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Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Walk Over Clients

Well, there you have it! And executive director at Goldman Sachs has explicitly corroborated what I and many in the blogosphere have been crowing for some time now, and that is...
The whole video can be seen here on the Max Keiser show, starting from about 19:00 minutes in where I discuss risk vs reward in GS and how they outperform eventhough risk outweighs reward. Those who like numbers and charts can see where I actually demonstrated in For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks:
As in “When the Patina Fades… The Rise and Fall of Goldman Sachs???“, we can reminisce over the fact that Goldman BARELY earns its cost of capital on an economic basis, and that’s before considering the potential horrors which may (and probably do) lay on the balance sheet (for more on BS horror, referenceReggie Middleton vs Goldman Sachs, Round 2) .
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.
And now we have supporting evidence from the inside... From the NYT:
"TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. I can honestly say that the environment now is as toxic and destructive as I have ever seen it."
"To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."
"I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work."
" I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave."
"How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence. What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym."
"I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all."
"It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen."
More on the topic..
The Goldman Grift Shows How Greece Got Got
I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!!
Is It Now Common Knowledge ThatGoldman's Investment Advice Sucks?
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zero hedge you are failing miserably.....you post very clever posts ,"which are for the "in crowd" people that know the score !but you are so clever YOU are missing getting over to the uninformed .the workers are to busy working to "GET" your in thinking .you need to posture to a wider populace ,being SOOO clever is SOOO dumb .
We only get to hear or read about the performance, usually the Gains, of GS the Company. I believe the really Big Gains would be found in the Personal Investment accounts of the GS Mgnt, if we ever had a chance to view them, little doubt scattered around the globe in various accounts, names and/or numbered.
Think about that. Whose "Investment" goes in first, especially those that have some Special Exclusive information backing it up. Those Bonuses must get Parlayed many times yearly.
Way to go Reggie ! First time you put something up that doesn't look like ADD on Ritalin ! Concise, clear, to the point, razor sharp. No loincloth and spear, but frankly, that probably only had Rainbow Coalition mass appeal. Congratulations on a great piece of reporting. The Squid is a lying sack of little shits.
"This "formual" works every time."
Is this a new hyphenated word like Formal Manual? I know it's supposed to be formula but still, nice...
I have spent most of my life being a succesful small business person. I have said there is a universal business plan. 1) Ask yourself if what you or your business is doing helps or brings value to the client. If not...do not do it. 2) Provide a great product or service at a medium price point. Not the highest price or the lowest. 3) Treat your employees like you do your clients. This "formual" works every time.
The squid breaks all the rules. It will likely pay the price in the long run. Congrads to Reggie...rock on!
Hey Reggie - how's apple's margin compression going?
It looks like Google is the one experiencing margin compression. They are losing their search grip, relevance and more importantly, developers. Oh, and Windows 8 is around the corner.
I couldn't resist. Otherwise, love most of your analysis.
cheers
Microsoft is lost-in-the-weeds...
It has gotten progressively worse since about the time they started putting a bunch of people into "Evangelist" positions. This is literally part of many folk's title at MS.
Faith-based software! FTW!
new formatting? nice i like..
I am shocked, shocked to hear these allegations about the good folks at Goldman. What next? Will Bermonkey confess that the Fed is a generational Ponzi scheme? Is Jamie Demon to admit that ISDA is a fraudulent clownshow? Will Eric Placeholder suddenly swing into action and prosecute Jon Comminglerzine for financial rapine? Something very strange is afoot...
REggie TODAY is your DAY MAN!
short Goldman bitchez
too fuking funny
SHORT THE MOTHER FUCKER
Vanqusih the Squid...Reggie, Reggie, Reggie...
Reggie must of read the story this morning and go, "Moonlanding"!
All of this reminds me of this great scene from HBO's John Adams when Jefferson confronts Hamilton on the power of banks in central government:
http://www.youtube.com/watch?v=pzH7mGt0VDE
Still better than being a client of Mother Fucking Global. Yippee we're saved by the squid pro quo.
Short the piss out of GS. Their model is nothing but organized fraud and payola.
Short them out of business and bloody their noses.
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Psst, Reggie! Have you raised your targets on AAPL?