Now, this begs the question as to just how lucky those potentially thousands of Goldman HNW clients are who are investing in the Goldman Facebook Special Purpose Hedge Fund. After all, this wasn't the first time that Goldman employed its financial engineers to make available certain illiquid and/or arcane investments for the benefit of their clients. Let's reminisce, shall we as I take you back to the BoomBustBlog post, When the Patina Fades… The Rise and Fall of Goldman Sachs???
In April of 2006, a Goldman Sachs formed “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 below 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.
Just one month later from Bloomberg:
Feb. 23 (Bloomberg)
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!]
“It’s almost too uncanny,” Calacci says. “If these banks had insight into the underlying loans because they had relationships with banks, originators or servicers, that’s at the least unethical.”[At the very least. I think it's called ILLEGAL!]
The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured — more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.
These tallies suggest a possible reason why the New York Fed kept so much under wraps, Professor James Cox of Duke University School of Law says: “They may have been trying to shield Goldman – for Goldman’s sake or out of macro concerns that another investment bank would be at risk.”
Goldman customers power the bonus pool through the losses they accumulate both by doing business with Goldman and following Goldman’s investment advice as Goldman takes the other side of the trade. This is now only starting to come out in the mainstream media, although I harped on this topic throughout 2008, see Blog vs. Broker, whom do you trust!.
And in Bloomberg: Goldman Sachs Hands Clients Losses as Seven of Nine `Top’ Trade Ideas Flop. Now there’s a big surprise! Listen, everybody makes mistakes, and no one is perfect (except for Goldman’s prop desk, but we’ll get to that point shortly). I will never criticize anyone for having a bad month, quarter or year. The thing is this is not about Goldman having a bad month, day or year, it is about their taking advantage of their clients. Excerpts from the afore-linked article:
May 19 (Bloomberg) — Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm’s investment advice fared far worse.
Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who adopted the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar.
…“This says that Goldman’s guys are only human,” said Axel Merk, who oversees $500 million as president and chief investment officer of Merk Investments LLC in Palo Alto, California. “No one is always right. There are a lot of cross currents in this market.”
This my dear friend, is what we in the industry refer to in technical parlance as BULLSHIT!!!! Goldman literally had a perfect trading quarter recently, with not one day losing money. Yes, the guys at Goldman are only human, but they are front running humans!
Gia Moron, a spokeswoman for Goldman Sachs, declined to comment.
Of course, you know I have much more. Reference The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short? where not only supplied the mechanics of the shenanigans, step by step, with downloadbable models, but I also illustrated the following:
Not to be outdone by those “lesser” brands on Wall Street. Goldman Sachs lost nearly 100% of their clients money in a similar CRE fund. Reference this FT article: Goldman real estate fund down to $30m (they lost $1.76 billion, yes, that’s a very big percentage loss).
These funds did very well during the boom, but when the obvious bust came (and I blogged about it in full detail, so no one could say they didn’t see it coming), these funds crashed. Professional asset managers should know better. They are simply delivering leveraged market beta, not alpha. Investors are paying a fortune in fees to ride the mortgaged ups and downs of the real estate market.
Here’s another tidbit of information. Some of the banks that sponsored these investment funds also helped arrange the financing of the buildings that the funds bought. Without discussing the wide implications of this potential and actual conflict of interest, it remains to be said that if the building goes underwater, the lenders (which were often the banks) were underwater on the deals as well. The banks that were underwater obviously need to get out from under these securities. What’s the easiest way to do that? Upgrade the sector and sell them to suckers, that’s how…
As stated Reggie Middleton vs Goldman Sachs, part 1, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and “Blog vs. Broker, whom do you trust!”, Goldman’s peddling of products often spells doom for the consumer (client) and bonus for the producer (Goldman). Goldman is now underwriting CMBS under a broad fund our $19 billion bonus pool “buy” recommendation in the CRE REIT space reference Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off . Now, after all of the evidence that I have presented against the CRE space, who do you think would be better for clients net worth, Reggie’s BoomBustBlog or Goldman?
You see, the moral to this story is that Even With Clawbacks, the House Always Wins in Private Equity Funds.
The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.
Under the base case assumptions, the cumulated return of the fund and LPs is -6.75% and -55.86, respectively while the GP manages a positive return of 17.64%. Clicking here to download this illustrative model in Excel: Real estate fund illustration.
Okay, I'm going to leave those doing "God's work" alone for now... Uh... Wait a minute. I just realized that these guys are considered to be the best on the Street! Did you know that Goldman came in number one for financial company analysis on the Street during the financial turmoil of 2007/8 and the government engineered recovery of 2009/10? They bested all of Wall Streeet with... drum roll then silence,,,, with a hint of hysterical laughter in the background.... A 38% accuracy rate! With friends like those brokers and analysts, who really needs enemies? As a matter of fact, the only one that I know of that bested those doing God's work and the rest of the street was this handsome, charismatic, and rather articulate blogger from Brooklyn... See Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
As you can see, and as has been hinted to in the introduction of this missive, BoomBustBlog is not your typical mainstream media concern. If there is a strong opinion backed by facts, or some truth to be told (even if - or especially if -mired in the arcana of finance, economics, or investment jargon), I truly believe entities such as this are the places to go for it - sensitive feelings and political correctness be damned. As of right now, there are not a lot of places to go for the skinny on things such as this Facebook investment, at least in my not so humble opinion. Anyone interested in discussing partnering to build a new style media concern that focuses on hard content that both understands and leverages the mobile computing space and the new media model should definitely contact me. Click here to find out more about Reggie Middleton and the BoomBustBlog.
More BoomBustBlog on new media:
- The Face Of Media In 2011 Is Not What What Is Being Marketed, But What You Actually Use Thursday, December 30th, 2010
- Why Traditional Media Still Doesn’t Get It Regarding Google, And Why Not Getting It May Marginalize Them! Wednesday, December 8th, 2010
- The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift Friday, July 9th, 2010
- Are Blogs Truly Competitive With the Mainstream Media in Terms of Quality of Content? Tuesday, April 20th, 2010
- Do Blogs Compete at a Level that Threatens Mainstream Media? Wednesday, February 17th, 2010