So that’s nice. Read more »
Goldman Sachs
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 »
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 »
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Posted in:
Hedge Funds
Everyone’s Just Gonna Wait Until The Next Crash To Buy Crash Insurance
By Matt LevineWill 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 »
MF Global Report Shows Limits Of The “Just Write All Your Positions On Post-Its” Method Of Risk Management
By Matt Levine
There’s a new report out today describing how MF Global blew up, which is not to be confused with the other two reports describing how MF Global blew up, and really enough is enough. If you’re interested in how MF Global blew up, basically Jon Corzine decided to put all its money into ultimately-not-all-that-horrible peripheral European sovereign bonds with repo-to-maturity funding, and the markets moved against him and he faced huge margin calls, and MF Global couldn’t meet those margin calls and went kaput, and at some point between the margin calls and the kaput MF Global seems to have used some client money to meet the margin calls, and that was a no-no, etc. Read more here or here or here or in the report.1
Still the report does have fun new details about just what a mess MF Global was. This one may have boggled me the most:
The Company’s efforts to sell its Euro RTM portfolio suffered a setback when Abelow brought a representative of the investment bank Jefferies & Company (“Jefferies”) to meet with Corzine to discuss selling the portfolio. Corzine refused to meet with the representative because he was in the process of auctioning some commercial paper, and needed to complete the sales before the close of the London market. Consequently, no sale of the Euro RTMs was discussed with Jefferies at this time.
This was on October 26, a day before the downgrade that ultimately sparked MF Global’s October 31 bankruptcy. I am trying and failing to imagine another financial company CEO missing his last chance to sell off a position in the bond trading book because he was too busy pricing a CP deal. Most financial companies have, y’know, treasury departments to sell their CP, and bond traders to trade their bonds.
Also on October 26, this happened: Read more »
Volcker Rule Forces Goldman To Shift Focus From Prop Trading To Small-Business Lending
By Matt Levine
There’s that old line that “hedge funds are a compensation scheme masquerading as an asset class” but the masquerade is getting harder to keep up because you can pay 2 and 20 for just about anything these days. If you wanted to you could pay – well, 1.5 and 20, with a 7% hurdle – to invest in middle-market leveraged loans via Goldman Sachs Liberty Harbor Capital, LLC,1 which is coming to a stock exchange near you as a listed closed-end fund, regulated as a business development company under the Investment Company Act of 1940.
BDCs are I guess all the rage as a way for alternative asset managers to access non-institutional permanent capital; separately, sidling up next to the Volcker Rule and taunting it is kind of all the rage at Goldman Sachs, and this seems to do that too:
Goldman is likely to invest some of its own money in the company and said in the filing that it expects the unit won’t be covered by the Volcker Rule, a part of the Dodd-Frank financial regulatory overhaul that restricts banks from making bets with their own funds.
Not sure which motive dominates here – Goldman Sachs Asset Management offers plenty of retail products, and why not have 1.5-and-20 retail products in that mix? – but the Volcker angle is intriguing. Read more »
Derivatives are confusing, even pretty simple ones, which is why Goldman Sachs can describe Warren Buffett’s sale of $5 billion of GS stock like this:
The Goldman Sachs Group, Inc. today announced that it has amended its warrant agreement with Berkshire Hathaway Inc., and certain of its subsidiaries (collectively, Berkshire Hathaway) from cash settlement1 to net share settlement.
“We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago,” said Warren Buffett, Chairman and Chief Executive Officer of Berkshire Hathaway. “I have been privileged to have known and admired Goldman’s executive leadership team since my first meeting with Sidney Weinberg in 1940.”
“We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer of Goldman Sachs.
In September 2008, Buffett bought – among other things – warrants to buy 43.5mm shares of Goldman Sachs stock in October 2013 for $115 a share, for a total purchase price of $5 billion. Today he amended that to instead allow him to buy in October 2013, for a total purchase price of zero, a number of Goldman Sachs shares equal to (A) 43.5 million times (B) [the average trading price of those shares at the end of September 2013 minus $115] divided by (C) that average trading price. As of when I type this, at a price of $145.80, that works out to around 9.2 million shares. So one way to read today’s agreement is that in effect Buffett is selling back 34 million (give or take) shares to Goldman for $5 billion. Read more »
Lloyd Blankfein is getting no help from on high with regard to a mortgage-backed securities class-action lawsuit. Read more »
To get a sense of how old the Goldman Sachs IPO lawsuit-and-maybe-scandal that Joe Nocera and Felix Salmon wrote about this weekend is, consider this: the alleged victim was a company named eToys. With the “e,” and the “Toys,” and the weird capitalization. Also Henry Blodget was the analyst who covered them at Merrill. Different times!
Nocera gives the basic facts and there’s something a little off about them:
The eToys initial public offering [in May 1999] raised $164 million [at $20/share], a nice chunk of change for a two-year-old company. But it wasn’t even close to the $600 million-plus the company could have raised if the offering price had more realistically reflected the intense demand for eToys shares. The firm that underwrote the I.P.O. — and effectively set the $20 price — was Goldman Sachs.
After the Internet bubble burst — and eToys, starved for cash, went out of business [in March 2001] — lawyers representing eToys’ creditors’ committee sued Goldman Sachs over that I.P.O.
The theory of the lawsuit is that Goldman screwed eToys on behalf of investors, pricing the IPO at $20 per share, rather than the $78 justified by demand, as evidenced by the fact that the stock briefly traded at $78 on the first day. An alternative theory is that Goldman screwed investors on behalf of eToys, pricing the IPO at $20 per share, rather than the $0 justified by fundamental value, as evidenced by the fact that the company went out of business 22 months after the IPO. Also it was called eToys come on. Read more »
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