For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks

Reggie Middleton's picture

Some of the top secret AIG bailout info is out. Guess who's at
the heart of it, making money by creating straight trash, selling it to
its clients then buying insurance to benefit from its inevitable
crash? I have been warning about Goldman's ability to sell trash to its
clients for some time now.

This is not a short post, for it is
packed with a lot of supporting information, analysis and data. If you
are looking for quippy paragraph, soundbyte or quick headline to get an
overview of,,, well whatever, click here, or better yet, click
. For everyone else who may be looking for deeper
investigative analysis and the unbridled TRUTH for a change, please
continue on.

First a little background info. Goldman is supremely
overvalued in my opinion. It is even more so considering much of its
profit is generated solely from the raping of its clients. I say this
holding absolutely no ill will towards Goldman. This is strictly
factual. Let's walk through the evidence, of profit potential,
valuation, and the stuff behind some of the value drivers in their
business model, like brokerage and investment banking...

For one, Goldman is
overvalued considering the economic profit that it generates. See Continuing the Goldman Sachs Valuation
Debate (for those who have closely followed my Goldman opinion, you can
skip down to the Bloomberg article towards the bottom of the page):

RM: GS return on equity has
declined substantially due to deleverage and is only marginally higher
than its current cost of capital. With ROE down to c12% from c20%
during pre-crisis levels, there is no way a stock with high beta as GS
could justify adequate returns to cover the inherent risk. For
GS to trade back at 200 it has to increase its leverage back to
pre-crisis levels to assume ROE of 20%
. And for that GS has to
either increase its leverage back to 25x. With curbs on banks leverage
this seems highly unlikely. Without any increase in leverage and ROE,
the stock would only marginally cover returns to shareholders given
that ROE is c12%. Even based on consensus estimates the stock should
trade at about where it is trading right now, leaving no upside
potential. Using BoomBustBlog estimates, the valuation drops
considerably since we take into consideration a decrease in trading
revenue or an increase in the cost of funding in combination with a
limitation of leverage due to the impending global regulation coming
down the pike. Using your method, our valuation would drop from where
it is to an even lower point.


Second, it still has a bunch of trash on its balance
sheet, seeReggie Middleton vs Goldman Sachs,
Round 2:

So, what is GS if you strip it of its government protected, name
branded hedge fund status. Well, my subscribers already know. Let' take
a peak into one of their subscription documents (Goldman Sachs Stress TestProfessional Goldman
Sachs Stress Test Professional 2009-04-20 10:06:45 4.04
 - 131 pages). I believe many with
short term memory actually forgot what got this bank into trouble in
the first place, and exactly how it created the perception that it got
out of trouble. The (Off) Balance Sheet!!!


Contrary to
popular belief, it does not appear that Goldman is a superior risk
manager as compared to the rest of the Street. They may the same
mistakes and had to accept the same bailouts. They are apparently well
connected though, because they have one of the riskiest balance sheet
compositions around yet managed to get themselves insured and
protected by the FDIC like a real bank. This bank's portfolio looked
quite scary at the height of the bubble.


  You know what
most people don't realize is that it looks quite scary now as well.


If one were to
strip out the revenues from prop trading, it would leave bards some
balance sheet issue. Again, I query, should virtual hedge funds that
pay out half of revenue as compensation trade at such high premiums to
the rest of the market? I don't think so, and I have put my money
behind the idea that the market will not think so in the near future

Now that we have established at least a basic
understanding of what is underneath the GS hood, let's see how the
engine runs in order to generate said profits. In Reggie Middleton vs Goldman Sachs,
Round 1,
I noted that Goldman often
peddled horrible advice and products to clients that repeatedely lost
tons of money, yet Goldman is still considered the best and the
brightest on the Street. Let's take a look:

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
 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):

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???


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.

blind following of Wall Street marketing research,
and the abject worshipping of Goldman marketing,inventory
 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.

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...

gsamp_2007.pngIn 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 victimsclients
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

 ,,, 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
 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.

So, after reminiscing about the GSAMP Slide, we get to a news story in
Bloomberg released just this morning...

Secret AIG
Document Shows Goldman Sachs Minted Most Toxic CDOs


Feb. 23

Representative Darrell Issa, the ranking
Republican on the House Committee on Oversight and Government Reform,
placed into the hearing record a five-page document itemizing the
mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe
Generale SA had bought $62.1 billion in credit-default swaps from AIG...

The public can now see for the first time how poorly the securities
performed, with losses exceeding 75 percent of their
notional value in some cases.
Compounding this, the
document and Bloomberg data demonstrate that the banks that
bought the swaps from AIG are mostly the same firms that underwrote
the CDOs in the first place.

The banks
should have to explain how they managed to buy protection from AIG
primarily on securities that fell so sharply in value
says Daniel Calacci, a former swaps
trader and marketer who’s now a structured-finance consultant in
Warren, New Jersey. In some cases, banks also owned mortgage
lenders, and they should be challenged to explain whether they gained
any insider knowledge about the quality of the loans bundled into the
he says. [Let's not play games here. The banks knew
what trash was hidden where!]

‘Too Uncanny’

“It’s almost
too uncanny,” Calacci says. “If these banks had insight into
the underlying loans because they had relationships with banks,
originators or servicers, that’s at the least unethical.
the very least. I think it's called ILLEGAL!

identification of securities in the document, known as Schedule A, and
data compiled by Bloomberg show that Goldman Sachs
underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured
-- more than any other investment bank.
Merrill Lynch
& Co., now part of Bank of America Corp., created $13.2 billion of
the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

tallies suggest a possible reason why the New York Fed kept so much
under wraps
, Professor James Cox of Duke
University School of Law says: “They may have been trying to
shield Goldman
-- for Goldman’s sake or out of macro concerns
that another investment bank would be at risk.”

Poor Performers

Goldman Sachs spokesman Michael DuVally declined
to comment.
[Of course...]

Schedule A also
makes possible a more complete examination of why AIG collapsed. Joseph Cassano, the former
president of the AIG Financial Products unit that sold the swaps, said
on a December 2007 conference call that his firm pulled back from
selling swaps on U.S. subprime residential CDOs in late 2005. The list
shows that the $21.2 billion in CDOs minted after 2005,
mostly based on prime and commercial mortgages, performed as badly as
or worse than the earlier subprime vintages.
seriously doubt so. Don't you guys know we are in the middlet of a
steep "V" shaped economic recovery and a roaring bull(shit) market? The
CRE and residential real estate markets have just about bottomed out
and the worst is over!]

As details of the coverup emerge, so does anger at the perceived
conflicts.Philip Angelides, chairman of the Financial
Crisis Inquiry Commission
, at a hearing held by his panel on Jan.
13, questioned how banks could underwrite poisonous securities
and then bet against them. “It sounds to me a little bit like selling a
car with faulty brakes and then buying an insurance policy on the
buyer of those cars,” he said.

if I may correct you my good man, it's more like selling a car with
faulty breaks, then buying a car accident swap on the driver (through
your own car accident swap dealer which has practically cornered the car
accident swap market, may I add) and getting repeat business from the
sucker who bought the car with bad breaks in order to sell him
multiple upgarded models of said faulty break car, complete with free
car accident swap counterparty membership! You make money off of him
until he dies, and then you simply cash in your swap. The swaps may not
be as profitable as they once were because the damn bad brake and car
accident swap regulators are starting to bitch and moan about you
making so much money from damn near killing poeple while having access
to federal funds. God's work, forbid. They are actually asking us to
foot the bill for damn near killing the clients without access to the
Fed window and 0.25% rates on our FDIC insured bonds!!!

‘Part of the Coverup’

Janet Tavakoli, founder of Tavakoli
Structured Finance Inc., a Chicago-based consulting firm, says the New
York Fed’s secrecy has helped hide who’s responsible for the worst of
the disaster. “The suppression of the details in the list of
counterparties was part of the coverup,” she says.

between Fed and AIG officials that Issa released in January show that
the efforts to keep Schedule A under wraps came from the New York Fed.
Revelation of the messages contributed to the heated atmosphere at the
House hearing.

“What date did you know there was a coverup?”
Republican CongressmanBrian Bilbray of
California demanded of Geithner. Lawmakers used the word coverup more
than a dozen times as they peppered Geithner with questions.


The government has committed more than $182 billion to AIG and owns
almost 80 percent of the company.

Document Withheld

late November 2008, the insurer was planning to include Schedule A in a
regulatory filing -- until a lawyer for the Fed said it wasn’t
necessary, according to the e-mails. The document was an attachment to
the agreement between AIG and Maiden Lane III, the fund that the Fed
established in November 2008 to hold the CDOs after the swap contracts
were settled.

AIG paid its counter parties -- the banks -- the
full value of the contracts, after accounting for any collateral that
had been posted, and took the devalued CDOs in exchange. As requested
by the New York Fed, AIG kept the bank names out of the Dec. 24 filing and edited out a
sentence that said they got full payment.

The New York Fed’s
January 2010 statement said the sentence was deleted because AIG
technically paid slightly less than 100 cents on the dollar.

in Full

Before the New York Fed ordered AIG to pay the banks in
full, the company was trying to negotiate to pay off the credit-
default swaps at a discount or “haircut.”

By March 2009,
responding to a request from Christopher Dodd, chairman of the
Senate Committee on Banking, Housing and Urban Affairs, AIG released
the names of the counterparty banks. In a filing later that month, AIG
included Schedule A, showing bank names while withholding all
identification of the underlying CDOs and the amounts of collateral
each bank had collected. The document had more than 800 redactions.

In May 2009, AIG again filed Schedule A, this time with about 400
redactions. It revealed that Paris-based Societe Generale got the
biggest payout from AIG, or $16.5 billion, followed by Goldman Sachs,
which got $14 billion, and then Deutsche Bank and Merrill Lynch. It
still kept secret the CDOs’ identification and information that would
show performance...

“This is something that belongs in the public
domain because it was done with public money,” Issa says. “The public
has the right to know what was done with their money and who benefited
from it.” Now, thanks to Issa, the list is out, and specific
information about AIG’s unraveling can be learned from it. At
the Jan. 27 hearing, the New York Fed was still arguing that the
contents of Schedule A shouldn’t be fully disclosed. Thomas Baxter, the New York Fed’s
general counsel, testified that divulging the names of the CDOs could
erode their value: “We will be hurt because traders in the market will
know what we’re holding.”

[Let's get this straight,
your selling your housem but it had a fire and 60% of it is burned
down. According to Baxter, you don't want anyone to tell your broker or
other housing investors that your house has burnt down or even the
address because it could (and let me quote this for the most accurate
effect) "could erode their value: “We will be hurt
because traders in the market will know what we’re holding.
Now (and excuse my French here), if that ain't some shit to be
admittting in public, in a Congressional hearing to boot, I don't know
what it. You guys have balls the size of bowling balls, ya' hear me!

Tavakoli calls that wrong. With many CDOs, providing more
information to the market will give the manager a greater chance of
fetching a realistic price, she says. [Who wants a realistic price when
you can try to fetch a Goldman RIPOFF price??? Really, let''s be real

Jack Gutt, a spokesman for the New
York Fed, declined to comment, as did AIG’s Mark Herr. What comment could they
possibly have after a statement like one above???

Bad to Worse

Tavakoli also says that the poor performance of the underlying
securities (which are actually specific slices or tranches of CDOs)
shows they were toxic in the first place and were probably replenished
with bundles of mortgages that were particularly troubled. Managers who
oversee CDOs after they are created have discretion in choosing the
mortgage bonds used to replenish them.

“The original CDO deals
were bad enough,” Tavakoli says. “For some that allow reinvesting or
substitution, any reasonable professional would ask why these assets
were being traded into the portfolio. The Schedule A shows that we
should be investigating these deals.”

the CDOs on Schedule A with notional values of more than $1 billion,
the worst performer was a tranche identified as Davis Square Funding
Ltd.’s DVSQ 2006-6A CP
. It was held by Societe Generale, underwritten
by Goldman Sachs
and managed by TCW Group Inc., a Los
Angeles-based unit of SocGen, according to Bloomberg data. It
lost 77.7 percent of its value -- though it isn’t in default and
continues to pay
. [Hey, doesn't this remind you fo the
GSAMP Slide, that funky new dance, introduced above???!!!

[As you can see, part of the probable reason for bailing out
SocGen was that Goldman sold them the equivalent of a financial
terrorism event, and the French government probably said, "Make this
right, or we'll go public!]

[Well, for all of
those guys who oppose mark to market rules, this CDO hasn't lost any of
its value since it continues to pay and is probably considered a
longer term asset. Mayhap they will take their capital and buy it at

SocGen spokesman James Galvin and TCW
spokeswoman Erin Freeman declined to comment. [Of


really wonders why anyone would even bother to buy trash like this
from Goldman or any other bank. Oh well, why not? They are the best and
the brightest, Right???


of Reggie on Goldman Sachs


Reggie Middleton vs Goldman Sachs,
Round 2 

Reggie Middleton Personally
Contragulates Goldman, but Questions How Much More Can Be Pulled Off 

Get Your Federally Insured Hedge Fund
Here, Twice the Price Sale Going on Now!  

§  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

 More remium Stuff!

Goldman Sachs Report June 21, 2008 Goldman
Sachs Report June 21, 2008 2008-10-20 16:48:01 361.18

Reggie Middleton on Goldman Sachs'
fourth quarter, 2008 results 


Goldman Sachs - strategic investment and public offering Goldman Sachs - Buffet's strategic investment
and public offering 2008-09-26 02:29:15 895.36

Goldman Sachs Goldman Sachs' Bank Holding
Company Fundamental Valuation and Forensic Analysis - Professional 2008-12-18
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Goldman Sachs Goldman Sachs' Bank Holding
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GS ABS Inventory GS ABS Inventory 2008-02-25
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Goldman Sachs Valuation Model updated for PPIP - Retail Goldman Sachs Valuation Model updated for PPIP -
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Goldman Sachs Stress Test Retail Goldman
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Goldman Sachs Stress Test Professional Goldman
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Free research and opinion


  • Reggie Middleton vs Goldman Sa...
    Before I get started, I want all to realize that this is not Goldman
    bashing piece. I think it is a [relatively] well run company, but its
    PR machine appears t
  • HMMM.... Why doesn't the FDIC ...
    FDIC quarterly report has been released. For some reason, it doesn't
    seem as cheery about the medium term as many other pundits and
    government officials
  • If a Bubble Bubble Bursts Off ...
    One of the quandaries of running a subscription service is that when
    you have some really juicy stuff, you inherently limit the audience
    that you are able to r
  • Oh No! A member of the mainstr...
    Charlie Gasparino actually seems as if he reads this blog. As readers
    know, I have stated many times that Goldman is nothing but a gigantic,
    taxpayer guarante
  • More Bank Bullsh1t???...
    the green shoots sprouting today, we have several lenders reporting
    things are potentially looking better. Let's glance at two: Loan
  • More Bank Bull Dookey?...
    reckon these last 11 or so weeks as being akin to the bubble,
    wherein obviously overvalued companies with no (or even negative
    earnings),murky futur
  • The two tailed banking crisis...
    From Mckinsey : From the first quarter of 2008 to the first quarter
    of 2009, quarterly noninterest revenue for corporate- and
    investment-banking acti

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RetiredVet's picture

I agree, this will  all end badly, very badly for the entire country, it is obvious that there is no stopping the corrupt shit going on all over Wall Street, especially at Goldman. One day, a loaf of bread will buy a bag of gold.

illyia's picture

One day, a loaf of bread will buy a bag of gold.

That is one scary statement...

masterinchancery's picture

We used to play this card game called "pass the trash"...

Anonymous's picture

I too am incredulous we haven't seen as much as a hint of a lawsuit, federal investigation, or any head roll anywhere on Wall Street.

What is more interesting to me though, why have those defrauded by GS not binded together as a class and brought their own suit...would this not force more discovery and at least put the problem more in the public eye? Would those little workers whose pensions got punished taking on the mighty Wall Street bank not garner at least a segment on CNN, FNC, etc?

alexdg's picture

I'll have to keep this article open on a browser tab for reading later tonight. Impressive work!

swmnguy's picture

This is some (intentionally) opaque and convoluted stuff.  I really appreciate Reggie's ability to translate it into everyday-people-speak, without dumbing down the content.  I kind of think I sort of get it, and that's due to Reggie.

caconhma's picture

We have the best of the entire world: a very corrupt government totally under control of criminal enterprises.

What values do these "investment banks" contribute to the Main Street and/or to the entire society so US taxpayers have to support them at any cost? Unfortunately, they are parasites sucking blood from the society.

Finally, are there any chances for the USA to have a meaningful recovery with the present political infrastructure when political elections are not local but instead are controlled by "outside" money? The answer is NONE. Unfortunately, WallStreet money like a malignant cancer is spread a deadly disease all over the USA body.

Observation: the US Main Street became a colony to the WallStreet.

Anonymous's picture


The reason THEY go back is ....

Where else would they go ????

Anonymous's picture

Reggie --

I am concerned you are just pessimistic. I read the stuff on your site post-Q1 2009... this was a FANTASTIC Q for banks. Go back and read the BAC Q1 2009 release again. It should've been obvious to you that it was a huge turn. You missed it. Why?

I think this analysis of GS is silly. The stock is depressed for reasons related to pending legislation and news headline risk (none of which will materially affect GS). Further, there is no better ROE business than "equity investment banking" where GS is the clear #1. In a recover cycle, this can drive ~50% earnings growth with next to ZERO capital usage. Remember, the Goldman banking franchise has been on the sidelines the last 18-months. Why count them out?

Further... the stock trades at 1.25x book. "Book" probably greatly understates the value of many of their businesses and assets in a break-up scenario.

Its an easy trade.

Reggie Middleton's picture

"Go back and read the BAC Q1 2009 release again. It should've been obvious to you that it was a huge turn. You missed it. Why?"

It's not that I missed it. I (generally) don't invest in BAC, and further I didn't believe it. If we didn't have FASB rollover on the 166-7, BAC would be in the single digit range. Think about it. BAC bought the leaders of the subprime loan manufacturing industry (CFC and ML) as they were both about to collapse, without subsidy (the ML backstop was given back, unused) and in the case of ML at a significant premium, all the while the problems that caused the collapse not only haven't been corrected, but have been exacerbated in many areas. These two companies have assets (combined) that equal or exceed the size of BAC pre-acquisition. Why in the world would anybody in their right mind believe that BAC had a huge turn, coincidentally right after it was made acceptable not to report balance sheet losses accurately - the same losses that drove LEH, BS, ML, WC and CFC out of business or damn close to it? I suggest you look at the last 4 quarterly reports of Fannie and Freddie to see what mortgage losses MAY look like if they were just a LITTLE more accurately reported. Roughly $6 billion per quarter, lost, and that is just one company. There is absolutely no reason to believe that BACs balance sheet is losing less - none at all.

I think this analysis of GS is silly. The stock is depressed for reasons related to pending legislation and news headline risk (none of which will materially affect GS).

Just the deletion of prop trading would hit GS revenues by about 13% and a much larger percentage of net profits. I don't follow your logic. Listen, if I miss something I'll admit it. I can't catch everything, and probably can't even catch most things. That being said, don't mistake manipulated stock market rallies as a true representation of fundamental well being. Things are far, far from well.

Further, there is no better ROE business than "equity investment banking" where GS is the clear #1. In a recover cycle, this can drive ~50% earnings growth with next to ZERO capital usage. Remember, the Goldman banking franchise has been on the sidelines the last 18-months. Why count them out?

I think you are confusing recovery cycle with credit bubble. The revenues that GS garnered from 2002 to 2007 and in Q42008 to q1 2009 were driven by an unsustainable, and probably unrepeatable (at least in the medium term) credit, liquidity and housing bubble. We will not see those anytime soon. At best they will grow revenue from taking market share. So, optimistically, let's assume they do that. How big is the market? Do you truly believe were in a sustainable frecovery or do you think the government has simply purchased GDP print points, paying $1.75 for every dollar worth of print? That is the question, and I think all know where I stand on it.

Further... the stock trades at 1.25x book. "Book" probably greatly understates the value of many of their businesses and assets in a break-up scenario.

The business franchise probably has a higher break up value, but you are totally disregarding the balance sheet. Come on, buddy. Look at the examples of the stuff they have underwritten, sold, insured and held. Look at the GSAMP slide and the AIG stuff. 70 to 75% decreases in value???!!! It is not as if I believe all of their balance sheet consists of this, but it is quite prudent to assume that a material amount of this is stuck on and off balance sheet. Do you think it is increasing in value or decreasing as we move further away from the bubble (that is being reblown, just to pop again). Look at new home sales and mortgage applications released today. Look at the NSA case shiller numbers from yesterday. Look at the value you and your neighbor's homes. How about their employment situation. The strength of the local municipalities, federal govt., sovereigns??? It is amazing that I even have to make this argument.

Anonymous's picture

Reggie for Treasury Secretary.

dkd's picture

I am not sure what to believe anymore.  First off, great article and post by RM.  However, lets assume RM is correct.  I am not a rocket scientist as you can tell by my ID (dkd), but if A=B and A=C, then B=C.  Why in God's name are several people including Geithner not in Jail?  The analogy of the car accident swap is precious and folks at GS should be charged with Fraud, insider trading, grand theft, and I am sure when it is all said and done, bribery.  Will someone please explain why this is not happening?

mikla's picture

"Anonymous" said it above:  "Too big to jail."

All cuteness aside, you are seeing a massive dislocation in the system, with incompetent and captured regulators, and Congressional oversight that is absolutely clueless (they honestly have no idea how economics, or the system, functions.)

I'm not a populist, but in this case the populism is correct -- a few private institutions are literally running the US Federal Government and setting policy (and literally helping themselves to taxpayer money).  Thus, there won't be any prosecutions, except for a few scapegoats (minor players) when things get politically too hot.

Government in general is paralyzed because their Keynesian world view is fundamentally flawed, all actions appear to be based on noise, and they have no idea what buttons and levers to push to get what they want.

For a fun read on this, google comments by Bill Black (a lead prosecutor during the S&L crisis), who today complains that thousands of indictments and convictions *then* correlates to *zero* indictments and convictions now.  (They honestly don't know what to do, and are fighting many fires in the kitchen.)

For what it's worth, it doesn't matter.  You're seeing the death-throws of the world economic system -- we will achieve complete ponzi collapse, followed by sovereign defaults worldwide (including the US), and it's already in progress.

And yes, as usual, Reggie is correct, with the data to back his point.

bruiserND's picture


very smart post ,wish you would have put up the Wm. Black link you mentioned.

Regie is the Bomb! Hope he gets an analyst job prepping the federal/ state prosecuting attorney / litigator in Manhattan.

OK folks , everybody gets a fantasy every once in a while. We just have to wait for anarchy and civil war instead.

Anonymous's picture

The solution is so simple even a serf can grasp it.

I'll give you a hint:

"Market is closed until further notice."

Pull Uncle Sam off the giant fraud street mammary gland in the sky.

DaveyJones's picture

you said it. This place has become so criminal, it is not only our leaders who have been paralyzed. The populace either can't comprehend it or can't admit it. This will not end quietly

Anonymous's picture

Reggie, I love your writing and your insights, but your charts are painful to look at.

Anonymous's picture


Seems to me there is a clear conflict of interest regarding the rating agencies and their clients such as GS.....


Just how much of the CCC crap....marked AAA....would have been sold had it been properly marked and rated ?

Answer....possibly only 5%

Which implies massive fraud ....conflict of interest.....and damages to the public in general...all over the world....

Perhaps the public should demand all GS heads on poles in public ? Along side the heads of the rating agencies ?

Too big to jail ?


And look at the infiltration in governemnt positions....

Now tell you really think that GS employees really want to hold govt. related jobs ?

Or is there another motive for this ?


So becomes a story of my packetbook is bigger than yours....and I will crush you in court .....and it does not matter whether I am right or wrong.....

My legal largesse is bigger than yours....


Reggie....what more evidence does the public need ?

Reggie Middleton's picture

Seems to me there is a clear conflict of interest regarding the rating agencies and their clients such as GS....

Crystal clear!

Just how much of the CCC crap....marked AAA....would have been sold had it been properly marked and rated ? Answer....possibly only 5%

Which implies massive fraud 

They would have been able to sell it, the issues is at what price? They mislead, then significantly overcharged for the product. If I sell you AAA that turns out to be CCC-, you probably paid too much.

Reggie....what more evidence does the public need ?

Obviously, it is not an issue of the amount of evidence. I think it is an issue of the delivery of the message. If this was delivered through CNN cast as an attack on the common man, you would probably get an upheaval. Through Bloomberg or through BoomBustBlog and you will have apathy among the mainstream. At least that's how I see it. I am still amazed at how many times the big banks can rip off the same group of investors over and over and still have them come back for more. See Wall Street is Back to Paying Big Bonuses. Are You Sharing in this New Found Prosperity? in reference to the real estate deals of the last few years. I even included a model to download to gauge how much you get ripped off relative to others!