Everyone knows the story of Abacus 2007-AC1 by now: Goldman Sachs sold some mortgage-backed-security CDOs to some people, and those people thought that the underlying mortgage-backed securities were chosen by an outfit called ACA Management to be Good, but in fact they were chosen by Paulson & Co. to be Bad, and they turned out to be Bad, and that was Bad. The SEC sued Goldman over it, and Goldman settled for $550 million, and then everyone else sued too because they had been lied to about who picked the mortgage-backed securities (Paulson, not ACA) and why (to fail, not to succeed).
Among the people who sued was ACA, whose role in the transaction was (1) pretending to pick the underlying RMBS and (2) issuing a financial guaranty policy (to Goldman) referencing the super senior tranche of Abacus. That tranche more or less went poof, and ACA ended up owing $840 million to Goldman (though, really, ABN Amro paid the $840mm, and Paulson got it).1 Since ACA was in the business of writing terrible financial guaranty policies, it blew right up and ended up paying only $30 million. Then it sued Goldman for the $30 million back, plus punitive damages. ACA’s claim is that, while it knew that Paulson had selected the underlying RMBS, it thought Paulson was net long Abacus, because Goldman schemed and lied, and that it wouldn’t have insured Abacus if it’d known the truth about Paulson’s position.
Yesterday ACA lost when a New York appellate court dismissed its case. The court split 3-2, and the opinion is short and pretty weird; basically the majority says “it doesn’t matter that Goldman lied to ACA about Paulson’s position, because ACA should have kept asking until it got the truth,” which is a funny law.2 The two dissenting judges seem to have rather the better of it.3
Still the result seems right. Read more »
The theme Mr. Cohn kept returning to was the primacy of clients. Asked what his daily routine looked like, his answer was simple. “The most important thing I do is deal with clients, client situations and opportunities for the firm,” he said. Mr. Cohn, a former trader, also said he had become a “better listener.” Still, Mr. Cohn retains something of an edge. When his father asks him how the market is doing, Mr. Cohn sometimes responds, “Which one?” even though he knows it’s unlikely his father would inquire about one of the many esoteric markets he works in, he said. [Dealbook]
We don’t have her side of the story yet but from what her enemies say about her I like Agostina Pechi’s style. Pechi is the former Credit Suisse emerging markets sales VP who quit to go to Goldman and whom CS is now suing because she (allegedly) took a bunch of secret stuff with her when she left. Also because she (allegedly) did this:
[B]eginning in February 2013, Pechi represented to her manager as well as other senior group management that [a certain] client’s interest in this and other private transactions was flagging. Credit Suisse scheduled in-person meetings with the client in an effort to revive interest in the deals.
Pechi was deliberately evasive with management regarding the status of those meetings and whether high-level decision-makers on behalf of the client would attend. Based upon Pechi’s representations, senior Credit Suisse employees did not meet with the client.
However, as Credit Suisse later discovered, Pechi attended two meetings with representatives of the client, at least one of which was attended by high-level decision-makers on behalf of the client, as part of the above-referenced private transactions.
Upon information and belief, Pechi held these in-person meetings in an effort to shore up her relationship with the client in preparation for her departure and to explicitly discuss moving its business to Pechi’s new firm.
Except for those last two paragraphs, that sounds like something I would do!1 Speaking of misplaced diligence here’s how Pechi spent her last vacation at CS: Read more »
Now that Goldman Sachs has succeeded in its mission of helping Apple fend off David Einhorn’s demand that it raise a two hundred plus billion dollars of preferred stock, I guess it’s time for someone at Goldman to sit down with Apple and say “now, guys, really, you ought to think about raising two hundred billion dollars of preferred stock, it’s just the sensible thing to do.” Or something. This debt-financed share-buyback plan doesn’t sound like too much fun for the bankers:
On April 23, Cupertino, California-based Apple said it would return an additional $55 billion in cash to shareholders to compensate for a stock that’s dropped on signs that the company’s growth is slowing. Although it has $145 billion of cash, Apple said it will use debt to help finance a total capital reward of about $100 billion to shareholders. …
Because investment-grade debt offerings typically pay low fees, banks may offer to do the transaction for little or no charge, [Sanford Bernstein analyst Brad] Hintz said.
“This is going to be a prestige-per-share, not an earnings-per-share, deal,” said Hintz, who worked as Morgan Stanley’s treasurer and as the chief financial officer at Lehman Brothers Holdings Inc. earlier in his career. “We’re really talking about a deal that’s going to be done as close to gratis as you can get.”
The amount Apple will be raising is a little unclear but $50 billion over the next three years is … possible? Maybe?1 Read more »
So that’s nice. Read more »
Honestly bank earnings week has been a little boring, no? It’s been quarters since anyone announced a six billion dollar trading loss, and the recent news is pretty much modest beats from a diverse mix of businesses and where is the fun in that I ask you. Financial-market memories are short and … have negative serial correlation, or something … which might explain why Goldman is down today despite announcing a $4.29 EPS vs. analysts’ $3.87, with strength in principal investments and debt underwriting making up for so-so FICC revenues.
The call: variations on boring. Goldman CFO Harvey Schwartz painted a picture of Goldman clients who are deterred from strategic activity by macro uncertainty – “oh we can’t do that merger, because, uh, Cyprus” – and so spend their time refinancing their loans every six months to get lower interest rates.1 I suppose their bankers have to make fees somehow. And there don’t seem to be many conclusions to draw from the numbers: FICC revenues are down because there is noise in FICC revenues, not due to any change in business mix or performance. VaR is down because market vols are down, not because of any change in risk appetite. Private equity gains in investing & lending reflect stronger public equity markets because private equity is just beta. I guess.
Nor is Harvey your go-to guy to fulminate about regulation, though these days really no one is. He said various nice things about how the regulators are working hard and getting it right, and how Goldman doesn’t act in anticipation of regulations but only responds to them when they’re final. Others have phrased this less charitably. Thus Goldman’s new BDC is not a preemptive effort to fit prop traders into the Volcker Rule, but just a client-driven part of Goldman’s asset management strategy – “deploying our competencies into opportunities we feel like our clients would benefit from.”
So what’s left? There’s comp, of course: comp accruals were 43% of revenue ($4.34bn), versus 44% in 1Q2012 ($4.38bn), and headcount is down 1%. Analysts tried to push Schwartz to extrapolate a trend there, but again he mostly resisted. Keep enough people to serve clients, etc. Read more »
The House of Blankfein was not going to get shown up by the likes of Sallie Krawcheck and Arthur Levitt, even if Motif’s business model is to be “an online evolution of investment clubs” that “allows investors to buy a bucket of stocks centered on a theme, like healthy food, inflation or even rebuilding after Hurricane Sandy.” Read more »
Lloyd Blankfein gained a beard and a few mill. Read more »
One might think that being terminated by Goldman Sachs for taking “inappropriately large proprietary futures positions in a firm trading account” and “violating investment-related statutes, regulations, rules or industry standards of conduct” might make it hard to get another job on Wall Street.
Not at all. It might make it hard, however, to get your deferred compensation after you plead guilty to fraud, re: said inappropriately large futures position. Read more »
Will stocks go down? Sure, maybe, whatever. I mean, they have so far today, I don’t know. It’s a thing that might happen and you might want to bet on it, one way or another. If you want to bet against it – if you think stocks won’t go down, or won’t go down by that much – then broadly speaking you can do one of two things, which are:
- Buy stocks, and get paid for taking the risk of stocks going down by getting the chance that they’ll go up, or
- Sell puts, and get paid for taking the risk of stocks going down by getting money.
That’s basically the world: you take a risk, and you get paid for taking that risk either with a fixed payment or an uncertain upside.1 You could imagine some sort of long-run expectation in which those strategies would be equivalent and I guess you wouldn’t be entirely wrong. Here is a graph:
That’s from a Goldman Sachs Options Research note out yesterday, and compares (1) buying and holding the S&P 500 (light blue line) with (2) selling one-month at-the-money puts on the S&P 500 stocks every month (black line), as well as the somewhat less relevant (3) just buying bonds. GS is recommending that you sell puts so the rest of the report is full of ideas to make that black line go higher but I hope you’re not here for investing advice so I’ll leave that to them. Read more »
Stephen Friedman, who preceded Corzine as Goldman CEO and whose tenure as New York Fed chairman was prematurely ended by the somewhat unsettling sight of said New York Fed pouring bailout money into Goldman’s maw as he worked for both, has reached mandatory retirement age. Read more »