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September 09, 2009

On Disclosure, Honesty, Ethics, and Outright Lies: Who can you trust these days?
by Reggie Middleton

The following is an interesting letter that I received from one of my many astute subscribers. He brings up the valid point that once management is allowed to exercise imprudently wide discretion in terms of disclosure (and by extension, opinion on valuations), then investing in the US public equity markets becomes essentially a widespread, electronic form of Vegas slot machines. Keep this in mind as I prepare to release my findings on JP Morgan (see the questions I raised about their derivative exposure here: (Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?) to subscribers, with a few freebies and tidbits to the general public as well.

Letter from a concerned reader (I haven't' disclosed his name, but he is free to reveal himself in the comments if he wants to):

Reggie:

Based on some recent research, it is clear that a small loan for $225 million from Goldman Sachs was the proximate cause of GGP's bankruptcy.

Here it is. Goldman made the loan on 10-8-2008 with GGP pledging various Columbia, MD properties as collateral. The collateral was released on May 15, 2009. I pieced this puzzle together from the Q 4 10-K referencing the $225 m Goldman loan (GGP Q4_10k 08/09/2009,14:10 65.99 Kb), a 2-4-2009 WSJ article discussing the loan (Loan Deadline Passes for General Growth - WSJ.com), the Q2 2009 10-k cash flow statment (GGP_Q2_10k_cashflow 08/09/2009,14:09 480.58 Kb) showing the funding of the DIP loan and the takeout of the Goldman loan evidenced by the deeds of trusts (GGP Goldman Deed of Trust 2009-09-08 14:03:23 2.08 Mb) and releases of the collateral (Goldman GGP Release 2009-09-08 14:06:07 63.08 Kb). In addition, the forbearance agreement reached in April 2009 required GGP to disclose the terms of Goldman loan agreement.

Reggie, the inescapable conclusion is that this loan was the time bomb that blew up GGP. How else can one explain their takeout with the DIP facility. This loan has never been disclosed.

Frankly, this is post-mortem non-actionable intelligence. For me this Goldman loan deal is an excellent example of excessive management discretion in defining a "material definitive" event. In this case, management deemed that a $225 million loan was "immaterial" and elected not to disclose the terms of the deal.

Six months later, the loan comes due with the lender apparently threatening Armageddon, successfully I might add, with the loan getting taken out in May with funds from the DIP line.

Also, attached, please find a copy of a letter from the SEC regarding the Bucksbaum Trust loans to the officers to cover margin calls (SEC_letter_re:_o d_loans 08/09/2009,14:20 19.74 Kb). So far, I have not located their reply. For those that haven't been following the blog for long, we found evidence of these issues over a year and a half ago, and plainly stated our concerns years before the lawuits were even considered. See "We did find some surprises, and my blog readers chimed in with their expertise and opinions..."

This failure to disclose is a real issue. How can anyone make informed investment decisions when management is withholding critical agreements that impact directly on the solvency of the Company.

I would like everyone to keep that last thought in mind as we parse through JP Morgan's (the so-called "most respected commercial bank on the street") deep dive next week.

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Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.