S.E.C. Sues Goldman Over Housing Market Deal – NYTimes.com
Shorts? SEC doesn’t like any structures right now
Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.
The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.
The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market.
Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.
Robert Litterman, chairman of Goldman Sachs Group Inc.’s quantitative hedge-fund group, will step down at the end of this month, a move planned before President Barack Obama’s call yesterday to limit proprietary trading at banks, according to people familiar with the situation.
Litterman, a 24-year Goldman Sachs veteran, advised a unit that ran Global Equities Opportunities, a quantitative hedge fund that required a $3 billion cash infusion in 2007. The fund, which used mathematical models to trade securities, closed last month after its assets fell to $200 million from as much as $7.5 billion, according to two people familiar with the situation.
Litterman’s departure was not connected to the fund’s closure, the people said. Global Equities and Goldman Sachs’s Global Alpha fund lost value in August 2007 when many quantitative managers raced to exit trades simultaneously. In June 2008, Litterman said the hedge funds suffered because they were too large for a “de-leveraging explosion.”
Goldman Sachs spent $16b on compensation in 2009 or just 35.8% of revenue to record the lowest compensation pay out on the street. Investment Banks like JP Morgan still target paying 40-5% going forward. Thus isn the Q4 ending December ’09, Lloyd Blankfein’s team earned a record $4.95 billion riding on a revenue of $9.62 billion vs $9.65 billion in the year ago quarter. Comp expense was thus down $3.4 billion to produce a great surge in profits.
Goldman also said compensation and benefits expenses were $16.19 billion in 2009, or 35.8% of net revenue. The ratio fell from 48% in 2008 to the lowest level in the company’s history, Goldman said.
The Wall Street firm, which has faced public anger over recording big profits after accepting bailout funds, said total compensation and benefits have decreased by $4 billion, or 20%, since 2007.
In the fourth quarter, compensation was reduced by $500 million to fund a charitable contribution, Goldman said Thursday.
Total underwriting fees at the investment bank climbed to $962 million from $460 million a year earlier.
“Despite significant economic headwinds, we are seeing signs of growth and remain focused on supporting that growth by helping companies raise capital and manage their risks, by providing liquidity to markets and investing for our clients,” Chief Executive Lloyd Blankfein said in a press release.
The bank’s earnings of $8.20 a share easily topped analysts’ expectations of $5.20 a share and compared with a loss of $2.12 billion, or $4.97 a share, in the quarter a year earlier.
Mr. Viniar said Goldman’s business through 2009 had been bolstered by its strong trading activities — helping companies and governments hedge interest rates or deal in currencies. This activity dropped off in the final quarter, he said, but its revenues were helped by strong investment banking activities, like equity and debt underwriting, in the fourth quarter. The dramatic slowdown in trading, however, had already begun to reverse itself in 2010, he said.
On average, each Goldman employee is set to receive about $498,000 in bonus and compensation for 2009, an amount that could still incense the bank’s critics, given the economic pain elsewhere in the country.
CFO David Viniar is reported to have spent the entire earnings conference delineating on how Goldman Sachs is showing “restraint” in its pay policies and how the government monies helped them turn the tide on 2008 and 2009
We will dive deeper once result season delivers by 21st when Goldman Sachs and some others like PNC and Sun Trust report earnings. Bank of America reports Tomorrow..
C ‘s loss of $0.33 per share is merely the payback being factored into the balance sheet. The credit losses were only $800 million.
Foreclosures will barrel down, Funds will not be cheap, their international operations cannot be contained or governed by local US law. Also domestic Citi business will turn profitable by Q3 and International Biz volume will exceed expectations
As per Marketwatch.com reports, also
“”Provisions and charge-offs were lower than we expected, suggesting that Citi’s ‘s outlook for its loan book has improved, particularly in corporate and international portfolios,” Standard & Poor’s analysts said in report to clients on Tuesday. “We think the pace of reserve building will continue to slow, allowing for an earnings improvement in 2010, the analysts concluded.””
Draft: Check our http://stocks.advantages.us for results based commentary
strangely enough, i have stuck to NY times for the result extract body..but the only thing of note below is the GCB profits of $1.6 billion which are based on hiding Card and other unsecured loan losses of $10 billion
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Bank executives say a speedier recovery in Asia and parts of Latin America has helped consumer loan losses. But amid double-digit unemployment and a weak housing market, the North American mortgage and credit card businesses keep hemorrhaging money — albeit, at a slower pace.
“Whether these trends continue will depend on the U.S. economy,” said John Gerspach, Citigroup’s chief financial officer.
Mr. Gerspach warned that stiffer credit card regulations would present a considerable headwind and the fate of the administration’s mortgage modification could significantly impact results. That program, by allowing the bank to delay booking losses on borrowers that fall behind on their loans, reduced credit losses by about $200 million in the fourth quarter.
Citigroup’s global consumer banking business posted a $1.9 billion profit for 2009, though that significantly overstated the performance of its mortgage and credit card businesses. For reporting purposes, the bank does not include its big mortgage, consumer finance and private-label credit card businesses. Those businesses, under the category of “Local Consumer Lending,” lost about $10 billion in 2009.
Over all, Citigroup’s investment bank reported the best results, though it still lagged competitors. Profit in the unit rose to $2.4 billion, up 6 percent from 2008. Although trading revenue surged in the first half of the year, it started to fizzle in the third and fourth quarters as the markets recovered. Its results also swung wildly from quarter to quarter from the impact of an obscure accounting charge on bank-issued debt, known as credit valuation adjustment, based on the perception of Citigroup’s financial health.
Mr. Gerspach said the figures needed to be adjusted again at the end of the year — lowering earnings by $840 million. “We corrected a mechanical miscalculation,” he said on the conference call.
Who brought the house down?
Hank Greenberg in an apparent bid to recover AIG’s golden goose from the two year hiatus in economic activity, remembering his last coherent version of 2007 here:
Greenberg blamed new standards for credit-default swaps — pushed by Goldman or Deutsche Bank AG, he said — and subprime, housing-backed derivatives sold and then shorted by Goldman as contributing to AIG’s collapse
This is excerpted from a short note on Bloomberg here
Also, in case you are wondering, no we do not plan this effort to grow into something as bg as the Business Week BX..pretty cool stuff, eh!
Blankfein not stepping in yet, means Greenberg has another couple of hits at it..and his best chance is if he gets a closed door session behind the curtains..write in
Meanwhile Blankfein got a vote down from the Financial Crisis Inquiry Commission
Lloyd Blankfein, the head of Goldman Sachs Group Inc., failed to own up to his firm’s role in selling mortgage securities that helped trigger the global credit crisis, said the chairman of the panel investigating the financial meltdown.
“Mr. Blankfein himself never admitted that there was any responsibility of Goldman Sachs to make sure the products themselves were good products,” Philip Angelides, chairman of the Financial Crisis Inquiry Commission, told reporters after a hearing in Washington today. “That’s very troublesome.”
Blankfein had just explained things too simply for those who expected a sobbing recalcitrant kneltdown humbug in every witness to the state, where they sat happily with the same Greenberg, prompting him to spend $44m on a weekend layover with his team among other things
Also we’ve got over Banking 2.0, it’s not technology
The Emerging Markets will be busy of course with Infrastructure Finance but the global divisions of American Banks are likely to suffer from post pay-stub executive trauma and a general feeling of ‘shoot, why should we ask them any’ additionally. The other business challenges in no small measure include the first budding months of the exit from recession and TARP for most. Citi’s leadership is in doubt esp. with Teresa Dial leaving unsuccessful and needled by the administrations’ review. Wells Fargo has the golden opportunity to build on its decimating the Citi challenge in the West Coast with the Wachovia acquisition working out for it despite the bad debt. It would however be bearing the brunt for credit losses again in 2010. The legal challenges against BofA here may not help either. Obama’s still got his hands full running all these banks and more effective regulation would really help the cause of those in the banks waiting for the change to stabilise as internal processes have had the designed regulations in practice for some time before the alt A movement was signed even.
Recently Moynihan also addressed town hall meetings as foreclosures modified exceeded 4% of the mortgages after a blank ten months. A similar town hall of bankers is now in progress in India hosted by SBI as the dollar continues for a resurgent 2010. Euro trades might not catch on to Indian FX intermediation even after a couple of bankruptcies, you may not be able to tell them apart from the Pound bashing that will ensue after British polls. The paper profits of the US banks are unlikely to calm them internally and even the investors can be a touchy lot despite beating analysts estimates.
Obama is trying to change the US stance on a Tax , just to get back at those who didn’t turn up for his ‘Townhall’
With popular anger building as big banks show profits and pay sizable bonuses while unemployment remains high, the Obama administration has come under pressure at home and abroad to support a financial transactions tax on institutions and to heavily tax their executive compensation.
But the United States, led by the Treasury Secretary Timothy F. Geithner, has been opposed, arguing that a transactions tax would simply be passed on to customers and a bonus tax could be easily circumvented.
Harder to understand and predict also will be the hopes of off shored jobs coming back whether it is Obama tricks or new centers in Morocco, Monte Carlo and mid-town America. Banking in any case is happier with the current branch market structure and does not imagine new branches from Chinese competitors or the phantom regulations of the pay czars.
Brian Moynihan and Benmoshe do show however that there are likely more new jobs for everyone by virtue of their own selves being virtual dolls of Greenberg and Kenneth Lewis. Citi is likely to pay second fiddle to Wells Fargo in the market sweepstakes and BofA may follow both if not careful. The other continents are likely to hear from only JP Morgan and Goldman Sachs this year.
Latam may yet continue to gladden Citi and Goldman Sachs as they try to write the new chapter for Banking growth, but JP Morgan is the clear winner. Global banking comments similarily are patched together at advantages.us Random thoughts or the Perfect Storm 2e edition, we’ll decide after Hank Paulson publishes his fictional piece on the raison d’etre of the crisis and the raison d’etat.
Welcome to Advantage Banking and Advantage Infrastructure in the new decade. We don’t think banking ever slimmed down at all! However, Fat Cat bankers are out of the mix. GS however couldn’t save its $44b compensation plan from prying eyes of pension funds yet.
Goldman Sachs’ earlier bonus component that averaged $700,000 per employee for this year is likely to be drastically revised. Initial reports suggested a 5 year stock purchase plan but the exact structuring is likely to throw up even more surprises as the government makes agreeing noises to the new compensation plan. France joined Britain in imposing a supertax, but the supertax by itself is unlikely to refund governments that are out of pocket..Immediate target for govt. failures and restructuring Portugal, Italy, Ireland, Greece and Spain. Italy and Ireland are yet to get notice from S&P or Fitch ratings divisions for the country debt/risk downgrade.
Also, the Commercial RE cost is likely to rack up over $225 billion and the US stimulus funds are likely to attempt more foreclosure finance having achieved only 4% till date. These may not affect bonuses but are likely to keep the government from allowing all its ‘equity’ in Citi, BofA and others to be paid off.
However, this partnership between governments and banks is also likely to bear some fruit in the tight infrastructure financing space despite the step up from private equity and ETFs
Bowing to calls for restraint in tough economic times, Goldman said that its most senior executives would forgo cash bonuses this year. Instead, the 30 executives will be paid in the form of long-term stock — an arrangement that means they will not get big year-end paydays, but one that could turn out to be enormously lucrative if Goldman’s share price rises over time.
The move is meant to address concerns that bankers and traders in the past benefited from short-term performance. The shift at Goldman locks up the executives’ rewards for five years and enables Goldman to claw back the bonuses in the event the bank’s business sours.
Goldman did not say how much it would pay the executives, suggesting the bank would continue a practice — widely followed in investment banking — of allocating roughly half its annual revenue for compensation. While their bonuses will be paid in long-term stock, the payouts are likely to be worth many millions of dollars.
On Thursday, the Treasury Department will auction off the stock warrants it received from the bank as part of its $25 billion Troubled Asset Relief Program loan.The warrants could be worth as much as $1.5 billion to taxpayers, according to one estimate — though the results of an auction held last week suggest the feds may not get quite that much.JPMorgan JPM, Fortune 500 repaid its TARP loan in June, but the New York-based firm declined to repurchase the warrants, which the government received for free as part of the deal. Warrants give the holder the right to buy stock at a certain price within a certain period.Under the terms of TARP, banks have the right to repurchase the 10-year warrants they gave the government, with the proceeds going to taxpayers as profits. A number of big banks including Goldman Sachs GS, Fortune 500 and Morgan Stanley MS, Fortune 500 made large payments to the government this past summer to buy back their warrants.A bank that declines to repurchase its warrants, for whatever reason, triggers an auction at which the government sells the warrants to private sector bidders.Treasury held its first warrant auction last week, reaping $147 million via the sale of warrants to buy shares in credit card lender Capital One COF, Fortune 500. Thats a nice chunk of change, though it was less than one researcher was expecting.
As you see below, Paulson’s fund has added BAC, Citi, Indymac, GS and even State Street using the enhanced corpus from shorting the world’s top banks against the MBS boom in 2007 when we had tipped over in volumes and quality of MBS/Sub-Prime
Interestingly, Dimon’s JP Morgan does not figure in this list. In an earlier article we had also brought out media reports of his play on the Kraft Cadbury deal! It wouldn’t be surprising if he gets a couple of ME And Asian investors in his hedge funds in a couple of months. He is sitting on a pretty pile and it will be much bigger in a couple of months when the banks start making some real gains after the accounting bounce back in the last 2 quarters in their fixed income portfolio
Paulson, one of the world's largest hedge-fund firms, held 300 million shares of Citigroup Inc. (C 4.15, +0.10, +2.47%) at the end of September, according to a regulatory filing late Friday. Three months earlier, the firm had no stake in the financial-services giant.
The stake in Citi was valued at $1.45 billion on Sept. 30, according to the filing. It’s not clear whether Paulson still owns the stake, but the firm doesn't specialize in rapid trading.
Citi stock climbed 2.5% to $4.15 during after-hours action Friday.
The Citigroup investment follows a big move by Paulson into Bank of America Corp. (BAC 16.00, +0.02, +0.13%) shares earlier this year. See story on Paulson's Bank of America stake.
Paulson, run by John Paulson, is best known for generating huge returns betting against mortgage-related securities in 2007 and financial institutions in 2008. However, the firm late last year launched the Paulson Recovery Fund, which invests in financial-services firms that are looking to shore up weakened capital positions.
As 2009 began, Paulson was among a group of private-equity investors who acquired failed bank IndyMac from the Federal Deposit Insurance Corp., injecting $1.3 billion into the lender.
In the second quarter, Paulson’s hedge funds bought bank stocks including Bank of America, Goldman Sachs Group (GS 176.68, -0.08, -0.05%) and State Street Corp. (STT 40.40, -0.05, -0.12%) , according to securities filings.
ZYAKAIRA(AMIT MITTAL) NOTES:
YES YOU SHOULD. The Distressed prices can recover quickly once there is liquidity in the market, as it has already done for those that were TARPed with the real cash. Also the debt market is in the best place for a rebound right now and it’s easy money for you, no Madoff
NO, NEVER: US could fail in the next 12 months if you think so..because without this debt coming back, you couldn’t print enough money..That said, however, the underlying documentation is incomplete, sold multiple times and if there is default, no one is paying..
YES, YOU SHOULD: Mortgage prices will recover once the real estate market recovers from the bottom. Cherry pick if you can..don’t touch UBS or any other bank that has already failed. Ask for the end user mortgage in each case and be convinced about it.
Remember Fink(Blackrock) is the king! Read the rest of this entry