This is the opinion piece that I promised on Goldman Sachs research and product sales. I want it to be clear that I have absolutely nothing against Goldman Sachs, and if I worked there I would want $19 billion of bonuses too, despite the fact that I just got bailed out by the taxpayer to the tune of over $50 billion and still have middle class taxpayer funded government subsidies intact. The fact of the matter is that I don't work for Goldman Sachs, and the reverence that they receive is illogical and borderline sickening, not to mention having nothing to do with the reality of the situation.
Note: I am typing this post at 3:30 in the morning, so there may be some typos and guffaws in the text, which I will try to catch and demarcate with a strikethough.
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!!!
Does anybody think that Lehman was a "one off" occurrence? Or for that matter does anyone believe that only Goldman is guilty of a lack of actual performance for their clients vs. their bonus pool???
In January of 2008, who among the Wall Street bank brand name crowd had a failure warning or even a sell call on Bear Stearns? Lord knows one was definitely called for, see Is this the Breaking of the Bear?. We can go on theme-wise with:
- regional banks (As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades).
- commercial real estate (The Commercial Real Estate Crash Cometh, and I know who is leading the way!),
- the monoline insurers (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton -11/13/2007), Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion in Equity 11/29/2007), etc. I can go on for quite a while, but hopefully you see a trend here.
As a matter of fact, many of these failed and failing companies actually managed to sell securities and raise capital at some of the worst time for any potential investor. Who do you think provided the optimistic research to lay the groundwork for said sales? More to the point, who do you think actually facilitated the sales? And the ass kicker question, "How did the buyer of said securities fare?" Looking back at two egregious examples:
- MBIA, who I warned about very early one, and even after my warnings and additional evidence sprouting from all over the place (see MBIA: A Low-Down Dirty Shame, - Is MBIA About to Pull the Wool Over the Market's Eyes? - As was warned in my previous monoline posts... ), MBIA was still able to float a debt offering to institutions who really, really, really should have known better. See After Reading the Prospectus and Reviewing Potential Losses, Would You Buy These Notes? I dare anyone to investigate how well those notes turned out.
- How about GGP and their secondary offerings? Although GGP Couldn't Afford its Dividend, they were able to have the Wall Street marketing wizards to enable a Press release announcing new equity financing - something that I didn't explicitly model in my own analysis (because I either didn't think anyone would be stupid enough to go for it or I probably severely underestimated the marketing prowess of the Wall Street machine - see sidebar below), but after reviewing information without the benefit of official documentation, there were no surprise nonetheless and my blog readers chimed in with their expertise and opinions...... For those who don't follow REITs, GGP filed for bankruptcy some months ago so you see how well that secondary did.
MAC Report_Consolidated_051209 equity offering addendum 2009-12-08 03:33:30 308.60 KbWell, the Wall Street Marketing Machine AKA "sell side research" is at it again. Just as I turn bearish on CRE for the second time (see Re: Commerical Real Estate and REITs - It's About That Time, again...), check out the "pump and dump job" from Merrill: Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!. I received emails about DDR's predicament (Diversified Development Realty Email of Interest), which makes sense, because Goldman Sachs is pushing CMBS secured by this company's malls (Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), which of course had a AAA tranche (see more on this Goldman phenomena below). What a coincidence! If you think that is a coincidence, just as pressure starts to turn up on in the CRE space with a bad macro outlook and an even worse fundamental outlook, Goldman upgrades the entire sector and issues a buy on Taubman (see my take. The Taubman Properties Research is Now Available). Anyone want to bet that Goldman won't help these REITs trade bad debt for more bad debt or bad equities??? Do you think they will have the gall, nerve, ability to push AAA financing for Macerich (A Granular Look Into a $6 Billion REIT: Is This the Next GGP?)?
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 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 victims clients 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.
Next, I will look into the true performance of the residential, non-conforming mortgage market using information sourced directly form our government.
More of Reggie on Goldman Sachs
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