Goldman and BP in PR Battle With Administration

What do oil spills and CDOs have in common? In addition to the fact that they were both disasters, one environmental the other financial, much. First of all, they were both very expensive, one causing incalculable damage to wildlife and industry, the other to homeowners, taxpayers and banks balance sheets. The cleanups of both are ongoing, with the final impact still years away from being tallied. Naturally, the administration has had to get involved, as the damage to the general public grows by the minute. Curiously, both Goldman Sachs and BP are in a PR battle for their lives with a wounded administration that needs to appear as if it is capable of assigning blame and proposing satisfying punishments to calm the furor of the angry voting public.

Witness today's front page FT article on the SEC's probe into yet another Goldman-backed CDO deal called Hudson. The $2 billion Hudson Mezz CDO was not included in the charges filed by the SEC back in April. This is a new investigation replete with similar accusations that GS structured and sold deals to its customers while simultaneously shorting the same securities because it thought they were junk. There is even an email where a GS employee said of a potential investor that it was "too smart to buy this kind of junk." It makes one wonder how many more of these deals is the SEC going to try to nail Goldman on? How much will this ultimately cost the storied and now embattled investment bank? The FT helpfully points out that $1.1 trillion in CDOs were issued between 2005-2007. Certainly not all of that issuance was by GS alone, but still, this could get very expensive. Particularly if all of Goldman's customers start to sue. Goldman's pockets are deep but even it cannot survive criminal charges. Anybody old enough to remember Drexel? For you younger folk, how about Arthur Anderson? Is the administration willing to go that far, or is it just trying to win a PR battle? As much as everyone hates Goldman right now, I suspect the latter. If we chose not to let the bank die in 2008, why do so now?

BP is another story. It is not an American company so who cares? Drive these fish killing bastards into the dirt, or at least until the stock gets cheap enough so that a US company can scoop it up, point the finger at the last bunch of jokers who ran the firm and reach an affordable settlement with the government, fishing industry, idled oil industry employees, and residents of the gulf who are wading through the sludge washing up in their backyard. Or a Chinese company. Whatever. In any event, pushing BP to the brink seems likely, as there seems to be little political upside to protecting a foreign company in an already vilified industry.

If I had to wager, I'd bet on GS surviving and BP not making it, with loads of volatility in between. The two even have a history together. Forget about BP's current CEO, who in a brilliant video posted on LOLFed, is compared to a cat. Let's talk about BP's former CEO, the disgraced John Browne, who resigned in 2007 due to scandal related to his lying on the stand about how he met his former lover, Jeff Chevalier. Mr. Browne was also forced to resign from Goldman's board, where he was serving as chairman of the audit committee. Not sure what Mr. Browne was doing while chairman of the audit committee during the boom, but he certainly wasn't auditing the bank's CDOs.

Treasury Nixes Sale of Fannie Tax Credits to Goldman

Apparently, there is only so much humiliation the Treasury can take from the profiteers of Goldman Sachs. While the Treasury's investment in Fannie continues to bleed cash out of its eyeballs, Goldman Sachs has money coming out of its ears. The folks at Goldman have daily meetings trying to figure out what on earth they are going to do with all the money they keep making, and then during those meetings, they just keep coming up with more ideas on how to make more money! Like buying tax credits from Fannie. After all, there is no way in hell Fannie is ever going to make another penny and everyone hates to waste a good tax credit. Really this is all in the interest of tax efficiency.

Not so fast, says the Treasury. According to a letter Treasury sent Fannie, selling the $2.6 billion in tax credits would cost taxpayers more than the company would gain from the sale. So the Treasury has nixed the sale. Fannie claims to be reviewing the decisions, whatever that means. When the Treasury owns you, I'm not sure how much of a say you get in these matters. Poor Goldman is stuck writing a big check to the government. Although, I'm sure their tax guys already have a few more tricks up their sleeves.

Goldman Shopping For Fannie Tax Credits

Ever the savvy financial engineer, Goldman Sachs is seeking to purchase unused tax credits from Fannie Mae. It's a simple idea really. Fannie, the former mortgage giant now 80% owned and controlled by the US government, has punted close to $38 billion in the first half of the year. Meanwhile, the folks at Goldman are swimming in dough thanks to ridiculous amounts of easy money tossed their way courtesy of the Fed, FDIC and the Treasury. Goldman is merely being tax efficient and trying to cut its bill a bit with some fancy accounting footwork. Besides, there's no way Fannie is ever crawling out of the hole and has no use for the mounting tax credits sitting on its books.

The only small problem with the plan is that it doesn't look or sound quite right to all of those angry plebians carrying pitchforks that are out for Goldman's hide. Why should Goldman be allowed to skip out on paying its tax bill after it's already received so much help from Uncle Sam? So the government is scrutinizing the deal and trying to determine whether it is worth the political furor that is sure to follow if it swaps some of the tax credits with Goldman for cold hard cash to help boost Fannie's bottom line. I personally don't care one way or the other. What difference does it make if Goldman gives money directly to the IRS or to Fannie? It all winds up in the same bucket. If Treasury is smart, it will just price the tax credits so that there is no financial benefit to doing the deal and Goldman will just pay its taxes directly. Problem solved. Given what an incredibly poor job Treasury has done so far negotiating its deals with Wall Street Banks (i.e. handing out 100 cents on the dollar to terminate the AIG swaps and doling out TARP funds without any restrictions, just to name two) it's hard to imagine it will negotiate a savvy deal this time around. After all, if there were no financial benefit, Goldman wouldn't be itching to do a deal. My advice to Goldman? Just pay your damn taxes and try to stay out of the papers.

Goldman: Manipulator or Victim?

Sergey Aleynikov, an ex-Goldman Sachs computer programmer, was arrested July 3rd and charged with a criminal complaint with stealing trading software. Teza Techonologies, the Chicago-based firm co-founded by a former Citadel Investment Group trader, said it suspended Aleynikov, who started work there the day before his arrest. The folks over at Zerohedge have spent an inordinate amount of time speculating and outright accusing GS of manipulating markets. I've maintained my usual level of skepticism, despite the fact that I love a good conspiracy theory, particularly when it pertains to an investment bank that seems to always get a bone from the government when it needs a boost. But I must admit, I'm seriously considering jumping on the Goldman-market-manipulator bandwagon. The Assistant US Attorney told a federal judge that Aleynikov's alleged theft poses a risk to US markets. He goes on to say that the code, which is worth millions (more likely billions if it really can manipulate markets), was transferred to a server in Germany and others may have access to it. "The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways." the attorney asserted. Theoretically speaking, the folks over at GS know how to use this magical code better than anyone. They're admitting it is so potent that it can manipulate markets. But don't worry, they would never use it to that end. GS only uses its power for good, not evil. Furthermore, I'm sure that the totally innocent guys at Teza had no idea that their employee was trying to steal a top secret code from GS that holds the market's fate in its hands. No doubt this trial will be an interesting one.

In what is bound to be more disheartening news for the folks at Goldman, the CFTC is proposing sweeping trading limits on oil, natural gas, and possibly other commodities. The agency is in the process of altering how it presents information to the public by incorporating data from swap dealers, foreign contracts tied to US futures, and professionally managed market positions such as hedge funds. Commodities swaps are all done OTC and the market is huge, so a bit more clarity on the size of the market should be a real eye-opener and possibly eye-popper. Goldman is a huge player in the commodities markets and likes to do things like put out research papers declaring that the price of crude will spike to $200 right before commodities prices take off. The investment bank cleverly lumps its equities, commodities and fixed income p&l together when it reports earnings, which for some reason seems to only annoy me and not the bone-headed analysts who cover the stock, because it does disguise the true volatility of the company's trading profits. Nevertheless, stricter trading limits on commodities is bound to cut into the firm's trading profits, as well as the other dealers that trade in commodities.

Street to Log Best Quarter Since Crisis

According to the WSJ, securities firms are set to log their most lucrative financial performance since the credit crisis erupted. The article mentions that the usual suspects such as JP Morgan, Goldman Sachs, Morgan Stanley and Bank of America are banking huge profits. The best part is, the article says that "instead of relying on risk and leverage to drive profits," they are deriving profits from trading and underwriting. Apparently, whoever wrote the article doesn't seem to know that the definition of trading is "taking risk." Sure, you can call it market making, but you're still risking capital to make money from buying, selling, and hedging financial instruments, particularly if we're talking about derivatives trading. Furthermore, the article goes on to say that the record underwriting fees that the banks collected in the quarter were mostly from underwriting shares for banks (i.e. themselves) that were forced to raise capital to replenish their beaten down coffers. The article doesn't even mention all of the cheap financing that the government has thrown at them to keep their financing costs down, a huge oversight, in my opinion. If you could borrow money at zero percent from the government, you'd be having a banner quarter too. Too bad your bank just raised your credit card fees, jacked up your rates, cut off your credit and won't let you refi your house. So thoughtful of those banks to pass all those savings along to the consumer right?

If banks think that continuing to underwrite their own equity and debt offerings ad infinitum is a sustainable business model, then they are sadly mistaken. Eventually, investors are going to figure out that whole dilution business and not participate in the 50th capital raising plan that Bank of America or Citi, for example, try to shove down investor's throat. The article cautioned about one time accounting issues that are likely to obscure the results, but as usual, I'll be waiting for the actual earnings announcement and the 10-Q release before I make any judgements about the financial health of our financial institutions.

Who Financed Goldman's Record Bonuses?

The Guardian published a much-ballyhooed article this weekend about a Goldman Sachs staff meeting in London where employees were told that they could look forward to record bonuses if the company registers its most profitable year ever. The bank, which repaid its TARP funds last week is rumored to have had a record first half, although it has yet to complete its second quarter and report results. Before everybody gets out their pitchforks, a moment of rational reflection is in order. First of all, whatever boob in attendance at the staff meeting that actually leaked this news to the press, amidst a worldwide recession where the finance industry's excesses have launched a political firestorm, should be canned. Once that's out of the way, we can talk about what exactly is wrong with the picture.

First of all, it helps to analyze how it is exactly that Goldman Sachs has managed to make so much money. The folks at GS are savvy traders, no doubt. But the real answer is that a host of government subsidies kept the investment bank alive during some of the most nauseating turbulence in the credit market's history. The $10 billion in TARP funds was chump change compared to the trillions in liquidity for illiquid assets that the Fed added to the market last year via its new lending facilities (TSLF, TAF, PDCF etc etc.) By taking over the roll of financing illiquid assets, when the Fed lowered interest rates to zero, it essentially reduced the cost of funds on ALL collateral to zero, not just treasuries, thus boosting profits substantially for the banking system. Meanwhile, spreads on illiquid products continued to trade at historical wides, which, as long as I've been in the market, has been unprecedented during an easing cycle. Furthermore, the Fed bailed out AIG, which meant that GS actually got to collect on its margin calls directly from the Fed. Although GS has made repeated claims that it was properly hedged and would not have had material exposure had AIG failed, I'm not buying that claim. Sure, Goldman might have hedged, but where did it get its hedges? Would those counterparties have survived a failure of AIG and would GS have been able to collect from them without a government guarantee? Last, but not least, GS was allowed to issue billions in FDIC-guaranteed debt at a greatly reduced cost from where its debt was trading at the time. One thing's for sure, if GS is paying record bonuses, that means at least our deposit insurance fund is safe for another year or so.

The Goldman record-bonus story illustrates precisely the flawed thinking behind Paulson and Bernanke's notion that if you bailout the financial sector, you bailout the economy. The economy is still struggling mightily. If it weren't for Fannie and Freddie, that are now direct wards of the government, it would be impossible for consumers to get a loan of any kind. As it is, the financial press is filled with reports of consumers and businesses getting cut off from credit. Yet Goldman Sachs made boatloads of money trading commodities, currencies, and fixed income. What the government did instead of boosting lending to the economy, was subsidize Goldman's, and in fairness, the other banks' trading operations, so they could go on to pay bankers a bunch of money. When populist furor initially erupted, those "in the know" kept saying that the average American didn't understand how finance really works and that they were too stupid to get why it was important to bailout the banks. But couple the Guardian article with the one in today's FT entitled "Bankers' pay soars as struggling groups aim to halt talent exodus," maybe the American public understood the picture after all.

Investor's in Money-Losing Goldman Fund Hit With Capital Calls

Even Goldman, widely regarded as one of the savviest traders on Wall Street, couldn’t avoid buying the top in the commercial real estate market. According to the Wall Street Journal, Goldman’s Whitehall, a real estate opportunity fund is faced with irate investors. What, pray tell can these investors possibly be irate about? After all, weren’t they all clamoring two years ago to get into a fund run by Goldman with a hoity toity name like Whitehall? First and foremost, the fund spent $3.7 billion on a wide range of real estate investments in 2007 that it has since marked down by $2.1 billion. Then, Whitehall bought out Goldman employees’ stakes in the fund late last year, albeit at hefty discounts, without granting other investors the similar courtesy. As if all this weren’t enough, Goldman is now asking remaining investors in the Whitehall Funds to pony up another $1 billion to meet capital calls. Sure, the capital calls are well within Goldman’s rights, and the investors are contractually obligated to cough up the dough, but still. It takes a lot of nerve to lose roughly 60% of investors’ money in a year and then ask them for more money. But if you’re Goldman, I guess you can always pull out that whole “We’re the best traders and investors on the street, so you’re better off giving us your money instead of those boobs at Lehman, or Bear, um, I mean Merrill, no wait, Morgan Stanley!” The thing is, according to the newly revised Whitehall business plan, the money from the capital calls will be used to pay back a $677 million credit line, and to recover 71% of investors’ total equity over the funds holding period. How Whitehall plans to pull off that feat in this depressed commercial real estate market where its assets are deteriorating by the minute remains a mystery. In particular, because Whitehall’s debt is guaranteed by Whitehall, the fund’s lenders can go after other assets within the fund besides individual properties. Sounds like one real estate "opportunity" I’d be glad to miss.

Goldman Sachs Posts Loss

Remember when everyone thought that Goldman Sachs was immune to any downturn because they were just smarter than the plebian boobs working at other investment banks?  As it turns out, Goldman really is just another cyclical investment bank that can't escape the worst downturn the securities industry has seen since the Great Depression.  CEO Lloyd Blankfein's statement, after reporting negative net revenues of $1.58 billion and a net loss of $2.12 billion for the fourth quarter, summed up the situation nicely:  "Our results for the fourth quarter reflect extraordinarily difficult operating conditions, including a sharp decline in values across virtually every asset class."  The good news is that Goldman is still standing unlike Merrill, Lehman and Bear.  Even better news is that the government has shown its commitment to keeping what's left of the banking community afloat by guaranteeing its short-term debt via the FDIC, lending billions against shady collateral via the Fed, handing the investment banks capital infusions via the Treasury AND reducing interest rates to near-zero via the Fed.  So, let's just say that Goldman isn't still standing due to its own genius.  Regardless, if the investment bank makes it out of this mess alive, and the credit markets actually improve at some point within the next couple of years, Goldman will be poised to profit from the upturn.  But unlike those optimists who are currently buying the stock on this earnings announcement, I'm willing to wait until at least a small glimmer of hope is on the horizon.   

Are Citi and Goldman Finally Facing the Music?

Citigroup's CEO Vikram Pandit held a town hall meeting intended to boost morale, and then announced that the bank will be eliminating more than 50,000 jobs or about 14% of its workforce.  I'm not sure how that town hall meeting was supposed to bring anyone back from the ledge, but at least the bank is getting realistic.  Citigroup announced that the company was planning to reduce expenses by 20%, targeting 2009 expenses of $50 to $52 billion.  The reports do not mention whether Citi plans to cuts the rest of its dividend.  But at some point it should sink in that paying a government-sponsored dividend in these times is flat-out moronic, not to mention politically unwise.

Meanwhile, in a masterful public relations move, top executives at Goldman Sachs have decided to forgo their 2008 bonuses.  Although Goldman has (so far) had a reasonably profitable year in what has been a disaster for other banking institutions, senior management has figured out that it is far less painful to give up a bonus than try to explain their compensation to Henry Waxman.  It is hard to make a case that your executives "deserve" millions in pay when the investment bank is surely being kept afloat by the Fed through its numerous new toxic-asset financing facilities.  Furthermore, partners at Goldman make $600,000 in salary and have all been showered with millions in compensation for the past several years.  Nobody at the senior ranks of Goldman is going to starve without a bonus this year.  Employees of Goldman Sachs are no doubt nervous about this announcement as it has implications for their own end-of-year compensation.

It is widely known that securities industry professionals are an extremely well-compensated lot.  The industry is clearly shrinking and many who were accustomed to getting paid hundreds of thousands and even millions a year are now facing the prospects of living off of their salaries or being unemployed for a very very long period of time.  The interesting follow-up question remains:  How will the contraction of the securities industry affect other sectors of the economy that thrived off of the Wall Street boom of the last few years?  It is widely known that investment banks were leveraged 35-to-1 during the boom.  But how leveraged were the bank's employees?  While it is certainly probable that some percentage of securities industries professionals lived within or even beneath their means, it seems more likely that a large percentage expected to collect huge bonuses every year to maintain their extravagant lifestyles.  How many of those shiny new Manhattan luxury condos are going to come on the market within the next two months?  What will this do to other luxury goods retailers?  Villa rentals in the Caribbean?  Prices on contemporary art?  Ferrari dealerships?  Secondary home prices in the Hamptons and Nantucket?  The list goes on and on.  But I suspect that if you're in the market for a slightly used Rolex, you're probably going to get a great deal. 

Money Markets in Complete Panic

The Fed conducted two auctions under its TSLF program today which attracted significant demand from primary dealers.  Under the TSLF, dealers offer hard-to-finance securities in return for Treasuries.  Investors are hoarding Treasuries because they are unwilling to hold any other collateral for fear that a counterparty will default leaving them with securities that they can't sell.  This hoarding has caused Treasury bills to trade close to zero, a highly unusual situation that last occurred around the time that Bear Stearns was on the brink and then not since World War II.  The TSLF is meant to alleviate this problem by helping dealers to finance their less desirable securities and giving them treasuries in return.  The results of the TSLF, which generated record demand at record spreads was an indication of how desperate dealers are to secure funding  The 28-day auction drew $71.25 billion in bids versus the $35 billion offered by the Fed with a stop-out was 3.00% (quoted as a spread).  The 14-day auction drew $64.35 billion versus the $35 billion offered with a stop-out of 2.50%.    

If you are looking for an explanation as to why Morgan Stanley and Goldman Sachs' stocks were getting pummeled the last few days despite their relatively decent earnings results, this is it.  Although the SEC and some pension fund managers believe this is an attack on the US financial system by opportunistic hedge funds, I believe it is investors reacting to the potentially catastrophic consequences of a complete seizure in the money markets that is bigger than the Fed's capability to resolve.  Morgan and Goldman rely on the money markets for financing, which are still digesting the consequences of the rash of bailouts, takeovers, and  bankruptcies.  Two money market funds just reported that they broke the buck due to investments in Lehman commercial paper.  How willing will money market funds be to invest in any more broker dealer investments? 

Calculated Risk highlights a quote from Morgan CEO John Mack in a NY Times article that is terrifying.  According to two people briefed on talks between John Mack and Citi CEO Vikram Pandit, Mr. Mack said "We need a merger partner or we're not going to make it."  It has been confirmed in the mainstream press that Mr. Mack is seeking a buyer for Morgan Stanley, however, that quote has a sense of urgency that is very unsettling.  If Morgan strikes a deal, can Goldman survive as an independent dealer or will it too be forced to find a partner?  I honestly don't know, and I suspect that the market's trajectory will continue downward until these issues are resolved.  

Update:  The Fed increased the amount of dollars that Central Banks around the world can offer from $67 billion to $247 billion.  Let's hope it is enough.

The Fate of Morgan and Goldman

While Lehman's assets are getting a true mark to market in bankruptcy court and Merrill and Bank of America are busy hammering out the details of their proposed merger, investors have turned their attention to Morgan Stanley and Goldman Sachs.  Both investment banks reported positive yet much lower earnings this quarter, but questions about their future as stand-alone investment banks remain.  Why?  Because the money markets are no longer willing to support an investment banking model.  Investors have finally figured out how risky it is to borrow money short to finance a huge, risky trading operation.  Morgan Stanley and Goldman Sachs have emerged as the best risk managers on The Street, yet sentiment has now appeared to turn against them.  Despite the AIG bailout by the US government, which was a far better alternative for the investment banks than allowing a bankruptcy filing, both Morgan Stanley and Goldman Sachs' stocks are getting routed in pre-market trading.  Credit default swaps on Morgan Stanley have now spiked to levels last seen on Lehman Brothers' debt.  Remember Lehman?  That other investment bank that went bankrupt last weekend?  If you thought the turmoil was over, think again.    

Analysts Continue Quarterly Brokerage Earnings Slashfest Ritual

Guy Moszkowski of Merrill Lynch downgraded Goldman and Lehman to "underperform" noting that "conditions have deteriorated significantly from July."  Meanwhile, Deutsche Bank analyst Mike Mayo cut his price target and estimates for Lehman Brothers.  He now expects Lehman to post a third-quarter loss of $2.68 a share, revised from a profit of 33 cents a share.  Why do I feel like I am experiencing deja vu?  Oh, that's right, because we go through this every single quarter.  How and why Mr. Mayo decided that today was the day that Lehman was going to go from a profit to a steep loss is only slightly mysterious.  After all, the market has been riddled with rumors of Lehman looking for buyers for its assets ("You need an asset management unit? Level 2?  Level 3?  We've got it all to go.  Just give us a bid.") for months.  If the company was cruising along making money, it wouldn't need more capital in addition to all the capital it has already raised.  Let's be honest, did conditions really deteriorate that much or are banks finally starting to face the music?  I know that spreads have widened back out again in the past month.  But the market price of the CDOs that Merrill Lynch puked for 22 cents did not drop from 40 cents at the end of the quarter to 22 cents two weeks later when Merrill sold them.  Merrill had these assets marked too high.  The same is probably true for some of the assets that Lehman holds in Level 3.  No market exists for these securities unless Lehman is willing to unload them at highly distressed levels and take a large loss.

In any event, I think it is a convenient coincidence that the brokerage analysts cut their estimates right after the SEC's naked short sale ban expired.  It was wise to wait until it was no longer a major inconvenience for hedge funds to short these stocks again.  That way, when various magazines are handing out analyst awards for great calls, analysts can say they had the timing right.  Maybe by then investors will conveniently forget that most analysts were estimating brokerage firm profits for the past three quarters before having to slash those estimates two weeks before the earnings announcements to avoid looking foolish.  The fact that investors still pay attention remains a mystery to me. 

WaMu, Wachovia Resort To Desperation

Once the bread and butter of Washington Mutual's core business, negative amortization loans are going the way of the dodo bird, the company announced last week.  In a brilliant PR move, the announcement to discontinue negative amortization and "flexible payment" loans was buried in the ninth paragraph of a press release WaMu issued on June 18th touting an additional $1 billion assistance fund for troubled mortgage borrowers.  The press release did not indicate what the company planned to offer as assistance to its credit card account holders.  Through its ill-timed purchase of Providian Financial, WaMu entered the business of credit card lending to questionable borrowers in 2005 at the peak of the bubble, and has aggressively increased its credit card accounts since.  No surprise that WaMu has the highest proportion of overdue loans among the top 15 providers.  Given how lousy WaMu's timing has been, I suppose it is also not surprising that it took WaMu a year into the credit crisis to figure out that maybe, just maybe, it should stop offering negative amortization mortgages.

Meanwhile, Wachovia has apparently given up trying to solve its own "pick-a-payment" mortgage problem and has hired Goldman Sachs as an adviser.  I imagine that Goldman may take one look at Wachovia's loan portfolio and immediately short the stock.  Wachovia's hiring of Goldman has started the rumor mill once again that some white knight will come along and rescue Wachovia.  JPMorgan is always considered a likely contender, but I'd bet against it.  Wachovia, after all, is still a $17 stock.  When it gets to $2 and comes with a $50 billion loan guarantee from the Fed, maybe Jamie Dimon will start negotiating.  

Goldman was more than likely tapped by Wachovia not only because it has managed to avoid damage suffered by its competitors, but possibly also for arranging the restructuring of Cheyne Finance, the $7 billion SIV that collapsed last year.  If any bank knows what to do with a bunch of underperforming assets, it should be Goldman Sachs.  More than likely, Goldman's solution for Wachovia will mirror what they just pulled off with Cheyne.  Just spin it all off into another investment vehicle and make sure that Goldman gets paid a portfolio management fee after marking the assets down significantly.  Nice gig if you can get it.

Goldman Reports Earnings

Goldman posted net income of $2.09 billion, or $4.58 a share, on revenues of $9.42 billion for the second quarter.  Although this was a decline from the previous year's quarter, it beat analysts' lowered expectations and it actually reported earnings instead of losses, in contrast with Lehman.  The firm said the 29% drop in fixed-income revenue was affected by $775 million of writedowns and credit market losses.  The amount of write-downs and credit market losses seems remarkably small relative to other firms and the size of Goldman's balance sheet.  But given how little information investors can glean about investment banks portfolios, they must trust that management is appropriately marking positions.  Revenues from commodities were higher, although the firm does not provide a breakdown between commodities, fixed-income and currencies, which are all lumped together.  The firm also trimmed its holdings in commercial and residential real estate, and leveraged loans, reducing its level III assets from $96 billion to $78 billion.  

How did Goldman have such a solid quarter while rival Lehman was busy puking assets and taking write-downs?  Part of it must come from the commodities business, where Goldman has been the most vocal about predicting ever higher prices for oil.  They are clearly bullish on commodities, which has absolutely been the right call.  Goldman is also a more diversified financial services firm, with other departments offsetting losses when one area suffers.  Goldman's shares currently trade at a significant premium to other investment banks and perhaps this quarter's earnings report justifies some premium.  But the outlook for investment banking, which is a cyclical business, remains murky at best, particularly with the Fed poised to reverse its recent banking-friendly easy-money policy. 

TPG and Goldman Offload Alltel to Verizon for $28.1 Billion

Verizon has agreed to purchase Alltel for $28.1 billion, allowing private equity investors TPG and Goldman to flip their purchase just seven months after taking the wireless telecom firm private in a $27.5 billion deal.  Verizon can now boast of being the largest US wireless carrier, besting AT&T who currently holds the title.  Why would Goldman flip its investment for such a meager premium so soon after it purchased Alltel?  Because, along with Citigroup, it wound up stuck with the bulk of the leveraged loans used to finance the deal when credit markets soured.  Perhaps Goldman was willing to accept rotten returns in its private equity arm in order to lose the debt taking up valuable space on its balance sheet.  TPG can move on to pursue other deals at today's discounted private equity prices without having to worry that its investment in Alltel will suffer further due to its mountain of debt.  Citigroup's Vikram Pandit will need to take the guys at TPG and Goldman out to dinner.  If only it were this easy to get rid of the rest of the $400 billion in assets that Citi is looking to sell. 

Update on the deal specifics: TPG and Goldman are actually getting decent returns on this deal.  Verizon is paying $5.9 billion for Alltel's equity (TPG & GS put up $4.6 billion in equity to do the deal), and assuming its debt for $22.2 billion.  $13.8 billion of Alltel's term loans will be purchased at full face value, while $5 billion in short term bridge loans will be purchased at a 4% discount to face value. 

Bank of America Slashes Estimates for Goldman, Lehman, Morgan

Analysts at Bank of America cut earnings estimates for Goldman, Lehman and Morgan Stanley today. In the event that you have been on a mission to the moon for the past three months and some delivery snafu has prevented you from receiving your copy of The Wall Street Journal, which has outlined in painstaking detail how terrible the environment has been for nearly every single line of business that the brokers rely on, day after day, you can depend on the trusty analysis from these jokers at Bank of America. Somehow, over Memorial Day weekend, it occurred to them that maybe, just maybe, they need to lower their unrealistic earnings targets so they don’t wind up looking like fools in front of the investment community when the brokers report their dismal earnings results next week. When Lehman reports a loss, instead of a profit as these guys were predicting before today, they can say “See, we predicted they would lose money!” I suppose that if analysts continue to lower earnings estimates a week before earnings every single quarter, than their overzealous earnings targets for these stocks may actually begin to resemble reality. Here’s a tip to all the brokerage analysts out there: you may wish to extend your ability to forecast earnings beyond the one week timeframe, or risk becoming a part of next week’s unemployment numbers.

Goldman's Blankfein Says End to Credit Crisis is Near..

Blankfein claims we are in the third or fourth quarter of the credit crisis, although he hedges by saying that the fourth quarter of most sports events tends to be the longest. Separately, yet totally related, Goldman punted $500 million of Chrysler bonds for $.63. So, let me get this straight, the credit crisis is almost over, yet GS is puking bonds at $.63. That's a mighty big discount if this credit crisis is really just a mark-to-market phenomenon and not indicative of future defaults. In Blankfein's defense, it is his job as CEO to try restore confidence at a meeting of GS shareholders. Furthermore, I'm certain that every dealer involved in the bond syndication of this deal knew it was a turkey at the time, but the capital markets shut down abruptly before they could offload any of the bonds.

Just how big of a turkey this deal would turn out to be didn't start to dawn on anyone until, oh I don't know, maybe three days after the deal closed. Was it the $2.7 billion in losses that Chrysler reported immediately following the buyout that gave it away? Or maybe it was the move by Cerberus, the PE firm who took Chrysler private, to hire Robert Nardinelli, a non-car-industry executive to run Chrysler? Robert Nardinelli, for those who don't recall, is the genius who was sacked from Home Depot after six years of below average performance (the stock declined while rival Lowe's rose significantly), because he wouldn't take a pay cut. I guess no CEO can be expected to live off of less than $200 million. At any rate, if I were GS, I'd be looking to hit the next bid behind that $.63...

No Price? No Problem. GS Creates Pricing.

Goldman Sachs Level 3 Assets Rose to 39% to $96 billion in the first quarter. It's headlines like these that make me doubt the positive earnings reported for the first quarter. According to recent accounting changes, dealers have to classify their assets into three categories, Level I (mark-to-market, or securities that have a price in the market), Level II (mark- to- model, securities that have no current price in the market but are marked based on known inputs) and Level III (mark- to- I-have- no- idea, I'm- just- making- it- up.) The fact that GS moved around $36.4 billion of its assets from another category into Level III means that they have no idea what those assets are worth and are just guessing at their value. That, my loyal readers is precisely why I can't buy into this idea of the worst being behind us. In fact, on this headline alone, I just upped my mattress allocation in my portfolio to 60%.