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HomeGoldman Sachs ‘Shooting Fish in a Barrel’
Posted by Larry Doyle on November 5th, 2009 9:37 AM |
Those who take risk do not always win. A variety of mathematical models dealing with risk address and negate the chance of almost uniform success by one party. While those on Wall Street would promote the overwhelming risks in the industry, I would maintain that Wall Street circa 2009 is not in the risk business. How so? Let’s review results from the firm regarded as the best at managing risk, that is Goldman Sachs.
The Financial Times provides insights into the Goldman Sachs ‘casino’ in writing this morning, Goldman Benefits From Trading Bonanza:
Traders at Goldman Sachs recorded only one daily loss in the third quarter, highlighting the trading bonanza sweeping Wall Street as central banks continue to pump billions of dollars into the financial system.
The performance – revealed on Wednesday in a regulatory filing – compares with two losing trading days in the previous quarter and confirms that the authorities’ drive to revive markets after the crisis is yielding huge windfalls for some banks.
Before the crisis, banks regularly recorded trading losses on several days in a quarter.
Goldman made more than $100m in profits on 36 of the 65 days in the three months to September and recorded more than $50m in profit on more than eight out of 10 trading days, the filing shows.
To lose money on a total of only three days over the last two quarters defies rules of logic, assuming that markets are free, fair, and balanced. Even in Vegas the house doesn’t win at that rate. The question begs then as to the nature of the supposed risks being taken by Goldman and every other Wall Street firm. Beyond the risks, we also need to question the very nature of the markets themselves. When a firm makes money 98% to 99% of the time, don’t tell me they’re taking risk. They are doing nothing more than ‘shooting fish in a barrel.’ How so? (more…)
Goldman’s Hatzius v Morgan’s Kasman: “Let’s Get Ready to Rumble”
Posted by Larry Doyle on October 30th, 2009 11:20 AM |
I love a good debate. Much like a prize fight, a healthy debate can ebb and flow as those ‘in the ring’ bob and weave while trying to score points. I so enjoyed a debate highlighted by The Wall Street Journal between the chief economists from Goldman Sachs and JP Morgan that I highlighted it in the Newsworthy section of Sense on Cents. For those who don’t visit that section of my site, I am compelled to replay this debate here.
In the inimitable words of Michael Buffer, “let’s get ready to rumble” as Goldman, J.P. Morgan Economists Debate Shape of Recovery:
The recession might be over, but how goes the recovery?
We posed that question to two prominent Wall Street economists with two very different views of 2010. Bruce Kasman, chief economist at J.P. Morgan, sees the U.S. growing at about a 3.5% pace for most of next year. That appears optimistic compared to Jan Hatzius, chief economist at Goldman Sachs, who sees gross domestic product growth of 2% or so at the start of the year tapering off to just 1.5% by year-end.
The following is an edited transcript of their remarks during a recent conference call with The Wall Street Journal.
Looking ahead to 2010, what kind of recovery do you see? (more…)
Goldman Calls ‘Huddle Up’
Posted by Larry Doyle on August 25th, 2009 4:20 PM |
Huddle up!!
Goldman’s play calling in regard to the dissemination of short term trading tips is receiving increased focus. The Wall Street Journal highlights Regulators Examine Goldman’s Trade Tips:
Securities regulators are examining weekly meetings at Goldman Sachs Group Inc. in which research analysts give tips to traders and then to big clients, as the Wall Street giant considers disclosing these so-called trading huddles to all its clients.
The Wall Street Journal reported Monday that analysts at Goldman sometimes shared with traders and key clients short-term trading tips that sometimes differed from the firm’s long-term research.
Examiners at the Financial Industry Regulatory Authority, the industry self-regulatory body known as Finra, and the Securities and Exchange Commission intend to ask Goldman for more information on these weekly get-togethers, people familiar with the matter said.
Internal documents show that at times, these short-term trading tips differed from Goldman’s long-term research. Critics complain that Goldman’s distribution of the trading ideas to Goldman traders and major clients hurts other Goldman customers who aren’t given the opportunity to trade on the information, and may be relying on the firm’s longer-term research to make investment decisions.
The huddles, and what is discussed during or after them, currently aren’t disclosed in Goldman’s long-term research. On Monday the firm internally discussed adding information about the service on its client Web site. Some firms, such as Morgan Stanley, also give stock ideas to clients, but disclose the service in their longer-term research and on its Web site.
My gut instinct tells me this business practice at Goldman may present regulatory issues at times but not necessarily always. The fact is there are times when a research analyst may feel a security is slightly overbought or oversold based on some short term technical dislocations. As such, he may share that assessment with traders and select clients.
However, there may be other times when a security is undergoing some fundamental changes and a research analyst is thinking about changing his call but does not immediately act upon it. The analyst will still highlight the short term mispricing.
Welcome to the very gray world of Wall Street research and trading.
Based on my experience on the fixed income side of the business, Goldman actually stopped publishing research around 2003 because they felt they were not being paid for it. Goldman actually had research analysts on the trading desk for the sole purpose of talking to clients. They did not publish written research.
At Bear Stearns in the mid 1990s, we would have weekly trading and research calls broadcast to all our clients. We screened clients from competitors by requiring clients to provide a passcode for the call. We still felt there were times when other Wall Street dealers accessed our calls.
Will any regulatory issues come from Goldman’s trading huddles? In my opinion, nothing big will develop. Goldman will likely post on its website a more explicit statement highlighting that short term trading tips are at times provided to capture market anomalies. The regulators will sign off on it and life will go on.
Be mindful, though, that Goldman is an aggressive short term trading shop. Given the lay of the land on Wall Street now, clients have to talk to Goldman whether they truly want to or not.
As is often said, if you are wondering who the pawn is, it’s probably you.
LD
Getting Goldman’s Call
Posted by Larry Doyle on August 24th, 2009 7:57 AM |
Goldman Sachs remains the focus of media attention. How do these wizards of Wall Street make so much money? What goes on inside 85 Broad Street? Is everything on the up and up? Are they smarter than everybody else on Wall Street? Does Goldman have better systems?
I addressed the Goldman business model on July 6th when I wrote, “How Does Goldman Sachs Operate?” I specifically highlighted:
Goldman decided to utilize its capital and balance sheet less so for origination capabilities and much more for principal trading (that is, making bets and taking positions with its own capital). Effectively, Goldman decided to operate much more like a large multi-strategy hedge fund. Goldman took enormous risks both in their proprietary books but also in their trading activity with customers. Goldman made a concerted decision to dominate the markets in which they chose to play.
If a firm is going to take large principal risk positions both within proprietary books and customer books (trading accounts used to trade with clients), two factors are of overwelming importance: information and relationships.
Goldman worked both of these angles very, very hard. Goldman developed extremely close relationships with the largest customers in the market and the largest power brokers in Washington and around the globe.
Many of Goldman’s relationships are with very active trading hedge funds. These funds know one goal–making money. Are rules violated? I’m sure they have been.
This morning, The Wall Street Journal reports Goldman’s Trading Tips Rewards Its Biggest Clients:
Goldman Sachs Group Inc. research analyst Marc Irizarry’s published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster “neutral” in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman’s traders the stock was likely to head higher, company documents show.
The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry’s research didn’t find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.
Every week, Goldman analysts offer stock tips at a gathering the firm calls a “trading huddle.” But few of the thousands of clients who receive Goldman’s written research reports ever hear about the recommendations.
At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman’s widely circulated research reports. Some Goldman traders who make bets with the firm’s own money attend the meetings.
Critics complain that Goldman’s distribution of the trading ideas only to its own traders and key clients hurts other customers who aren’t given the opportunity to trade on the information.
Securities laws require firms like Goldman to engage in “fair dealing with customers,” and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman’s stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research.
Former Goldman client George Klopfer of Park City, Utah, who was unaware of the trading tips until recently, says the practice is unfair. “When I joined Goldman as a client, I got all these fancy brochures saying they put the client first,” he says. “I just don’t want to have to worry about them or big clients trading on stuff like this. I was at the end of the food chain.” He says he pulled out most of the $20 million in his account earlier this year after losing money on several Goldman funds. Goldman says individual clients like Mr. Klopfer typically have a long-term investing approach and are not focused on individual stocks.
![[Goldman's Trading Tips Reward Its Biggest Clients]](http://s.wsj.net/public/resources/images/P1-AR261A_GOLDM_NS_20090823184910.gif)
I take the following away from this WSJ commentary: (more…)
Will Goldman Sachs Be Bulls, Bears, or Pigs?
Posted by Larry Doyle on August 21st, 2009 4:46 PM |
There is no doubt that Goldman Sachs is currently the preeminent shop on Wall Street. JP Morgan is a respectable second. I am not sure if there is a close third.
Despite Goldman’s resurgence, they have a major problem — that being their public image. What are some of Goldman’s issues? They include:
1. the firm’s close ties with Washington insiders . . .
2.their agggressive trading and risk profile . . .
3. the proprietary nature of their business . . .
4. the mere fact that they have made so much money (with the assistance and in the presence of Uncle Sam), while the economy continues to suffer . . .
Charlie Gasparino of CNBC addresses a number of these points as well as the fact that Goldman will likely face the public’s wrath when they pay out billions in bonuses come year end. The Goldman execs exacerbate the situation by playing the ethnic angle as Gasparino writes, Goldman Execs Blame Anti-Semitism. In my opinion, Goldman makes a huge mistake playing that card.
The fact is the public sees Goldman specifically and Wall Street in general benefitting from taxpayer dollars injected into the system along with a host of Fed and Treasury programs. While Goldman has paid back its TARP funds, they have still benefitted from financing backed by the FDIC. Moreso than direct benefits to the firm, Goldman has clearly benefitted indirectly from the gamut of Uncle Sam’s largesse.
Uncle Sam clearly has a large amount of ‘skin in the game.’ Goldman can address its image and burgeoning reputation problem by increasing its own ‘skin in the game.’ How can they achieve this? They should compensate employees in stock to a much greater extent and have that stock vest over a longer time period.
Typically, senior executives, traders, and bankers are paid approximately 35% in stock and the stock would vest over a three year time frame. As such, individuals would typically have one year’s worth of compensation tied up in the firm.
Let’s see Goldman pay people 65-70% in stock and have it vest over a 5 to 6 year time frame. If Goldman is concerned about losing people, that pay structure would serve as a real disincentive for other firms to hire Goldman people. Make no mistake, Goldman employees would NOT be happy to be paid in this format . . . BUT there would be plenty of people on Wall Street who would take that pay structure right now to work at Goldman Sachs.
Goldman has the opportunity through this bonus cycle to display whether they are bulls, bears, or pigs.
LD
How Does Goldman Sachs Operate?
Posted by Larry Doyle on July 6th, 2009 6:37 PM |
Goldman Sachs is widely regarded as the top Wall Street bank. What makes Goldman so special? Is everything on the up and up? Is it one massive conspiracy? At the request of a number of readers, allow me to share my perspectives on Goldman Sachs, in general, and my thoughts on Matt Taibbi’s article in Rolling Stone magazine, “The Great American Bubble Machine.”
Goldman Sachs has always had a tremendous investment banking franchise along with outstanding risk management capabilities within its trading operation. That said, in the ’80s and ’90s Goldman was certainly one of the best shops on the street but it had plenty of company. In my opinion, Goldman separated itself from the Wall Street crowd after the repeal of Glass-Stegall which had previously separated commercial and investment banking operations.
With the repeal of Glass-Stegall, most investment banks looked to grow origination capabilities in order to compete with the large commercial banks. At the same time, most commercial banks looked to grow their investment banking and trading operations.
Goldman stood out by taking an entirely different tact. Goldman decided to utilize its capital and balance sheet less so for origination capabilities and much more for principal trading (that is, making bets and taking positions with its own capital). Effectively, Goldman decided to operate much more like a large multi-strategy hedge fund. Goldman took enormous risks both in their proprietary books but also in their trading activity with customers. Goldman made a concerted decision to dominate the markets in which they chose to play.
While Mr. Taibbi paints Goldman as one large conspiratorial machine, I beg to differ. In fact, the reason why I initially only skimmed the Rolling Stone article is because it oversimplifies the Goldman business model and paints the entire firm and all its employees with a broad brush. (more…)
Is Uncle Sam Manipulating the Equity Markets?
Part II
Posted by Larry Doyle on July 6th, 2009 7:47 AM |
Who does not like a good summer read? Well, combine money with espionage and we have all the makings of a fascinating story.
The other day I wrote a post, “Is Uncle Sam Manipulating the Equity Markets?”, highlighting allegations by Joe Saluzzi of Themis Trading of highly suspect trading activities on the NYSE. Another chapter in this fast moving intrigue unfolded over the weekend. Thanks to kbdabear for sharing a Reuters news release, “A Goldman Trading Scandal?”, which adds significant fuel to the fire. Let’s review in a rational fashion. Reuters reports:
Did someone try to steal Goldman Sachs’ secret sauce?
While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.
The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.
Who is this individual, Aleynikov? (more…)
