Goldman Sells Equity To Buy Junk

Tyler Durden's picture

Goldman Sachs, pillar of ethical honesty in the lead up to the last market top and crisis, appears to be so bullish on leveraged loan and high-yield debt that it prefers to create an entirely separate holding company (that requires less transparency), raise external equity capital, lever up, and use a management team with "no experience managing a business development company (BDC)." As the WSJ reports, Goldman plans to offer shares in a new unit, Goldman Sachs Liberty Harbor Capital LLC "as soon as is practicable," in a BDC that means it is exempt from the so-called Volcker Rule.

The entity also enables Goldman to report less transparently since it qualifies as an emerging growth company under the JOBS Act. The hope is to leverage the special purpose vehicle.

We can't help but think back to the firm's ability to create bespoke securitizations for its clients that implicitly enabled it to be short into the CDO collapse. In this case, we wonder if funding this vehicle with outside capital, remote from the bank itself, and perhaps transferring the bank's exposure to HY and leveraged loans (which are trading at dramatically rich levels currently and have been called 'frothy' by more than one Fed president) is an implicit option on credit (if credit rallies, profits go up to parent entity; if credit tanks, entity implodes and eats 'remotely' the new equity capital without affecting the bank itself)? Or maybe we are being too negative?


Via WSJ,

Goldman Sachs Group Inc. has launched a new specialty finance company to invest in high-risk debt primarily of U.S. mid-size companies with no credit ratings.


... plans to offer shares in the new unit, Goldman Sachs Liberty Harbor Capital LLC, "as soon as practicable after the effective date of this registration statement."


... the group has "elected to be regulated as a business development company under the Investment Company Act of 1940."


Goldman said it expects the new unit will not fall be covered under the so-called Volcker Rule, which was is part of the Dodd-Frank financial regulatory overhaul.




The unit does qualify as an emerging growth company under the Jumpstart Our Business Startups Act of 2012, known as the JOBS Act, which could allow it to "take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies," said Goldman in the filing.




Goldman said its investment advisor Goldman Sachs Asset Management L.P. and its management, which will earn incentive fees based on their performance, "have no prior experience managing a BDC."

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fonzannoon's picture

Cue Sen. Levin saying some angry stuff in dramatic senate testimony by Goldman bankers looking scraed and confused. Cue Sen Levin walking away to get a sandwich and yell at some kids to get off his lawn. Cue small time pension plan angry as hell. Cue Lloyd Blankface changing the subject.

Careless Whisper's picture

"Liberty Harbor" ; that doesn't sound at all like a casino. What could possibly go wrong?

Its Only Rock N Roll's picture

"Liberty Harbor" will be attacked by the Japanese in the middle of the day with their exploding debt bombs. 

Key-Rick's picture

It's about time someone put together a sensible investment to take advantage of the attractive yields on non-investment grade corporate bonds.

disabledvet's picture

"so that it can be shorted." hard to do that in house you know.

FoeHammer's picture

"You've seen the Harlem Shake...But have you seen the DC Shake(down)?"

Check out Lloyd poppin' that Dom.  haha

Blano's picture

I moved to Texas to try and get away from pathetic pieces of shit like Levin.  Just another reason why Michigan will never amount to anything.

WillyGroper's picture

Another "Shitty Deal" for the taxpayer no doubt.

DJ Happy Ending's picture

Thanks for the contrarian indicator Tyler.

FieldingMellish's picture

Lots of cash, frothy markets, leverage, inexperience... what could possibly go wrong?

jcaz's picture



Ya, saw this same idea with Enron-  they thought they were smarter than the average hamster, too.....

OutLookingIn's picture

I see its got little round spots all over it!

From people trying not to touch it with ten foot poles!

New_Meat's picture

Snowflake b likin' hiz chops.

paint it red call it hell's picture

Lets see if I got this;

1. Set up company outside of financial regulation

2. Hire newby's to manage said entity

3. Sell shares at public offering

5. Buy junk bonds off Fed balance sheet and from buddies

6. Bankrupt company with bad junk debt

OH, Wait, I left out step 4!!!

4. Insure with lots of Credit Default Swaps....

How hard is this stuff?????

short screwed's picture

you forgot 5) scare congress into bailing out counter parties of said default swaps at tax payers expense

paint it red call it hell's picture

I just assumed AiG would get the biz

erg's picture

You had an up vote and it disappeared. Did I see that?

*rubs eyes*

Need a drink.

erg's picture

ala Hank (stuttering/didn't recuse/$200 million waiver/marshall law tomorrow) Paulson.

Michelle's picture

If I may embellish:

5. Buy junk bonds from Fed balance sheet and buddies for pennies on the dollar

6. Bankrupt numerous companies with bad junk debt while shorting same companies' stock

4. Insure with lots of credit default swaps from over-leveraged counterparties.

7. Low ball CDS credit event auction using parent company funds

TraderTimm's picture

Whatever Goldman is selling, you shouldn't be buying.

scatterbrains's picture

Well now that depends.. if I'm a director of a very large public pension fund I might buy hand over fist so long as Goldman assures me they have a nice position waiting for me when I leave public office.

short screwed's picture

it won't tank until BofA or Citi decide to open one of their own. And of coarse GS will be selling.

Bennie Noakes's picture

New junk for old! New junk for old!

erg's picture

Bring out your dead!

*tinny bell is struck*

Downtoolong's picture

Calling all Muppets.

If you liked our Facebook deal, you're gonna love this.


NoDebt's picture

Yeah, this has "roach motel" written all over it.  I love junk and rode it for years, as I have posted on here before.  But this is a case where I'd rather be out a year early than a day late.

Junk has been levitated by a quest for yield in combination with historically low default rates in recent years.  The yield is now down to a nice savings account return in 1995.  The historically low default rate..... well, nobody ever thought people would default on their mortgages, but eventually they did.

morning_glory's picture

Meanwhile Coutts private bank has just advised clients not to lever up on high yield bonds.


chinaboy's picture

Looks like GS had smelled blood.

benbushiii's picture

Maybe Paulson is gets to play along also.

MyBrothersKeeper's picture

Non-traded BDC's are not bad investments but it's very important to have an independent 3rd party manager of the portfolio. Leveraging should also be very limited. I'm not sure about "no credit rating" businesses either as most BDC's invest in below investment grade but still very investment worthy especially considering most should be in senior secured debt....which means if any company in the portfolio goes banrupt, the portfolio has 1st crack at the assets.

Debt Slave's picture

One thing the muppets seem to forget is that Goldman follows only one objective:


Is it good for Goldman Sachs?

The Onion Of Twickenham's picture

"Liberty Harbor"? Hmm... is that a place? You know, like "Shenandoah" and "Blue Ridge"?

q99x2's picture

Whenever I hear the Jobs Act I always hear Bill Black's incredulous laugh and see Fraud spelled with a capital F. Should be a good company to watch for the opportunity to short.

web bot's picture

This is crimminal.

moneybots's picture

"as an emerging growth company under the Jumpstart Our Business Startups Act of 2012, known as the JOBS Act, which could allow it to "take advantage of specified reduced reporting and other burdens that"

work to protect investors against FINANCIAL FRAUD.


This has FINANCIAL FRAUD written all over it.  As William Black stated, the JOBS Act moves fraud from debt to equities.

moneybots's picture

"Goldman Sachs Group Inc. has launched a new specialty finance company to invest in high-risk debt primarily of U.S. mid-size companies with no credit ratings."


What better way to engage in financial fraud.  No credit rating at all.  In one sense though,  it is more honest than rating junk AAA.  Investors should expect to lose their money chasing this pig.  You can't say William Black didn't warn you.



moneybots's picture

 "... the group has "elected to be regulated as a business development company under the Investment Company Act of 1940."


Translation: the group has elected for the fox chicken coop open door option.

moneybots's picture

 "Goldman Sachs Liberty Harbor Capital"


What do those words really mean?  What a great sounding title.  Liberty, it sounds so American.  Harbor, a safe place for ships. 


Lincoln Savings.   Honest Abe.  What a great name for a savings and loan. 

The savings and loan scandal.  Charles Keating was convicted as head of the company Lincoln Savings.  Wikepedia noted "Lincoln's branch managers and tellers convinced customers to replace their federally-insured certificates of deposit with higher-yielding bond certificates of American Continental; the customers later said they were never properly informed that the bonds were uninsured and very risky given the state of American Continental's finances."  "About 23,000 customers were left with worthless bonds."


What is behind the name Liberty Harbor?  Does it actually mean the opposite of what it proclaims?  Is it about the liberty to take the money the investor harbors currently in a safer place?  The depositors of Lincoln Savings were talked into higher yielding junk and wound up with nothing.