks
- REITs
- Risk Management
- Stress Test
- Unemployment
This is the opinion piece that I promised on Goldman Sachs research and
product sales. I want it to be clear that I have absolutely nothing
against Goldman Sachs, and if I worked there I would want $19 billion
of bonuses too, despite the fact that I just got bailed out by the
taxpayer to the tune of over $50 billion and still have middle class
taxpayer funded government subsidies intact. The fact of the matter is
that I don't work for Goldman Sachs, and the reverence that they
receive is illogical and borderline sickening, not to mention having
nothing to do with the reality of the situation.
Note: I am typing this post at 3:30 in the morning, so there may be
some typos and guffaws in the text, which I will try to catch and
demarcate with a strikethough.
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)
- 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 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!!!
Does anybody think that Lehman was a "one off" occurrence? Or for
that matter does anyone believe that only Goldman is guilty of a lack
of actual performance for their clients vs. their bonus pool???
In January of 2008, who among the Wall Street bank brand name crowd
had a failure warning or even a sell call on Bear Stearns? Lord knows
one was definitely called for, see Is this the Breaking of the Bear?. We can go on theme-wise with:
- regional banks (As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades).
- commercial real estate (The Commercial Real Estate Crash Cometh, and I know who is leading the way!),
- the monoline insurers (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton -11/13/2007), Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion in Equity 11/29/2007), etc. I can go on for quite a while, but hopefully you see a trend here.
As a matter of fact, many of these failed and failing companies
actually managed to sell securities and raise capital at some of the
worst time for any potential investor. Who do you think provided the
optimistic research to lay the groundwork for said sales? More to the
point, who do you think actually facilitated the sales? And the ass
kicker question, "How did the buyer of said securities fare?" Looking
back at two egregious examples:
- MBIA, who I warned about very early one, and even after my
warnings and additional evidence sprouting from all over the place (see
MBIA: A Low-Down Dirty Shame, - Is MBIA About to Pull the Wool Over the Market's Eyes? - As was warned in my previous monoline posts... ), MBIA was still able to float a debt offering to institutions who really, really, really should have known better. See After Reading the Prospectus and Reviewing Potential Losses, Would You Buy These Notes? I dare anyone to investigate how well those notes turned out. -
How about GGP and their secondary offerings? Although GGP Couldn't Afford its Dividend, they were able to have the Wall Street marketing wizards to enable a Press release announcing new equity financing
- something that I didn't explicitly model in my own analysis (because
I either didn't think anyone would be stupid enough to go for it or I
probably severely underestimated the marketing prowess of the Wall
Street machine - see sidebar below), but after reviewing information
without the benefit of official documentation, there were no surprise nonetheless and my blog readers chimed in with their expertise and opinions...... For those who don't follow REITs, GGP filed for bankruptcy some months ago so you see how well that secondary did.
Well, the Wall Street Marketing Machine AKA "sell side research" is at
it again. Just as I turn bearish on CRE for the second time (see Re: Commerical Real Estate and REITs - It's About That Time, again...), check out the "pump and dump job" from Merrill: Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!. I received emails about DDR's predicament (Diversified Development Realty Email of Interest), which makes sense, because Goldman Sachs is pushing CMBS secured by this company's malls (Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), which of course had a AAA tranche (see more on this Goldman phenomena below). What a coincidence! If you think that is a
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coincidence, just as pressure starts to turn up on in the CRE space
with a bad macro outlook and an even worse fundamental outlook, Goldman
upgrades the entire sector and issues a buy on Taubman (see my take. The Taubman Properties Research is Now Available).
Anyone want to bet that Goldman won't help these REITs trade bad debt
for more bad debt or bad equities??? Do you think they will have the gall, nerve, ability to push AAA financing for Macerich (A Granular Look Into a $6 Billion REIT: Is This the Next GGP?)?
Reference "Blog vs. Broker, whom do you trust!"
and
you will be able to track the performance of all of the big banks
and broker recommendations for much of the year 2008 for the companies
that I
covered on my blog. Since the concept of sell is rather remote to any
big broker whose trading desk is not net short a particular position,
it would be safe to assume that if the market turns the broker's
recommendations will also turn in a similarly abysmal year as well.
Just to be clear, this is not about ability, or who is the smartest. It
is about marketing and conflicts of interest. Brokers do not charge for
their research. Thus it should be obvious to anyone with even the
slightest modicum of business savvy that the sunk costs that is freely
disseminated research is most likely a loss leader (with the losses
being born by the consumers of said research) otherwise known as the
marketing arm for underwriting, sales and trading.
The blind following of Wall Street marketing research, and the abject worshipping of Goldman marketing, inventory dumping, sales
research allows them to rake billions of dollars off of their clients
backs, yet clients still come back for more pain. A fascinating,
Pavlov's dog's/Stockholm Syndrome style phenomena. Have you, as a
Goldman client, performed as well as their employees receiving $19
billion in bonuses? Don't get me wrong. I'm not hating Goldman, but now
they are actually raping raking billions of dollars
off of the tax payers backs as well. I do not do business with them,
hence I do not want get my back raked - but it appears that as a US
taxpayer I have no choice. A company that nearly collapsed a year ago,
receives mysteriously generous government assistance (AIG full payout
during its near collapse as an insolvent company) with the help of
highly ranked government officials (many of which are ex-Goldman
employees) and then pays out record bonuses on top of so many tens of
billions of dollars of taxpayer aid with taxpayers facing high
unemployment and sparse credit is not necessarily a company that should
be looked upon as a scion of Wall Street. There is no operational
excellence here. The only reason such an aura exists is because main
street and Wall Street clients have an amazingly short memory, as I
will demonstrate in the paragraphs below. This goes for the big Wall
Street banks in general, and Goldman in particular.
As stated above, Goldman is now underwriting CMBS under a broad fund our $19 billion bonus pool "buy" recommendation in the CRE REIT space. Let's take a look at another big bonus development exercise, marketing push they made into MBS a few years ago...
In
April of 2006, a Goldman Sachs formed "Goldman Sachs Alternative
Mortgage Products", an entity that pushed residential mortgage backed
securities to its victims clients through GSAMP Trust
2006-S3 in a similar fashion to the sales and marketing of the CRE
CMBS that is being pushed to its victims clients as
described in the links above. The residential real estate market faced
very dire fundamental and macro headwinds back then, just as the
commercial real estate market does now. I don't think that is the end
of the similarities, either.
Less then a year and a half after this particular issue was floated,
a sixth of the borrowers defaulted on the loans behind this product,
according to CNN/Fortune, where the graphic to the right was sourced from. Here's an excerpt from the article of October 2007 (less
than a year after the issue was sold to Goldman clients, clients who
probably didn't know that Goldman was short RMBS even as Goldman
peddled this bonus bulging trash to them):
By February 2007, Moody's and S&P began downgrading the issue.
Both agencies dropped the top-rated tranches all the way to BBB from
their original AAA, depressing the securities' market price
substantially.In March, less than a year after the issue was
sold, GSAMP began defaulting on its obligations. By the end of
September, 18% of the loans had defaulted, according to Deutsche Bank.As
a result, the X tranche, both B tranches, and the four bottom M
tranches have been wiped out, and M-3 is being chewed up like a frame
house with termites. At this point, there's no way to know whether any
of the A tranches will ultimately be impaired...,,, Goldman said it made money in the third quarter by shorting an index of mortgage-backed securities. That prompted Fortune
to ask the firm to explain to us how it had managed to come out ahead
while so many of its mortgage-backed customers were getting stomped.
The party line answer to the bolded phrase above is "risk management".
Goldman is prone to say, "We were just hedging out client positions".
Well, I wonder, were they net short or net long RMBS. You want to know
what my guess is??? Looking back to there CMBS offerings of late,
clients and bonus pool enhancement customers should inquire, "Is
Goldman net short the trash, bonus pool enhancement CMBS products that they are peddling to me???"
Now, fast forwarding to the present day, we look into "GSAMP Trust 2006-S3" and we find (courtesy of a follow-up CNN/Fortune article):
...the formulas used by Moody's and S&P allowed Goldman to market the top three
slices of the security -- cleverly called A-1, A-2 and A- 3 -- as AAA rated.
That meant they were supposedly as safe as U.S. Treasury securities.But of course they weren't. More than a third of the loans
were on homes in California, then a superhot market, now a frigid one. Defaults
and rating downgrades began almost immediately. In July 2008, the last piece of
the issue originally rated below AAA defaulted -- it stopped making interest
payments. Now every month's report by the issue's trustee, Deutsche Bank, shows
that the old AAAs -- now rated D by S&P and Ca by Moody's -- continue to rot
out.As of Oct. 26, date of the most recent available trustee's
report, only $79.6 million of mortgages were left, supporting $159.9 million of
bonds. In other words, each dollar of bonds had a claim on less than 50¢ of
mortgages.All the tranches of this issue, GSAMP-2006 S3, that were originally rated below
AAA have defaulted. Two of the three original AAA -rated tranches (French for
"slices") are facing losses of about 90%, and even the "super senior,"
safer-than-mere-AAA slice is facing losses of 25%.
As of Oct. 26, date of the most recent available trustee's report, only $79.6
million of mortgages were left, supporting $159.9 million of bonds. In other
words, each dollar of bonds had a claim on less than 50¢ of mortgages.... ABSNet valued the remaining mortgages in our issue at a tad above 20% their face
value. Now, watch this math. If the mortgages are worth 20% of their face value
and each dollar of mortgages supports more than $2 of bonds, it means that the
remaining bonds are worth maybe 10% of face value....If all the originally AAA -rated bonds were the same, they'd
all be facing losses of 90% or so in value. However, they weren't the same. The
A-1 "super senior" tranche was entitled to get all the principal payments from
all the borrowers until it was paid off in full. Then A-2 and A-3 would share
the repayments, then repayments would move down to the lower-rated issues.But under the security's rules, once the M-1 tranche -- the
highest-rated piece of the issue other than the A tranches -- defaulted in July
2008, all the A's began sharing in the repayments. The result is that only about
28% of the original A-1 "super seniors" are outstanding, compared with more than
98% of A-2 and A-3. If you apply a 90% haircut, the losses work out to about 25%
for the "super seniors," and about 90% for A-2 and A-3.
Next, I will look into the true performance of the residential,
non-conforming mortgage market using information sourced directly form
our government.
More of Reggie on Goldman Sachs
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Free research and opinion
- Reggie Middleton on Goldman Sachs' fourth quarter, 2008 results
- Goldman and Morgan losses in the news, about 11 months late
- Blog vs. Broker, whom do you trust!
- Monkey business on Goldman Superheroes
- Reggie Middleton asks, "Do you guys know who you're messin' with?"
- Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
- Reggie Middleton on Goldman Sachs Q3 2008
§ As Reality hits, the Masters of the Universe are starting to look like regular bank employees
Reggie Middleton's Goldman Sach's Stress Test: Breaking Ranks with the Crowd Once Again!
Who is the Newest Riskiest Bank on the Street?
More remium Stuff!
Goldman Sachs Report June 21, 2008 2008-10-20 16:48:01 361.18 Kb
Reggie Middleton on Goldman Sachs' fourth quarter, 2008 results
Goldman Sachs - Buffet's strategic investment and public offering 2008-09-26 02:29:15 895.36 Kb
GS ABS Inventory 2008-02-25 06:48:56 1.22 Mb
Goldman Sachs Valuation Model updated for PPIP - Retail 2009-04-04 19:50:51 388.04 Kb
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Corporate welfare case Goldman Sachs is clearly a walking conflict of interest. What baffles me is why its clients don't see this. Stockholm Syndrome, perhaps?
There's too much symetry in the chart. Except for the dec 6 2007 to dec 30 2007 the chart clearly shows feeding buyers to the sellers.
Sorry Reggie, but I could read Taibbi all freakin day long. This article just hurt my head. I stopped reading halfway through, opened Google Earth and flew the SR 22 into the US Virgin Islands. Perfect landing by the way.
Reggie
Any idea how much these guys make selling treasuries?
Shadowstat's projecting 5 trillion in churn in 2010 alone and now that we are constantly going to be rolling debt over going forward I wonder how much skim that will provide for the "bonus pool"
I don't know why everyone keeps talking about how Goldmans so smart, AIG bankrupt them and left them holding a lot of toilet paper and they'd be using it to wipe their asses with it if Tiiiimmmmaaaaay had not defrauded the public and made them whole again.
TIA
AndyC
"I don't know why everyone keeps talking about how Goldmans so smart"
I think that the general consensus here at ZH as outlined by the great reporting is that GS is not the smartest rather the strongest. Their strength is derived from years of developing the perfect game.
The revolving door at 85 Broad St is a spacewarp portal to and from Washington DC where everyone is welcome to partake at the executive level if and only if they play The Goldman Game.
Goldman has developed this industry standard and everyone in DC knows it and covets their `Goldman-parachute` after their years of public service(*cough*).
Long live The Squid.
"I actually admire their prowess. Not for operational excellence (as many mistakenly consider them to have when not adjusting accounting returns for risk), but for the way they seem to get away with murder, time after time."
getting away with murder is a little easier when you are (and bought) the prosecutor.
It is hard to take seriously a post that says "Brokers do not charge for their research."
This is a fundamental misunderstanding of SS research.
Brokers don't charge for that. My experience(I'm a broker) is nobody charges for that. Oh wait that's the truth and people don't like the truth, like GS and pals are sucking the system dry in hopes the wall of money will protect them from the mobs of g*&s and b*ll(ts. That's not a threat either just what they may bring on themselves.
Truly a public service...I've always known of Goldman's shorting of RMBS (while peddling to clients) before the crash but couldn't cite any specific examples. This is goin in the ol reference folder and I'm sure will come in handy later.
Reggie, meet market maker.
It should surprise no one that thieves come in the night, just like Goldman Slacks.
It must be nice to be rich and corrupt -- they always win until they don't. If every depositor withdrew their money from all banks, Goldman Schlepps would be dust. The tide would be out and many in Washington would be dust with them.
As usual top-notch stuff. However, why the exclusive attention to GS? Yes they are bloodsucking bastards and the day they go belly-up will be joyfull, but as the Economist or the FT (can't remember which one) noted nobody talks about JPM, and their VAR, bonus-pool, balance-sheet etc are even bigger. So my question is, can't we bash both institutions, or is Dimon sacred?
By the way, the captcha is exceedeingly stupid: thirteen plus X equals minus ten If I enter -23 it will refuse it because "answer has more than 2 digits". So I will enter 8, have it refused, and post again.
"By the way, the captcha is exceedeingly stupid: thirteen plus X equals minus ten If I enter -23 it will refuse it because "answer has more than 2 digits". So I will enter 8, have it refused, and post again."
A Reggie fan no doubt.
I got JPM in an earlier post: http://boombustblog.com/200909181143/An-Independent-Look-into-JP-Morgan.html
OK, thanks!
Reggie,
I looked into the investment trust for a major US church denomination and found their bond fund stuffed full of toxic MBS garbage. 'Twas done by a Wachovia subsidiary, Tattersall, part of Evergreen, now having the mutually dubious pleasure of being owned by Wells Fargo. Only 1% of the entire bond fund was in Treasuries and only about half was rated AAA--and most of that was really just more agency MBS.
http://newcovenantfunds.com/assets/documents/funds/12.31.08semi-annualfi...
The trust is the New Covenant Trust. Reggie, these bastards jammed their poison needles into our churches. This bond fund lost 15% last year. The 'safe' fund! I bet this is not at all unusual and most of it has yet to be found. If your family attends church, I give it at least 50% odds that it's happening to your loved ones RIGHT NOW...100% that it's happening to someone on your block.
The American people have only the slightest glimmering of what's really going on. I really don't know what will become of the middle class society we all fought and dreamed for. The damage is so massive it's hard to comprehend.
Peace to you and best of luck with your work.
betcha the Synagogues are safe, though
Pardon me while I lower myself to this asshole's level for a moment.
Was that remark really necessary you piece of shit?
Sorry for the interruption. There is just something about bigots that just don't mesh with the quality of this site. I'll be more restrained in the future.
You know this is one of the best financial
web sites ,bar none, not only for the quality
of the in-depth reporting but the intelligent
discourse that follows. It takes a long time
to build up a reputation and a even
longer time to build up an
intelligent following.
So please excuse me while
I lower myself to this assholes
level for one moment.
Was that remark necessary? You piece of shit?
I hope that didn't upset community
guidelines to much
Is there an echo in here?
Your intelligent response avoided the question/statement all together. Instead you opted to attack a fellow member here. Upsetting the community guidelines concerns you but adding quality `discourse` does not. Time to take a cold hard look into your mirror.
Our churches, our towns, our schools, our pensions...and this was done (and is still continuing) all over the globe too. And to pay for it all the master plan is to induce inflation by debasing our currency. The only response I've been able to come to personally is to do all I can to support the communities I am a part of.
An informative, enjoyable read. Thanks Reggie.
Second that.
For the love of Pete, you're too long winded dog.
I did make it to "please bear with this rehash". Then I realized that I did not have breakfast yet(although hash is not on the menu).
You do not value my time Reggie. Does ZH pay you for each word published?
Try CNBC. I think that it would have content more in line with the shallow 30-second sound bite type of "information" that you are looking for, as that clearly values your time better than an in depth piece.
@Anon Here's the bottom line since you don't have the intellect to read this well documented post.
How many companies were able to pay out $19 Billion in bonuses (or profits) because of the investing advice they received from GoldmanSachs ???
Anyone? Anyone?
It's a very Reggie-like piece.
In depth Rehash & Spam.