I warned readers and subscribers regarding Goldman valuation several times starting in 2008 (reference Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look and A Realistic View of Goldman Sachs and Thier Lastest Quarterly Results). I also want to make it clear that I thoroughly warned on ethics in dealing with the customer (see When the Patina Fades... The Rise and Fall of Goldman Sachs??? ). 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!

... Goldman Sachs’s trading profits come from capturing bid- offer spreads when its traders act as intermediaries for clients, Gary Cohn, the firm’s president and chief operating officer, said last week in New York. Proprietary trading isn’t a main driver of earnings, he said.

The trade advice for customers is distributed by Goldman Sachs’s global markets economic research group. It tracks the performance of the trades in a daily research note. The time period of the recommendations is 12 months.

The performance this year is a reversal from 2009, when nine of Goldman Sachs’s 11 trading recommendations made money. Investors saw a 22 percent return owning Chinese stocks and a 12 percent gain buying the British pound versus the dollar, according to a Goldman Sachs note on Dec. 1.

Goldman Sachs analysts made eight trade recommendations for this year in December, including telling clients to buy the British pound against the New Zealand dollar. On April 1, Goldman Sachs added a ninth “top” trade, telling clients to buy Chinese stocks listed in Hong Kong and predicting the Hang Seng China Enterprises Index would rise 19 percent to 15,000.

... Since then, the gauge has slid 9.4 percent to 11,426.18. The Shanghai Composite index has entered a bear market, losing about 21 percent this year. That’s the third biggest decline in the world after Greece and Cyprus. The decline accelerated this month on concern Greece, Spain and Portugal will struggle to finance their budget deficits and dismantle the euro. The Chinese stock recommendation was made by a group led by Dominic Wilson, a senior Goldman Sachs economist in New York. Wilson cited inexpensive valuations and “robust” economic growth. He also said investors have already factored in the risk of higher interest rates in China.

Wilson wasn’t available to comment because he was out of the office traveling, according to an e-mail.

This should  show everyone what I have been decreeing for some time now. At best, following the analysts and traders of the big banks will simply deliver unlevered beta. These guys got their asses handed to them in 2008 and early 2009, both the prop trading desks (from Reggie Middleton vs Goldman Sachs, Round 2 )...

... and the alleged "advice that was given to customers...

Exit Calls

“Emerging markets appear superior to the developed world, but the market isn’t trading that relationship,” said Eric Fine, who manages Van Eck Associates Corp.’s G-175 Strategies emerging-market hedge fund. “It may be that some assets are mispriced, but if the market starts to discount the end point of the game, such as the collapse of the euro, it’s not that mispriced.”

Analysts at Goldman Sachs recommended investors exit two trades in February, one involving interest-rate swap rates in the U.K. and another advising clients to buy credit-default swaps in Spain and sell similar contracts in Ireland. The first trade had a potential loss of 24 basis points and the other had a return of 2.9 percent, according to figures issued in the appendix of the research note in February.

Or you could have been following BoomBustBlog which had this European Sovereign thing down pat since early January with option returns in the deep three digits and still running strong! I bet the Goldman trading desk had the same positions that I did. Why didn't they recommend them to their clients???? Probably because they needed someone to sell their trades into...

... Goldman Sachs makes more money from trading than any other Wall Street firm. In the first quarter, the bank’s $7.39 billion in revenue from trading fixed-income, currencies and commodities dwarfed the $5.52 billion made by its closest rival, Charlotte, North Carolina-based Bank of America Corp. In equities, Goldman Sachs’s $2.35 billion in revenue was about 50 percent higher than its nearest competitor.

Cohn told investors at a May 11 conference in New York that the firm lost money on only 11 days in the last 12 months. He said that uncanny streak of success refutes suspicions that the bank depends on proprietary bets with its own money. “It is implausible that a proprietary-driven business model could be right 96 percent of the time,” Cohn said. Instead, he said the “simple answer” is that the firm makes money by capturing bid-offer spreads when acting as an intermediary for client trades. Goldman Sachs executives have grappled before with questions about whether they’re better at making money for the firm than for their clients, according to an internal e-mail dated Sept. 26, 2007, that was released by a U.S. Senate subcommittee last month.

Oh, now there goes a hard question if I ever hear one!!!

U.S. Lawsuit

The e-mail to Chief Executive Officer Lloyd Blankfein from Peter Kraus, who was then co-head of the company’s investment- management division, explains that individual investors, unlike institutional clients, occasionally make “comments like ur good at making money for urself but not us.”

The U.S. Securities and Exchange Commission filed a lawsuit against Goldman on April 16 accusing the company of misleading investors in a mortgage-linked asset. Goldman denies those allegations and said it will fight the charges.

The NY Times has chimed in on this as well:

As the housing crisis mounted in early 2007, Goldman Sachs was busy selling risky, mortgage-related securities issued by its longtime client, Washington Mutual, a major bank based in Seattle.

Although Goldman had decided months earlier that the mortgage market was headed for a fall, it continued to sell the WaMu securities to investors. While Goldman put its imprimatur on that offering, traders in the same Goldman unit were not so sanguine about WaMu’s prospects: they were betting that the value of WaMu’s stock and other securities would decline.

Goldman’s wager against its customer’s stock — a position known as a “short” — was large enough that it would have generated at least $10 million in profits if WaMu collapsed, according to documents recently released by Congress. And by mid-May, Goldman’s bet against other WaMu securities had made Goldman $2.5 million, the documents show.

WaMu eventually did collapse under the weight of souring mortgage loans; federal regulators seized it in September 2008, making it the biggest bank failure in American history.

Goldman’s bets against WaMu, wagers that took place even as it helped WaMu feed a housing frenzy that Goldman had already lost faith in, are examples of conflicting roles that trouble its critics and some former clients. While Goldman has legions of satisfied customers and maintains that it puts its clients first, it also sometimes appears to work against the interests of those same clients when opportunities to make trading profits off their financial troubles arise.

...

WaMu is not the only Goldman client the firm bet against as the mortgage disaster gained steam. Documents released by the Senate Permanent Subcommittee on Investigations show that Goldman’s mortgage unit also wagered against Bear Stearns and Countrywide Financial, two longstanding clients of the firm. These documents are only related to the mortgage unit and it is unknown what other bets the rest of the firm made.

Goldman also bet against the American International Group, which insured Goldman’s mortgage bonds, and National City, a Cleveland bank the firm had advised on a sale of a big subprime mortgage lender to Merrill Lynch.

Well, I was short WaMu and Countrywide in 2007 too (Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide), as well as Bear Stearns in January of 2008 (Is this the Breaking of the Bear?:) but I wasn't trying to sell WaMu/Countrywide/Bear Stearns shares or mortgages long to my subscribers either. Come to think of it, I may even go to jail if  got caught doing such a thing... Actually, I was doing the exact opposite, suggesting that short was the way to go in direct contravention to the advice of Goldman. Let's reminisce. 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.

The mainstream media jumps when Goldman’s sales and marketing staff analysts make a recommendation or prediction, despite the fact that no one really bothers to look back to see how profitable the GS sales and marketing staff analysts have been for their clients vs the risk-adjusted profitability for their bonus pool shareholders. One example that I have used in my previous posts was Lehman Brothers, who I became increasingly bearish on in early 2008 (if you’re a regular reader, please bear with this rehash):

• See “Is Lehman really a lemming in disguise?” (Thursday, 21 February 2008)
• Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!)
• Lehman stock, rumors and anti-rumors that support the rumors Friday, 28 March 2008 and Funny CLO business at Lehman Friday, 04 April 2008.

The esteemed Goldman Sachs did not agree with my thesis on Lehman. Reference the following graph, and click it if you need to enlarge. Notice the tone, and ultimately the outright indication of a fall in the posts from February through April 2008 above, and cross reference with the rather rosy and optimistic guidance from the esteemed Goldman (Sachs) boys during the same time period, then… Oh yeah, Lehman filed for bankruptcy!!!

In Reggie Middleton vs Goldman Sachs, Round 2, we rehash some critical valuation aspects of Goldman which show that the company was grossly overvalued from the get to.

In Reggie Middleton Personally Congratulates Goldman, but Questions How Much More Can Be Pulled Off, I detail what will be the next big item in the news regarding investment banks - and that is the scam that is being perpetrated with REITs and commercial real estate. On that note, up next is Morgan Stanley.

Subscribers can reference our valuation of Goldman via this link: GS 4Q09 Final Review and Updated Valuation 2010-02-01 03:04:55 528.52 Kb