As the 'naughties' come to a somewhat anti-climactic close, it is important for those of us in the investment community to take stock of what new lessons have been learned, what immutable laws have been reinforced, and what changes in policy, strategy and execution need to occur in order to avoid a repeat of the booms and busts of the last decade.
For some reason Zero Hedge is prone to take a great deal of heat (both directly radiated and reflected) whenever we opine on the (rather obvious to us) prospect that interest rates might actually (quelle surprise) rise in this environment. Today, rather than engage in "we told you so" gloating, or endure the repetitive pleadings of commentators that this or that Treasury auction was really a success if you just look a little deeper at the figures, we'll just quote Bloomberg quoting other fixed income observers on today's auction of two years, in an article "ambiguously" titled "U.S. 2-Year Yields Highest Since October After $44 Billion Sale."
As much as you hate gold bugs saying "I told you so"... they were right... at least these last 10 years (absent JPMorgan shorting gold in tried and true fashion down to $250 tomorrow).
"Now that the crisis is over, and given the special circumstances of the crisis, and Goldman’s contribution to value-destroying securitizations, it is in the public interest to claw back the money paid to Goldman Sachs. AIG did not need to settle for 100 cents on the dollar in November 2008, and in September 2008, a good negotiator would have refused to hand over more collateral, and should have clawed some back (or insisted it was a temporary loan). Money should be clawed back before Goldman pays out taxpayer subsidized bonuses." - Janet Tavakoli
Views on upcoming, yet unannounced testimonies from Blankfein, Dimon et al from Janet Tavakoli, as well as the maddening inefficiency and government when it comes to all things financial. And some stern condemnations: "Credit derivatives have been criticized for information asymmetry, so why not criticize how these committees operate? I am happy to publicly state that they are rigged."
WSJ reports that the president of Consumer & Small Business Banking for Bank of America has been named CEO. Yet will the track record of the new CEO be spotted from the beginning: recall that Moynihan served as emergency General Counsel replacement after then GC Tim Mayopoulos was suddenly fired in December 2008, presumably for objecting to the Merrill deal. With the lawsuit on the Merrill debacle yet to come, courtesy of Judge Rakoff, will Moynihan be implicated, in addition to lame duck Ken Lewis?
Earlier today the general public got one of its first public disclosures of what Goldman believes its prop trading operation contributes to the firm's top and bottom line. For those uninitiated with banker lingo, prop trading is basically the profit that Goldman makes by transacting exclusively as a hedge fund: this is not agency or facilitation revenue, but merely principal positions that represent balance sheet risk for the firm. Of course, with the Fed having made clear that America would fail before Goldman does, the definition of risk as it applies to Goldman is laughable. Yet considering that Goldman must disclose a trading VaR , or value at risk on a quarterly basis, which over the past year has averaged over $200 million, one can back into what the actual prop capital and revenue generated by prop strategies is (VaR is simply a statistical calculation of how much Goldman would stand to lose if a "one in twenty" event occurred. It is not the maximum loss risk that Goldman has exposure to - a good example of a terminal event, i.e., one which would leave the firm bankrupt overnight, or aVaR of infinity with a narrower confidence range, would be something like the recently notorious "what if" of an aborted AIG bankruptcy, courtesy of Tim Geithner). Goldman's head of PR claims the Goldman's prop trading accounts for only 12% of net revenue. Zero Hedge disagrees, and we would like to pose a question to Mr. van Praag which we hope Goldman will answer for us in order to refute our observation that Goldman may be disingenuous in its public statements.
"When I asked Ken Lewis, Bank of America’s CEO, about why he had not disclosed the mounting losses to shareholders before the shareholder vote, he told this Committee that he relied on the advice of counsel. Protecting shareholders is often, in the final instance, the practical responsibility of corporate General Counsels and their outside counsel. The Subcommittee’s investigative findings demand the question, “Where were the lawyers?” The glaring omissions and inaccurate financial data in the critical November 12 Forecast
make Bank of America’s decision not to disclose to shareholders unsupportable. Furthermore, the flaws in the forecast document were so obvious that they should have alerted the attorneys to the necessity of a reasonable investigation before making a decision on Bank of America’s legal duties to disclose. The apparent fact that they did not mount such an investigation makes the decision not to disclose Merrill’s losses to shareholders an egregious violation of securities laws." - Dennis Kucinich
While the recent Goldman announcement may sound good to some, it entirely misses the point of the outrage of the many who actually realize what is going on. Further, it fails to go far enough. What Goldman needs to do is to go back to its partnership days where it was their capital at risk (all of it) and not the shareholders.
Ken Lewis may think everyone has forgotten about him... But we haven't. Tomorrow's hearing before the House Oversight Committee will see the SEC's Robert Khuzami field questions about BofA's "criminal" acquisition of Merrill, which according to Dennis Kucinich represented an "egregious violation of securities laws." Consider it an appetizer ahead of the full blown jury trial before one Judge Jed Rakoff, coming soon to a publicly accessible courtroom near you.
Several months ago Zero Hedge did an exhaustive study of relative contributions to GDP by consumer class decile: the conclusion was that even though it accounts for a mere 10% of US population, the ultra rich are responsible for over 40% of consumption in the US (yes David Bianco, that ever critical 70% of GDP, get over it). Of course, they end up being taxed for the privilege of consuming so much, but that's irrelevant for this post. What is, however, is a recent GALLUP poll which proves that Rosenberg's theme of "new normal frugality" is now entrenched in the consumer's psyche, and not just among the lower- and middle-classed, but, most surprisingly, in the higher income brackets as well. In November the richest Americans reported a 14% drop in average daily discretionary spending to $117. This is a far cry, and 30% off, from the peak of $185/day report in April of 2008. It also represents a disappointing downward inflection from October 2009, when hopes prevailed that upper income spending would once again take off courtesy of 33 Liberty.
Considering it was just a year ago when we were jolted into this banking-induced recession, you can imagine my astonishment when I read this recent Forbes headline:
“Dubai's Failure Exposes A U.S. Advantage
The well-regulated U.S. financial sector has a lot to show for itself.”
Remember the deal which to much fanfare, lots of subsequent Merrill upgrades, and endless boasting by SL Green CEO Marc Holliday was supposed to usher in the second golden age for New York Commercial Real Estate? The deal that was the alleged steal of 485 Lex by a bunch of shady investors which we wrote about first 4 months ago. The deal that SL Green CEO, Marc Holliday said "is a first, but significant step
towards the sale of interests in 485 Lexington Avenue. If ultimately
approved, the transaction would demonstrate that the Midtown Manhattan
office market continues to stand as one of the world's top locations
and that investor interest is once again on the rise." Remember now? Ok. That deal just died. And with it died any hope that the "Midtown Manhattan office market continues to stand as one of the world's top locations," that REITs fairly priced, and that Bill Ackman's recent REIT book talking tour is anything but.
Such a bearish appearance must be the result of the rose-colored glasses affirmative action thing at GE Capital: we have yet to see what the Comcast policy vis-a-vis unbiased content is. Nothing substantially new from Meredith - same focus areas of concern including toxic mortgages on the Fed's balance sheet, non cash flow generating "assets," and consumer, consumer, consumer (apparently she has not read the David Bianco piece either - after all the US consumer now accounts for 100% of Kindle revenues and 0% of US GDP, or so Merrill will soon want you to believe). Yet withComrade Sam making sure all is good for ever (the alternative, just like falling housing prices in your average S&P model from 2005, simply did not compute at the most recent 5 year plenary session), is there any reason to worry about anything? After all the debt auction carnival begins afresh again today at 1PM with $40 billion in 3 years. So long as those keep getting gobbled up without a glitch, all shall be well.
I don't want anyone to think this is a Goldman bashing exercise. 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. You gotta give it to them. I want readers to take time to go through the anecdotal evidence here and decide if it is more profitable to invest with Goldman, or actually attempt to put your bid in to get a slice of that $19 billion, middle class taxpayer funded, regulator protected bonus pool.