The How to Think About Series

How to Think About Goldman’s Q2 Results

vstg.JPGGoldman Sachs announced this morning that second quarter profit fell eleven percent, with net income dropping to $2.09 billion ($4.58/share) from last year’s $2.33 billion ($4.93/share). The earnings, which beat analysts’ prediction of $3.42/share, are the lowest second-quarter result since 2005. As you’ve probably heard, the decline has largely been attributed to debt-related losses. But we know the real story, which you can bet Lloyd hopes no analyst brings up during today’s conference call.

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How To Think About The New Citi Slogan

A lot of you have been wondering if C’s new slogan, “Citi Never Sleeps” is for real. It is. I know it’s a stretch to ask a rational human being to accept, but stay with me, ‘cause it’s all about to make sense.
Sources tell DealBreaker (enough with the anonymity, talkin’ Jimmy Cayne here, informant #1**) that the new tagline is the first step in Vikram Pandit’s “Double Secret Plot To Golden Parachute” plan. You see, reader, Vik is smart enough to recognize that there’s no way to fix the train wreck that is Citi. The inevitable end game of this folly is “I get shitcanned and get my payout.” And, as an astute businessman, Vik knows that the sooner he gets fired, the less the board can hold him accountable for, and “the more loot Vickie keepie.” He’s got a much stronger case to demand mucho dinero after 6 to 8 months of inane ideas and stock price dropping directives (“come in to work on no sleep! It’ll help us to better assess risk!”) than after three years.
Which is why, as fast as he and the brain trust can come up with them, he’s implementing as many stupid ideas as possible, and has even set up a tips line that the public can use to proffer suggestions (we’ll send over any worthy ideas from the comments section this afternoon, so start thinking). As Cayne tells us, “It’s basically Vik’s ‘accelerated path’ to joining his boys—me and Stan, no Prince—in Maury Povich’s basement.” Cayne added that while he’s “skeptical” that Pandit will be able to approach “Jimmy levels of fuck up,” he supports VP’s plan wholeheartedly, “’cause we’re running low on snacks, and the two– yes two– assistants Bear’s still got working for me act all put out when you ask them to make chip runs.”

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The billions upon billions of dollars that Citi wrote down under the umbrella of “stuff we fucked up on” today (and the resulting “negative revenue” of $5.1 billion) shouldn’t give investors the confidence that C has the vaguest notion of what it’s doing. And yet, the bank’s stock is up almost seven percent. There is only one logical explanation for this surge. People want to see more of this:

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goya.JPGAt times like these, with Bear getting flushed down the 14th Floor Mens, you school girls need a voice of authority to give you a sense of history. Show you how we got here. That voice is me. So gather round, kids. Lesson time, courtesy of Bessie’s History of Bear Stearns: A Timeline.
– 1923: Bear Stearns is founded as an equity trading house by Joseph Bear, Robert Stearns and Harold Mayer with $500,000 in capital. While he felt “gipped” at the time, Mayer and his descendants are pretty psyched that they voted ix-nay on Bear Stearns Ayer-May. In a remarkable symmetry, Bear will probably end up with the same $500,000 it started with in 1923.
– 1955: Bear Stearns opens its first international office in Amsterdam. Later that year in the same city, Purdue dropout-cum-future Bear Chairman/CEO-cum-Destroyer of All Worlds Jimmy Cayne, then 21, consumes his first pot brownie.
– 1969: At a New York bridge tournament, future Bear Stearns CEO Alan “Ace” Greenberg meets a 35-year-old Jimmy Cayne, then gainfully employed as professional card player. Impressed by Cayne’s stage presence and pluck, Greenberg offers him a job as a Bear stockbroker on the spot, without seeing a resume or checking references. As they sealed the deal, Greenberg famously said to Cayne, “What’s the worst that can happen? You destroy $100bn in shareholder capital?” As far as we know, it is the only instance of an individual being hired for a Wall Street job at a bridge tourney.
– 1985: Bear Stearns becomes a publicly traded company, because this is too good a deal to keep from the average investor.

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cramerspitzerphotobooth.jpgHow easy would it be to chalk Jim Cramer’s horrifically bad guidance to a Mad Money emailer last Tuesday to keep his money in Bear Stearns up to Jim Cramer being just plain clueless? I don’t know, very? But let’s think about this for a sec. JC’s given what’s known in the business as “shitty investment advice” in the past, that’s an incontrovertible fact. But has he ever been this off? As far as we can tell, he’s not officially retarded—or Tim Sykes. So what was it then, that made him tell “Peter,” “No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear”? Once again, the answer lies with Eliot Spitzer’s love of whores. As you well know, JC was very shook up about not being brought into the inner circle of Spitzer’s prostitution ring. He was in no position to be giving counsel about anything. Once the shock of the betrayal, or as he’s been referring to it among friends and colleagues “My Personal Crying Game,” wore off, Cramer came to his senses and said the common stock was “worthless” on Friday. What we’re trying to say, Peter, is that you should cross “Uncle Jim” off your To Maim List, smear some red lipstick on your mouth, and start thinking about how to make Spitzer, and not James, pay for your losses (sources in his pants tell us Silda’s already gone for the obvious, so you’re really going to have to think outside the box on this one).
Oops – CNBC’s Cramer Said ‘Don’t Move’ From Bear a Week Before Collapse [Business & Media Institute]

Alwaleed.JPGAs keepers and dispensers of business wisdom, people often ask us to explain certain mysterious aspects of the world of finance to them that they cannot explain to themselves. Since we think on a higher plane about this stuff than most, it’s generally helpful to use a pop culture analogy to elucidate. Don’t think of this as us dumbing down the material for your benefit, but merely-actually, that’s exactly what it is. But what I’m saying is, don’t feel bad about it. In fact, today’s question comes from a dear reader who embraces his own limitations, and asks us to answer his thorny question in a way that any simpleton can understand. “Steve in Stamford” writes, “My favorite memories from childhood involve ‘sick days’ from school, where I would sit in front of the tube eating Tasti Cakes and watching reruns of ‘Beverly Hillbillies,’ ‘That’s My Mama,’ ‘Flintstones’ and the Hulk. The lessons gleaned have informed my investment decisions later in life. Lately, I’ve been at a loss on Citi — I don’t get it. Any insights to be drawn from TV Land?
Great question, Steve, and topical, too. On Tuesday, Sameer Al-Ansari, the head of Dubai International Capital said at a private equity conference, “In my view it will take a lot more than that to rescue Citi and other financial institutions.” This was sort of a “no shit” statement that pointed out something every 2-brain celled human being’s been thinking since Meredith Whitney told him/her to back in October but apparently it knocked some sense into the 1-brain cell guys, who still saw some value in C, and the courage to short that shit—resulting in a four percent drop in Citi’s stock price. Then, today, Dubai International said in a statement, “Dubai International Capital has never expressed an opinion on the investment merits or financial condition of Citi.” That’s right, Steve—it was all in your head. Am I saying Citi’s largest shareholder outright lied to you? No, they’re not smart enough for that. What we’re saying is, they have no idea what’s going on. Which brings us to this—Citi, and its ragtag coterie of hangers-on, is the TV equivalent of the seminal sitcom, “Hogan’s Heroes.”
Think about it, Steve: the premise of the show was that the POWs at Stalag 13 were actually active participants, using the camp as a base of operations for sabotage against the Nazis. Their leader was senior ranking POW officer Colonel Hogan. The prisoners were in contact with Allied command, and running the show, aided by the incompetence of camp commandant Colonel Klink and his aide, Sergeant Schultz. Citi is the Third Reich. The failed experiment. Weill would be Hitler but he flew the coop with Eva Braun, and let Pandit do the whole “Third Act in the Bunker” thing. Meredith Whitney is Hogan. Alaweed is Klink. Dubai International is Schultz– “I zhee nothing.” We almost said Pandit is Schultz, but that would be giving him too much credit.
That’s really it. Hope this helped, Steve. If you have a question you’d like answered, shoot us an email at tips at dealbreaker dot com, or give us a call at (203) 890-2000. We know what we’re talking about.
Dubai International Says It Takes Back Citi Comments [DealBook]

cigars.jpgFidelity agreed yesterday to pay $8 million to makes claims that members of its staff accepted improper gifts from brokers go away. We find the fact the firm neither admitted nor denied any wrongdoing (I know this is how it works but silence for a sec and go with me) to be tacit indication that the people in charge approved and continue to approve of the Wimbledon tickets, flights on the Concorde, passes to the 1999 Ryder Cup golf tournament, hits of E, and dwarf-featuring bachelor parties bestowed upon 13 current and past employees, including former Magellan fund manager Peter Lynch. And frankly, we could not agree more.
You should be able to use all the resources at your disposal to get your shit done, and if you happen to be on the receiving end of a cigar-filled humidor worth $1,300, good for you. Not so much with the dwarves but we don’t yuck other people’s yums. The only problem is Fidelity’s self-imposed limit on gifts to employees, which is $100. Raise the bar, or drop it all together, and make this business what it should be, which is a free for all. While we’re waiting for the paperwork to go through, take a cue from Blarney, and introduce your clients to the various Times Square peep shows (only cost a quarter, so it would take awhile to butt up against the limit), or the pseudo-straight married men of NJ, who’ll do it for free. At the risk of ending this on a self-serving note, we’ll remind you at this time that DealBreaker has no monetary restrictions on whatever treats you’d like to drop in our laps, which you probably already intuited if you’ve ever observed Don Klarney in the Meat Packing district on a Saturday night.
Fidelity to Pay U.S. To End Case Over Gifts [NYT]

How To Think About The Credit Suisse Pricing “Error”

dougan_lead_1.535638.jpgA lot of people are acting all shocked and dismayed over the little slip-up that happened at Credit Suisse. Saying they can believe something like this would happen over at Bear, where Jimmy Cayne spends all the money on chips and forgets to leave an IOU, and UBS, where God retroactively punishes, and Citi, where you’ve got eight people sharing one chair and nobody can even hear themselves think, but not at CS. Bad things don’t happen to good people and bad things like multi-billion dollar mistakes certainly don’t happen to good people who live within 200 feet of the Shake Shack. I’ve got news for those of you failing to “get” how Credit Suisse could suddenly come up with this gigantic fuck-up, worthy of even Citigroup’s praise, when just last week Brady Dougan told reporters everything was cool– there never was any “error.” Well, never any error that D-gan didn’t orchestrate himself.
And no, I’m not talking about fraud. Let’s leave that up to Goldman, the professionals. Listen to D-gan’s wording from yesterday’s call: he defends the bank’s controls, saying it was a “very good sign” the “errors” were caught “rapidly, and…by our internal processes.” You can almost see him cocking his eyebrow slightly, just ever so slightly, too, can’t you? That’s because he’s got a secret– this whole thing was a drill. Not a joke, a drill. Dougan wanted to test the controls in real-time; make sure everything was up to code. Two something billion dollars was sacrificed now so that twenty something billion dollars doesn’t have to be sacrificed later. Don’t believe us? That’s fine, you’re entitled to your own (woefully misguided) opinion, and we know you’ll come around eventually. Get into my head and it’ll make sense. In the meantime, I challenge you all to come up with a more plausible explanation for what happened. It’s an impossible task but nonetheless, the best answer wins lunch at the SS, on Carney.
Credit Suisse Suspends Traders After Mispricings [DealBook]
Dougan’s Assurance of Shareholder `Comfort’ Proves Immaterial [Bloomberg]