Friday, 16 April 2010 07:13

So, How Many Banks and Analysts Were Bearish On Goldman Before Today?

 

I know I'll raise my hand to the aforementioned question. The issue is, as I huffed and puffed about how overvalued GS is, particularly considering the amount of risk that it faced, I got a lot of blow back. The same blow back I got in early 2008 when I shorted GS from $180 to $75 (see Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis). Well, I guess we can all see the risk that I was referring to, right???

When the Patina Fades... The Rise and Fall of Goldman Sachs??? Tuesday, 16 March 2010

I have warned my readers about following myths and legends versus reality and facts several times in the past, particularly as it applies to Goldman Sachs and what I have coined "Name Brand Investing". Very recent developments from Senator Kaufman of Delaware will be putting the spit-shined patina of Wall Street's most powerful bank to the test. Here is a link to the speech that the esteemed Senator from Delaware (yes, the most corporate friendly state in this country). A few excerpts to liven up your morning...

Reggie Middleton vs Goldman Sachs, Round 1Tuesday, 08 December 2009 and Reggie Middleton vs Goldman Sachs, Round 2 Sunday, 31 January 2010

On December 8th of last year, I penned "Reggie Middleton vs Goldman Sachs, Round 1"wherein I challenged all to take a critical look at exactly how much money was lost by Goldman Sachs' clients. Well, here comes round 2, which is directed at Goldman (over)valuation.

 

For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, Wednesday, 24 February 2010 -Those CDO buyers shoudl really heed this article. Not only did the GSAMP investors lose over 80%, but the real estate investors lost 98% (see Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!).

First a little background info. Goldman is supremely overvalued in my opinion. It is even more so considering much of its profit is generated solely from the raping of its clients. I say this holding absolutely no ill will towards Goldman. This is strictly factual. Let's walk through the evidence, of profit potential, valuation, and the stuff behind some of the value drivers in their business model, like brokerage and investment banking...

But wait! There's more, and it get's quite interesting...

 

 

Reference "Blog vs. Broker, whom do you trust!" and you will be able to track the performance of all of the big banks and broker recommendations for much of the year 2008 for the companies that I covered on my blog. Since the concept of sell is rather remote to any big broker whose trading desk is not net short a particular position, it would be safe to assume that if the market turns the broker's recommendations will also turn in a similarly abysmal year as well. Just to be clear, this is not about ability, or who is the smartest. It is about marketing and conflicts of interest. Brokers do not charge for their research. Thus it should be obvious to anyone with even the slightest modicum of business savvy that the sunk costs that is freely disseminated research is most likely a loss leader (with the losses being born by the consumers of said research) otherwise known as the marketing arm for underwriting, sales and trading.

The blind following of Wall Street marketing research, and the abject worshipping of Goldman marketing,inventory dumping, sales research allows them to rake billions of dollars off of their clients backs, yet clients still come back for more pain. A fascinating, Pavlov's dog's/Stockholm Syndrome style phenomena. Have you, as a Goldman client, performed as well as their employees receiving $19 billion in bonuses? Don't get me wrong. I'm not hating Goldman, but now they are actually raping raking billions of dollars off of the tax payers backs as well. I do not do business with them, hence I do not want get my back raked - but it appears that as a US taxpayer I have no choice. A company that nearly collapsed a year ago, receives mysteriously generous government assistance (AIG full payout during its near collapse as an insolvent company) with the help of highly ranked government officials (many of which are ex-Goldman employees) and then pays out record bonuses on top of so many tens of billions of dollars of taxpayer aid with taxpayers facing high unemployment and sparse credit is not necessarily a company that should be looked upon as a scion of Wall Street. There is no operational excellence here. The only reason such an aura exists is because main street and Wall Street clients have an amazingly short memory, as I will demonstrate in the paragraphs below. This goes for the big Wall Street banks in general, and Goldman in particular.

As stated above, Goldman is now underwriting CMBS under a broad fund our $19 billion bonus pool "buy" recommendation in the CRE REIT space. Let's take a look at another big bonus development exercise, marketing push they made into MBS a few years ago...


In April of 2006, a Goldman Sachs forced "Goldman Sachs Alternative Mortgage Products", an entity that pushed residential mortgage backed securities to its victims clients through GSAMP Trust 2006-S3 in a similar fashion to the sales and marketing of  the CRE CMBS that is being pushed to its victimsclients as described in the links above. The residential real estate market faced very dire fundamental and macro headwinds back then, just as the commercial real estate market does now. I don't think that is the end of the similarities, either.

Less then a year and a half after this particular issue was floated, a sixth of the borrowers defaulted on the loans behind this product, according to CNN/Fortune, where the graphic to the right was sourced from. Here's an excerpt from the article of October 2007 (less than a year after the issue was sold to Goldman clients, clients who probably didn't know that Goldman was short RMBS even as Goldman peddled this bonus bulging trash to them):

By February 2007, Moody's and S&P began downgrading the issue. Both agencies dropped the top-rated tranches all the way to BBB from their original AAA, depressing the securities' market price substantially.

In March, less than a year after the issue was sold, GSAMP began defaulting on its obligations. By the end of September, 18% of the loans had defaulted, according to Deutsche Bank.

As a result, the X tranche, both B tranches, and the four bottom M tranches have been wiped out, and M-3 is being chewed up like a frame house with termites. At this point, there's no way to know whether any of the A tranches will ultimately be impaired...

,,, Goldman said it made money in the third quarter by shorting an index of mortgage-backed securities. That prompted Fortune to ask the firm to explain to us how it had managed to come out ahead while so many of its mortgage-backed customers were getting stomped.

The party line answer to the bolded phrase above is "risk management". Goldman is prone to say, "We were just hedging out client positions". Well, I wonder, were they net short or net long RMBS. You want to know what my guess is??? Looking back to there CMBS offerings of late, clients and bonus pool enhancement customers should inquire, "Is Goldman net short the trash, bonus pool enhancement CMBS products that they are peddling to me???"

Now, fast forwarding to the present day, we look into "GSAMP Trust 2006-S3" and we find (courtesy of a follow-up CNN/Fortune article):

...the formulas used by Moody's and S&P allowed Goldman to market the top three slices of the security -- cleverly called A-1, A-2 and A- 3 -- as AAA rated. That meant they were supposedly as safe as U.S. Treasury securities.

But of course they weren't. More than a third of the loans were on homes in California, then a superhot market, now a frigid one. Defaults and rating downgrades began almost immediately. In July 2008, the last piece of the issue originally rated below AAA defaulted -- it stopped making interest payments. Now every month's report by the issue's trustee, Deutsche Bank, shows that the old AAAs -- now rated D by S&P and Ca by Moody's -- continue to rot out.

As of Oct. 26, date of the most recent available trustee's report, only $79.6 million of mortgages were left, supporting $159.9 million of bonds. In other words, each dollar of bonds had a claim on less than 50¢ of mortgages.

All the tranches of this issue, GSAMP-2006 S3, that were originally rated below AAA have defaulted. Two of the three original AAA -rated tranches (French for "slices") are facing losses of about 90%, and even the "super senior," safer-than-mere-AAA slice is facing losses of 25%.

As of Oct. 26, date of the most recent available trustee's report, only $79.6 million of mortgages were left, supporting $159.9 million of bonds. In other words, each dollar of bonds had a claim on less than 50¢ of mortgages.

... ABSNet valued the remaining mortgages in our issue at a tad above 20% their face value. Now, watch this math. If the mortgages are worth 20% of their face value and each dollar of mortgages supports more than $2 of bonds, it means that the remaining bonds are worth maybe 10% of face value.

...If all the originally AAA -rated bonds were the same, they'd all be facing losses of 90% or so in value. However, they weren't the same. The A-1 "super senior" tranche was entitled to get all the principal payments from all the borrowers until it was paid off in full. Then A-2 and A-3 would share the repayments, then repayments would move down to the lower-rated issues.

But under the security's rules, once the M-1 tranche -- the highest-rated piece of the issue other than the A tranches -- defaulted in July 2008, all the A's began sharing in the repayments. The result is that only about 28% of the original A-1 "super seniors" are outstanding, compared with more than 98% of A-2 and A-3. If you apply a 90% haircut, the losses work out to about 25% for the "super seniors," and about 90% for A-2 and A-3.

So, after reminiscing about the GSAMP Slide, we get to a news story in Bloomberg released just this morning...

Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs

From Bloomberg:

Feb. 23 (Bloomberg)

 

Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG...

The public can now see for the first time how poorly the securities performed, with losses exceeding 75 percent of their notional value in some cases. Compounding this, the document and Bloomberg data demonstrate that the banks that bought the swaps from AIG are mostly the same firms that underwrote the CDOs in the first place.

The banks should have to explain how they managed to buy protection from AIG primarily on securities that fell so sharply in value, says Daniel Calacci, a former swaps trader and marketer who’s now a structured-finance consultant in Warren, New Jersey. In some cases,banks also owned mortgage lenders, and they should be challenged to explain whether they gained any insider knowledge about the quality of the loans bundled into the CDOs, he says. [Let's not play games here. The banks knew what trash was hidden where!]

More of Reggie on Goldman Sachs

Reggie Middleton vs Goldman Sachs, Round 2

Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off

Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now!

 

§  As Reality hits, the Masters of the Universe are starting to look like regular bank employees

Reggie Middleton's Goldman Sach's Stress Test: Breaking Ranks with the Crowd Once Again!

Who is the Newest Riskiest Bank on the Street?

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Last modified on Thursday, 14 July 2011 10:26

6 comments

  • Comment Link Commercial Banks Wednesday, 02 February 2011 01:33 posted by Commercial Banks

    hey, I added ur site to my RSS reader. thnx the posts are awesome!

    Report
  • Comment Link phirang Tuesday, 20 April 2010 08:36 posted by phirang

    I have finally turned bearish on the banks.

    Why?

    Obama has intentions to shrink, as $ of GDP, the size of the banking industry. That $50b "pot" will come out of shareholder's equity in the various banks.

    The "Volcker Rule", too, if implemented, will certainly blunt further upside in the investment banks.

    Report
  • Comment Link Reggie Middleton Tuesday, 20 April 2010 06:15 posted by Reggie Middleton

    The snowball effect of our litigous society can kill Goldman:

    Britain's Financial Services Authority (FSA) will launch a formal inquiry into Goldman Sachs, connected with the SEC probe.
    http://www.cnbc.com/id/36659294

    Cali. Fund to Examine Goldman Practices
    http://www.cnbc.com/id/36658768

    AIG Eyes Action on Goldman over $2 Billion CDO Losses
    http://www.cnbc.com/id/36656434

    Report
  • Comment Link Reggie Middleton Monday, 19 April 2010 20:28 posted by Reggie Middleton

    If the market tanks, their fortunes go with it. I've been looking at some retailers lately as well. I will post some preliminary ideas tomorrow.
    @exchangetube
    thanks!

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  • Comment Link shaunsnoll Monday, 19 April 2010 18:15 posted by shaunsnoll

    some of the asset managers look like interesting shorts from here again. BEN, JNS, GAM, BX, WDR etc...

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  • Comment Link xchangetube Monday, 19 April 2010 10:56 posted by xchangetube

    Well great analysis and statistical results...

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