How to funnel your hard earned money into our I-bank : the Goldman primer

Its fucking amazing.

Amidst the current economic mess, while jobs are being lost in millions, people are being forced to leave their homes left right and center, life savings, 401ks, retirement savings of the common man are being reduced to rubbles, I banks (read Goldman Sachs) continue to churn out amazing profits from what is now nothing but a naked form of state-subsidized (read Obama administration) profit generating racket for the remaining few I-banks (Goldman primarily after Merryl, Bear Sterns and Lehmann managed to go belly up with greed, as a sidenote the prestigious scumbag and asshole of the decade award goes to (Sloan) Harvard alum and ex Merryl CEO John Thain for managing to award himself and his fellow execs 100s of millions of $$ in performance bonus exactly 8 days before they had to go to the US government asking for a bailout).

Ok lets start:

The chief players: Goldman Sachs, SEC, White house
Cameos: Merryl, Bear Sterns, Lehmann
Comic relief: AIG
Act 1: The great depression of 09 aka how wall street managed to ass rape you

The story so far (quoted in green):

A former Goldman chief, Rubin, presses the Commodities Futures Trading Commission(CFTC, a federal government regulation and enforcing agency for the market) to deregulate a type of derivative contract whose chief benefit to an investment bank like Goldman is that it allows it to lend more — the CDS being most useful as a tool to move investment risk off a bank’s balance sheet. Then another Goldman chief, Paulson, pushes for further relaxation of lending limits. Then Goldman jumps head-first into the housing bubble, buying tens of billions in CDS protection to hedge their crazy investments. This massive explosion in lending by banks like Goldman, fueled in part by the use of derivatives like CDS and fueled still more by the 2004 change in rules, puts an enormous strain on the economy, leading to giant holes blown in its hull by the end of 2007 and on through 2008. It follows that when Goldman’s chief partners in those CDS deals, AIG, collapses as part of this wave of crashes, Paulson — now Treasury Secretary — rushes to the rescue, pumping billions in taxpayer money into AIG that is quickly funneled to Goldman. Then a Goldman alum is put in charge of AIG while another bunch of Goldman alums funnels still more bailout money to AIG, and yet another Goldman alum is put in charge of regulating the derivative market that is the focus of most of the bailout efforts.

In the midst of all of this, something amazing happens. Goldman Sachs, along with Bank of America, Morgan Stanley, and a host of other “troubled” banks, reports a profit for its first quarter in 2009! How and why that happened is another fascinating story, for another time. For now the only thing to remember is that all the same people who got us into this mess — Rubin, Summers, Goldman in general — are now being put in charge of the cleanup by a president who spent most of 18 months on the campaign trail pledging to end the influence of money in politics.

Add this together with the obscene giveaway that is the Toxic Asset program Geither has just devised (Goldman Sachs “expressed interest in participating in the plan as an investor,” according to the WSJ), and you have an amazing situation. Between the Bush and Obama administrations, you have a bailout program that has now figured three ways to funnel money to Goldman, Sachs: via AIG, via TARP, and now via this trillion-dollar “Public-Private Investment Program,” which basically lends huge amounts of money to investors and provides guarantees against heavy losses. It’s free money, state-subsidized profiteering at its most naked.

Hail Goldman, fucking assholes, all of you execs and b-school alums at Goldman should be lined up in a row and asked to eat shit burgers followed by a "thanks a lot, can I have one more and please can you piss on me while you are flipping those shit burgers".

In today's fun news: I played poker at the airport on saturday after my flight got delayed on a supremely dodgy Boingo connection, and managed to rip $8k off a huge donkish player in less than 2 hours.

EFF U WORLD: so says Citi and AIG and I-Banks

And the plot (conspiracy?) thickens. Those following the markets would know that there was a memo by Citi chief Vikram Pandit in early March, that got conveniently (?) leaked to the media and that shows that Citi was pretty profitable in the first quarter of 09, quoting Pandit:

"In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. In January and February alone, our revenues excluding externally disclosed marks were $19 billion".

Of course soon thereafter other such news came gushing in from other I-banks (JPMorgan, BOFA, GS..etc etc) and all of them reported major profits in that time frame (first two months of 09). For the layman like me this was utterly puzzling, banks with garbage on their balance sheets suddenly should not, by any logical means, start raking in big profits in a market with ever widening spreads and a ultra tight credit market.

But spending a ton of time reading a ton of, usually useless information, does have its perks when I finally came up on these whistle-blowing bunch of writeups from Zerohedge, there is a followup post on Rortybomb as well.

Basically what Pandit and his clique at the I-banks are upto this time is the following, (I quote in green)

• AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam. (this happened in the jan-early march time frame of 09).
  

• What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

So essentially AIG is a clearing house, it funnels in tax-payer money in billions and serves it up on silver platters to I-banks with a ton of garbage derivatives on their balance sheets as profitable trade opportunities. The sad part is that the banks then come up with blatantly false follow-up statements, on the back of these criminally-shady deals, announcing "Hello world we are profitable invest in us".

One wonders how much low can this supposedly respectable executives at I-banks stoop to? As I have alluded several times in this blog "Ethics for MBA, often publicized with vigor by B-schools" is an eye-candy meant for mary poppins.

Also to those disgruntled soul(s) who have spammed my mail box/comment section (comment moderation is now on) on the previous post regarding false claims and charges of plagiarism, which I-bank do you work for?

Some Observations on Goldman Sachs from a finance applicant's perspective

My weekend reading yielded some interesting titbit pieces of info that could be of interest to mba applicants as well as mba students interested in finance. The titbits however are not encouraging if you are thinking of I-banks/Wall street careers.

Background: What I will talk about is the so called derivative space in I/commercial banking, a particular member of this derivative space : credit default swaps (CDS) is now being accused of being the villain that brought down the financial sector.

The CDS for the layman is essentially an insurance against something (usually company bonds/debt etc). An underwriter (AIG) like your local auto insurer charges the insuree a monthly payment (coupon) determined by the CDS rate and if something bad happens to the insuree's holdings the underwriter ponies up the insured money just like an auto insurer pays for your wrecked car in case of accidents. Of course when all these CDSes started defaulting simultaneously (primarily because they were junk grade to start with, for example a pizza delivery boy in orange county,CA ,offered a 350k house loan on zero down, underwritten by AIG, packaged as CDS instrument by Lehmann... u get the picture), the insurer (AIG) was called upon by a myriad of insurees for the lumpsump payments causing the meltdown.

Now the derivative space has some more members besides the CDS notably :

1. interest rate
2. foreign echange
3. equities
4. commodities
5. CDS
   

Brief history tutorial for the layman: During the boom period in Wall street (1998 to 2007) , leading to the meltdown, the entire derivative space ballooned from $33 trillion to about $200 trillion, while CDS grew from about $150 billion to $5 trillion.

However another silent player in this dreaded derivatives basket seems to have risen in a more alarming fashion. It is the interest rate (1, in the list above, specifically swaps but also futures and forwards) that has grown from $24.8 trillion to $164.4 trillion!

In simple terms an interest rate swap (IRS) are merely contracts exchanging a stream of interest payments for another party's stream of cash flows, the underlying interest rate is often the Fed rate. Now associated with the IRS and derivatives is something called Total Credit exposure (TCE) which is essentially a metric that measures a bank's risky credit/risk eposure. Higher the number worse the bank.

Now for the bad news:
The Office of the comptroller of currency released a chart last week for the top 5 banks and the percentage of their total credit in relation to the potential toxic risky credits/derivatives arising from interest rate swaps (item 1 in the derivative basket above).


Table reproduced for better visibility:
Total credit exposure to risk based capital (%)
JPmorgan: 400(Q4 03), 384 (Q4 08)
Bank of America: 178(Q03,08), 179 (Q4 08)
Citi 260: (Q3), 278(Q4)
Goldman: 4(Q3), 1056(Q4)
HSBC : 664 (Q3), 550(Q4)

And drum-rolls please we have a winner. IT IS OUR OLD I-BANK PAL GOLDMAN SACHS WITH A STAGGERING 1056% % ratio of their total credit in terms of interest rate swaps.

The ramifications of this I leave to the readers, but just for fun imagine GS defaulting on these, ah wouldnt that make the AIG collapse look like peanuts. For those getting ready to join Goldman Sachs be sure to ask your bosses about these charts, Id love to have an explanation for their immense love of interest rate swaps. Also those in the class rooms do me a favor ask your fin-profs about these numbers, either way I'd love to know whats going on with this epic GS and IRS love saga. And a true love saga always needs a tragic ending, right ;-)

Charts Source :
http://www.occ.treas.gov/ftp/release/2009-34a.pdf:zerohedge :Office of comptroller of currency's quarterly report for bank trading and derivative activies

I am back --- with a whimper

• 8-6 has got boring, although I am still in research, our whole group has had a recent focus/image makeover, making us almost completely service- rendering bitches for our clients (internal and external).
• I don't like the projects I am supposed to work in 09-10.
• With oil and the economy in free-fall our lofty bonuses (announced Dec08 for 09) are going to be severely trimmed.
• I am feeling immensely strait-jacketed in terms of my career road-map.

Sum total of this bullet-based rant: I WANT AN MBA, again.

So after being out of the game for just about a quarter, I am back, back to play my part in that indy-500 of rat races aka Mba-admissions (drummrolls please) and that too at an unprecedented time.

My mood is sour and am feeling especially bitchy, so lets continue on the path of dourness and take a sneak peek into the current economic scene from an mba aspirant's perspective:

1. Sales and Trading : S&T was the reason I started looking into mbas. I wanted to be in a hedge fund running money like theres no tomorrow. Sadly investment research reveal total AUM for hedge funds have fallen to $965 billion in Jan from just about $1.9 trillion in May 08, an astounding 50%+ drop in just about 3 quarters. In may of 08 there were about 10,000 operational hedge funds, today that number is less than 6000, steamrolling towards the 5k mark, of course as hedge funds go belly-up hiring freezes, newly hired traders go over to cnbc and some audition for stripper jobs. Since I am feeling especially pissy here is the story of a hedge fund manager netting 750k anually who now works as a pizza boy at $7.95/hr,but he does deliver your pizzas in his leased Merc, soon to be repoed though.
   
   Former Morgan-Stanley junior banker/trader now working as a full-time NYC stripper netting 100k+.
   
   
2. I-banking : Sell side finance to start with (sell side is for the dummies btw), where you are essentially a middleman (akin to a pimp, pimping for money in expensive $2200 black suits and gelled hair, instead of the bing and glean that your average pimp puts on) putting together exotic products for your clients and often mixing in super-toxic little understood instruments into those product pools. But hey you still make decent dough, well you used to, if I was graduating today from a B-school I wouldnt touch an I-bank with a barge pole.
   
   
3. REITS (Real estate): I said I wouldn't touch I-banks with a barge pole if was graduating today, in that case I need to make a will forbidding my offsprings to use the phrase REITs in any source or form ever. A few charts for the pain that has now been re-christened Real Estate investment:
   
   
   What the first chart basically shows is the massive debt maturities that most REITs are now facing through to 2011. The problem is that REITs need to get financing/refinancing or some structural revolving credit line with their existing as well as new creditors to deal with these. Now those into Real estate will know that earlier this month Simon property group, perhaps the biggest player in this space (also the one with the best credit ratings on moodys and S&P), announced it was raising $500 million in bonds to take care of its debt at an astounding 10.15%!!! Pain anyone.
   

Now that my finance options are out of the way and the post is lit up in red, I'll retreat into my corner and sulk some more.

edit: I finished some catch up reading on mba related stuff and realized that there seems to be a shift in career focus towards clean energy, biofuels and stuff like that at most major B-schools. That is pretty surprising primarily because if you are rejecting Wall street based on your risk-averseness, then moving towards clean energy is almost surely suicidal. It is a sector that survives solely on subsidies and realistically has little chance to be a major/significant player anytime soon. The name though sounds chic and cool "Clean tech".