Wednesday, 18 March 2009 00:00

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

From CNBC/NY Times:

Goldman Offers Loans to Stretched Employees


The New York Times

| 17 Mar 2009 | 07:39 AM ET

Goldman Sachs got its bailout. Now some of its bankers, those aristocrats of Wall Street, apparently need a bit of a bailout too.

Goldman, which accepted billions of taxpayer dollars last fall and, as learned Sunday, was also a big beneficiary of the rescue of the American International Group, is offering to lend money to more than 1,000 employees who have been squeezed by the financial crisis. The loans, offered via e-mail last week, could range from a few thousand dollars to hundreds of thousands.

Working at Goldman has long been regarded as a sure path to riches. But Goldman’s employees are losing money on their personal investments — particularly in Goldman’s own elite investment funds, which have been considered one of the perks of working at the bank.
I have many friends that work on Wall Street. I believe that the layperson actually believes that working on the Street qualifies you for being an "astute investor" or adept at personal finance and money management. This is actually far from the truth. The culture of the Street is to think with your income statement, not your balance sheet. Many try to keep up with the Jones's vs. staying down low with the Middleton's. Living income statement centric can cause a shock to the system when said income is disrupted in a poor credit environment. This is why I try my best, and try my best to teach my 3 children, to think off the balance sheet vs the income statement.

Now these funds have stumbled, and some Goldman employees who financed their gilded lifestyles by borrowing in good times are suddenly short on cash needed to meet commitments to their personal investments in the funds. “It’s a problem with the culture of spending,” said Gustavo Dolfino, the president of Whiterock Group, a Wall Street recruitment firm. “No matter how much you have, you spend like you have a lot more.”


At least one of the vehicles, in a group known as the Whitehall funds, sank more than 50 percent last year. Another let its investors withdraw their money this year — at a significant loss.

With a focus on real estate and private equity investments, the funds — which also include Goldman Sachs Capital Partners — have traditionally performed extremely well, sometimes increasing sevenfold in a few years.
It has performed extremely well during private equity (PE) and real estate (RE) bull markets and consequent bubbles. Haven't most PE and real asset funds performed well in thier resepctive bull markets and bubbles, though? I know mine certainly has. The key is to know when the bull run is about to end. It's not what you make, it's what you get to keep that counts! Goldman even promoted its employee participation in the funds as a selling point to outside investors.

Some Goldman employees got rich before the markets collapsed, allowing them to invest several million dollars in the funds, often on a leveraged basis. Only three years ago, Goldman paid more than 50 employees more than $20 million apiece. In 2007, its chief executive, Lloyd C. Blankfein, collected one of the biggest bonuses in corporate history — nearly $70 million.
Again, I believe that was a raging bullmarket and bubble speaking.

But one former Goldman partner estimated that a quarter of the bank’s roughly 100 partners are now worth $5 million or less because of losses on their company stock and other investments.
This is a significant statement! Piercing the pentamillionaire mark to the downside puts Goldman Sachs below the demographics of this Blog! Beware of living your life and basing your decisions off of just your income vs. your net worth! Another nugget of wisdom: deleverage often, and diversify regularly! Last year, the bank’s seven top executives received no bonuses. One of them, Jon A. Winkelried, resigned from his position as co-president a few weeks ago, saying he wanted to spend more time with his family. His estate on Nantucket is on the market.

It is unclear how many Goldman bankers and traders will take up the bank’s offer. The funds periodically require investors to add more money, and late last year, Goldman’s most senior management and board began to realize some employees might have trouble living up to this obligation after receiving low bonuses, according to a person briefed on the situation.

Employees in the funds are contractually obligated to meet requests for more capital. Several funds have such capital calls scheduled for April. Employees who fail to make the payments risk losing their jobs, according to a person familiar with the situation.

The new loans at Goldman are being offered to help employees meet capital demands from the internal funds and cannot be used for other personal needs, according to people familiar with the matter.
This will simply put the Goldman employees further in the hole. They may be better off losing their jobs. Borrowing money to meet margin calls on rapidly depreciating assets bought at the top of the largest RE and PE bubble since the GOLD RUSH is simply flushing good money after bad. It will be decades, if that soon, before we reach those real asset nominal prices again, and on a real (inflation adjusted) basis, considerably longer than that! This should be readily apparent to those who really know their real estate! Again, just because you are a banker, trader or analyst doesn't mean you are an astute investor or are adept at managing your personal or family finances. I am quite sympathetic towards these employees and their families. I don't want to seem callous or cold and don't want anyone going through hard times who doesn't deserve it, but I would like to point out what I see as facts.

A spokesman for Goldman Sachs confirmed the existence of the loan program but declined to elaborate. The funds that are the most troubled were raised right before the financial crisis. Goldman raised $20 billion in its most recent private equity fund and some $9 billion in the Whitehall real estate funds in 2007 and 2008.
This is a problem. The bubble was massive and painfully obvious in both PR and RE! To raise these funds and invest on a leveraged basis at these times was simply foolhardy, plain and simple. To think, this is considered the bastion of western Finance! In 2006, you could have walked down any number of litter strewn street in Alphabet City, NY and see homemade posters on telephone poles touting, "Private Equity Courses for $550, learn the Private Equity Game and earn millions!" 'Nuff said! As for real estate, reference my warnings throughout 2007 and 2008. Goldman should cough up a few thousand dollars and get a site license to BoomBustBlog!

Thoughts on the US Publicly Traded Homebuilders, :

I noticed that many pundits are focusing
on single family residential market, most likely because it is in the
news so often. It is bad, very bad. I am an ex-residential real estate
investor who sold off in 2005 due to fundamentals that were totally out
of whack. It appears that many do not see how precarious the commercial
sector has become, with many deals being done at 2-5% cap rates (net
profit yields) in Manhattan and many major metro areas, which is
absolutely ridiculous considering the risk and illiquidity of these
deals. The compensation for these deals are coming no where near
justifying the risk. I am sure the excessive liquidity coupled with
significant demand caused the cap rate compression, but the buyers fell
for it assuming liquidity and demand would continue for some time.
Well, corporate liquidity has just dried up, and many
are stuck holding the bag with buildings that are yielding as low as
half that of treasuries, yet easily quadrupling the risk. Some are even
selling at lower cap rates in successful flips (reference the
Blackstone purchase of Sam Zell's portfolio, which was totally
overpriced, yet Blackstone managed to flip much of the portfolio over
to speculators, some of which actually flipped it over to someone else
at a profit - ALL in a period of a few months). This has now become
nigh in impossible, but in an attempt to raise the cap rates,
commercial rents have skyrocketed to all time highs in the major metro
areas, causing significant pressure on corporate profits (I have inside
knowledge of this affecting MAJOR public and private firms who are
looking to expand and are getting squeezed).

And now, on to small residential (single family and 1-4 family residential)...

How Far Will US Home Prices Drop?, Sep 01, 2007: I do not know, and I doubt anybody else does either. How much they will
drop nationwide is a fools question, and to hazard a guess would be an
exercise in futility due to the extremely geographic nature of the
housing industry. Remember, no one lives in a nationwide home!!! There
are some areas where I would bet the farm on a 20-25% drop though from
peak to trough, Vegas doesn't look to good and Southern Florida is in
for a lot of pain (re: condos). There are southern Florida condo
developers who have been foreclosed upon because they could not sell
above their cost and the land was too expensive to convert into a
rental. That, in itself represents a 25% drop, retail, so it has
already started happening in some areas at a rate that is higher than
the historical average - and we have just started the real estate bust.
Florida is an interesting area due to the inherent demand for clear
water, good weather and the pretty women night life effect, not to
mention favorable homestead laws. It also has laws that favor condo
development for you don't need a red herring in the same fashion as
cities such as NYC, hence you can pre-sell condo units with a set of
plans and then finance the actual construction with a bank loan and
deposits from pre-sales.

Listen, if a lowly blogger can figure this out, then the world's most respected global investment bank should have been able to as well. The fact that they will lever up and plunge into what I clearly saw was a crashing market makes it quite plausible that they probably made similar timing and valuation errors in other overvalued and over leveraged asset classes as well. These are most likely held in SIVs and off balance sheet vehicles. For those who don't follow me regularly, I have released a lot of research on Goldman and have shorted them quite profitably since the $180's.

Free research and opinion

spreadsheet Goldman Sachs - strategic investment and public offering 2008-09-26 02:29:15 895.36 Kb

pdf Goldman Sachs Report June 21, 2008 2008-10-20 16:48:01 361.18 Kb

pdf Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Professional 2008-12-18 10:12:37 267.49 Kb

pdf Goldman Sachs' Bank Holding Company Fundamental Valuation and Forensic Analysis - Retail 2008-10-20 15:45:05 348.99 Kb

GS ABS Inventory GS ABS Inventory 2008-02-25 06:48:56 1.22 Mb

About a third of the money in the funds typically comes from Goldman and its employees, and since 1991, the bank and its employees have accounted for $7.5 billion of the $26 billion in the Whitehall funds.

Some employees now wish they had not invested. Properties like the Helmsley building, which Goldman helped purchase in 2007, have nose-dived in value. I told you so (see above). Stuart Rothenberg, the former head of Goldman’s real estate group, warned just before he retired last year about Goldman’s real estate exposure and said Goldman became “for all intents and purposes, almost an enlarged hedge fund,” according to Reuters. Ya think?

Beyond the drop in the stock market, there are various reasons cash is tight for some Goldman employees. Some traders, for instance, are facing tax bills for bonuses paid in early 2008. They already spent that money, and their bonuses early this year were too small to foot the bill.

Others who borrowed against their stock holdings have been forced to sell at losses or put up more collateral against their loan. This again, although a common practice on the street, is very dangerous. Considering the potential for volatility in equities, borrowing for anything other than very short term bridges is unwise - unless you are accurately and fully hedged in your positions, which is something that I doubt many bank employees are. If I am not mistaken, many banks forbid employees from taking bearish positions against the company's stock. Goldman is one of many banks that has issued margin calls on its employees.

The employee loans, of course, may not turn out to be a good investment for Goldman, though Goldman can take employees who do not pay to court or seize money from their brokerage accounts. Well, the investment is in the goodwill of the employees, not the interest on said loans to employees, thus this is an misleading statement. The question is, at least from a purely investment perspective, are the employees worth it?

To some, the development underscores how many wealthy Wall Streeters got in over their heads.

“Most people investing in Whitehall thought this was a sound and probably even a conservative investment,” said Janet Hanson, a former Goldman employee who is the founder of 85 Broads, an organization for women that takes its name from the address of Goldman’s headquarters. “No one saw the entire thing collapsing.” Ms. Hanson, please read my blog
from December of 2007:

I wonder how much Goldman would offer me to come and work for them? Would they even be able to pay me considering the new TARP restrictions? See my thoughts on that topic -

The Wall Street Pay Dilemma Really Shouldn't Be Much of a Dilemma at all!


Last modified on Wednesday, 18 March 2009 00:00


  • Comment Link YAYANKEE Wednesday, 25 March 2009 14:54 posted by YAYANKEE

    Moody's Investors Service on Wednesday cut its ratings on Wells Fargo & Co (WFC:$15.25,00$-0.25,00-1.61%) and downgraded the bank's preferred shares into junk territory, citing concerns that government could intervene to suspend payments on the preferred shares.
    Moody's cut Wells Fargo's (WFC:$15.25,00$-0.25,00-1.61%) senior subordinated debt rating one step to A2, the sixth-highest investment grade, from A1 and cut its junior subordinated debt one step lower to A3.
    The bank's preferred stock was slashed nine notches to B2, five steps below investment grade, from A2.
    The preferred stock downgrade reflects concerns "that Wells Fargo's (WFC:$15.25,00$-0.25,00-1.61%) capital ratios could come under pressure in the short term, increasing the probability that systemic support will be needed," Moody's said in a release.
    Wells Fargo's (WFC:$15.25,00$-0.25,00-1.61%) capital ratios are relatively low and the bank could face sizable credit costs in the coming 12 to 18 months, Moody's said.
    Ratings on the company's senior debt, however, reflect "very high" systemic support for the debt, Moody's added. "Such support, however, could be potentially harmful to preferred stock investors."
    "If Wells Fargo (WFC:$15.25,00$-0.25,00-1.61%) were the recipient of capital support from the U.S. government, that support may be accompanied by the suspension of dividends, or even a distressed exchange by which preferred investors may be compelled to exchange their preferred stock for common stock," Moody's said.
    Moody's outlook for Wells Fargo's (WFC:$15.25,00$-0.25,00-1.61%) senior debt is stable, indicating an additional rating change is not anticipated over the next 12 to 18 months. The outlook for the preferred shares is "developing," indicating the rating could be raised, lowered or left unchanged. (Reporting by Karen Brettell; Editing by James Dalgleish)

  • Comment Link Rumi Thursday, 19 March 2009 13:13 posted by Rumi

    Thanks for that link.

  • Comment Link MBA_MSF_CFA Thursday, 19 March 2009 12:38 posted by MBA_MSF_CFA

    Why would anyone feel sympathy for these guys? Ever check out Wall St Oasis? These clowns look down upon everyone else, feel their Harvard and Wharton MBA's make them better than everyone else and think they run the world. With the pedigree they have, to not be an "adept or astute" personal investor almost doesnt make sense. These cats manage billions of dollars of other people's money but can't manage their own? Huh?

    I laugh at their predicaments and wish more of it for them. The Street has needed to be knocked down a few pegs for a while now.

  • Comment Link Rumi Thursday, 19 March 2009 11:16 posted by Rumi

    I don't understand why FASB or the banks think that destroying what little credibility is left is a good thing.

  • Comment Link YAYANKEE Thursday, 19 March 2009 09:59 posted by YAYANKEE

    If the Chinese don't buy our paper, the Fed will!!! What a joke.

  • Comment Link javal Thursday, 19 March 2009 09:49 posted by javal

    While seeking answers I found that when BoE decided to buy long term treasuries it was hit with 7X offers. Goin by the same logic the speculation is China, etc.. will sell out to the willing fed and so will be a mad rush from private investors. What happens after that? If Fed expands the program the private holders will continue to exit. Eventually there's no one to purchase the treasuries except the fed itself. How will the defecit be funded then? The ensuing crash will be spectacular. Fed is just postponing the inevitable.

    Looks like Jim Rogers gets the credit of calling this one from the Fed coming:

  • Comment Link phronesis Thursday, 19 March 2009 03:25 posted by phronesis

    here is a post from Karl Denninger at the Market Ticker commenting on what he thinks will happen if we proceed with literally printing our way out of this and the devastating effects of trying to issue bonds through it. Reggie do you have any thoughts on this scenario?

  • Comment Link javal Thursday, 19 March 2009 02:36 posted by javal

    So is it an impossible scenario to imagine Fed prints $4 trillion? The rest of G20 is in a worser shape anyways. Screw the taxpayer he's too lazy/comfy to go to the streets to protest. Throw him a $5000 check ..he's mathematically challenged to understand it is actually a death knell on his quality of life for the rest of his life. Maybe silence China by offering Iraq. Make peace with Iran etc. What is a plausible worst case scenario, however irrational, that'll outlast a short's staying power?

  • Comment Link NDbadger Wednesday, 18 March 2009 19:32 posted by NDbadger

    now i'm losing it. 1.8 trillion in banks, half of which is in the top 4 banks.

  • Comment Link NDbadger Wednesday, 18 March 2009 19:32 posted by NDbadger

    opps, I meant 1.8 trillion in the big banks.

  • Comment Link NDbadger Wednesday, 18 March 2009 19:30 posted by NDbadger

    I know it's not, I'm just surprised how much life these bear market rallies can have.

  • Comment Link NDbadger Wednesday, 18 March 2009 18:23 posted by NDbadger

    Estimates are that there are 4 trillion in losses in the financial system, and 1.8 billion in the 4 big banks. It's hard to believe the crisis is over.

  • Comment Link javal Wednesday, 18 March 2009 15:58 posted by javal

    What is the worst case scenario for being short? What if Fed continues to monetize (print) at the expense of devaluing the $ and inflation in future?

  • Comment Link 123burke Wednesday, 18 March 2009 12:43 posted by 123burke

    Good point

  • Comment Link Reggie Middleton Wednesday, 18 March 2009 12:11 posted by Reggie Middleton

    Even as a forgivable loan, they are just getting buried further. Hypoethical: They levered up 2x to buy assets at the top of a bubble. The assets depreciate 50% and are still declining. They are at negative equity by a few percentage points, with margin calls coming. They get a loan to cover margin calls, then the assets fall further (it's going to happen) and they get another margin call. The simply then relinquish their entire investment, and potentially their jobs. The loans are forgiven, and are now considered income by the IRS. The problem is that is income which they never even got to see, yet they are paying taxes on it with not current income and further depreciating assets.

    So, you see, they are better off not taking the loan if their investments are failing.

  • Comment Link 123burke Wednesday, 18 March 2009 10:09 posted by 123burke

    Not a 100% sure these "Loans" will ever be repaid. Wall Street is a crafty bunch trying to get around the rules. "Forgivable Loans" are common on Wall Street. In fact many brokers are recruited using "Forgivable Loans". Basically they are "lent" the money and never have to pay it back (As longs as they stay with the firm for a set period of time). Given what just happend at AIG, a loan sounds better. Just my opinion.

Login to post comments