The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

To: Hiring Committee, Goldman Sachs
From: Barry Ritholtz
Re:  Position, Head of Public Relations, Goldman Sachs
Date: February 13, 2012

>

Gentlemen:

Now that your public relations chief, Lucas van Praag is (finally!) retiring, it is time for the executive committee to seriously rethink the position of PR head. To be blunt, your efforts have not been up to the level of excellence that one would expect from Goldman Sachs. It would be impolite to speak ill of the job done by LVP has done under challenging circumstances, but you gentlemen need to face the facts, and fast. On his watch, the firm’s reputation has suffered, its ability to recruit top talent has been compromised, and its market cap has gotten shellacked.

In short, your PR efforts have performed about as well as the ABACUS 2007-AC1 –  the John Paulson created mortgage bundle that cratered. Or, about as well as John Paulson’s fund in 2011, which also cratered (I am seeing a pattern here).

All of which says, you guys have really stunk the joint up.

Thus, it is with great pleasure that I toss my hat into the ring for the position of Director of Communications for Goldman Sachs. Not only do I have the requisite skill set to help rehabilitate the image of the 100+ year old firm — media savvy, legal smarts, netizen, with just a dollop of snark — but I believe I can help you move gracefully into the new century.

Here is how I would restore the luster to the now tarnished Goldman Sachs reputation, returning her to her former glory.

1. Radical Transparency:  In this day and age, with everyone Facebooking and Tweeting and Foursquaring, GS remains a bit of a mystery. Open the firm up — social networking for everyone! I want your traders Tweeting, your bankers blogging, your compliance people Tumblring. Instagram photos from the Muni Bond desk, Flickr accounts from the Prime Brokerage department. Why? So you can:

2.  FLOOD THE ZONE: You need to overwhelm the public with info. When traders like the Fabulous “Fab” Tourre showed up in the press, people were aghast at the arrogance, impudence, and lack of empathy. That’s only because the public is so unfamiliar with how traders talk. Overwhelm them with the minutiae of life on an Institutional Sales Desk. It will titillate them for a few days, but then they will be proactively preempted — instead of  the next recoil, the public will become inured to it.

3. Internal Legal Fund Line: Look, SEC fines and Civil Suits are merely the cost of doing business the Goldman Sachs way. Recognize this, and build into each transaction a small internal tax. Any decent trader will tell you the first loss is your best loss. Its much easier to write a $500,000 check than the $50 million or $500 million dollar one. The mistake you made with the Abacus case was not recognizing this soon enough and making it go away sooner.

PS: Who the hell is your outside counsel? They gave you awful advice, resulting in a half a billion dollar record setting fine. Fire those bums, and replace them with someone competent. (I’ll ask around for you)

4. Government Infiltration Service: Stop hiding the great public service that Goldman Sachs offers to governments around the world, and stand proud! There are legions of former Goldie employees working at every strata in every major government. Recognize the great charitable service these former employees provide, by taking enormous pay cuts to serve. Help these folks thru the difficulty of low paying government service, by holding some Goldman Sachs stock for them. When they retire from Civil Service, they have a small nest egg to rely on. They certainly are professional enough not to allow their holdings to compromise their objectivity when affecting policy!

5. Warren Buffett: Why are you hiding the Bailout Investment the legendary investor made in you? Promote it! I am spit-balling here, but how about advertisements that promote the savvy investment made by the greatest investor of modern times? “When the crisis hit, Warren Buffett entrusted billions to Goldman Sachs” – You cannot buy that sort of great PR! Or how about:  Good Enough for Warren, Good enough for you! Thats Gold!

6. Sense of Humor:  Every time I see a current or former Goldie CEO, they are stiff, formal and utterly lacking in any kind of levity. Granted, Senate Banking Committees are no place for stand up, but geez, what a buncha stiffs! Lloyd Blankfein, Hank Paulson, Jon Corzine, Robert Rubin. Lighten up, Nancies! A little humor goes a long way, especially during those dreary SEC meetings. I happen to know Robert Khuzami is total cut up! Try opening with a humorous anecdote.

7. Offense Beats Defense: Now take that sense of humor, and apply it in a way that humanizes the firm. Establish a fund for the preservation of the endangered Vampire Squid. Take Matt Taibbi out for drinks.Try to look less like the Borg, jamming your blood funnel where ever there is the smell of monies. Give out Vampire Squid plushies as gifts to clients and friends!

8. Play the Anti-Semite Card:  As a fellow tribesman, I have been infuriated by some of the obvious attacks on the firm. Every time some critic spits out the words “Goldman Sachs,” they are really making thinly veiled Anti-Semitic attacks. Get PC on these people. Whenever the firm is assaulted by outside agitators, do some opposition research and dig up some dirt. Once you call out these Al-Qaeda sympathizers, a lot of the attacks will go away!

~~~

Well, that is my short list. My starting salary is negotiable, including a rich stock option plan, which I hope to liquidate tax free before eventually going into government service.

I await your call,

>

Barry Ritholtz

When the Twitter handle @GSElevator first launched, I followed it for a while, but soon thereafter unfollowed. Some of it was funny — very funny — but it read less like overheard true conversations, and more like what someone imagined would be overheard in a Goldie elevator.

I hadn’t thought about it until a reader sent me a link to a hilarious story about a roadshow gone terribly wrong. It confirmed my suspicions that this was being written by a young aspiring sitcom writer, and not a banker. More on that in a moment.

@GSElevator author is supposedly a “former first-year analyst, now working in Goldman’s investment banking and capital markets divisions.” I highly doubt that for a variety of reasons, starting with the fictitious parody-like way they read, rather then genuine conversation.

Then there is the math: Think just for a brief moment about every elevator ride you have ever taken — you are either with a large group of people, where no one speaks — or with a smaller group where there is some conversation. Even if we expand the geography to include offices, hallways, lobbies, dining rooms, glimpses of such explicit and inappropriate speaking come along infrequently. Certainly not two or three times per day. Even if a team of 1000s of eavesdroppers are listening, transcribing and mailing in the Tweets to a central editor, there simply are not that many offhandly humorous statements made in banks in New York / London / Hong Kong. It would quickly exhaust the global supply of that rare earth mineral hilarium.

All good bankers understand Risk Factors — its explicitly detailed on all their documents. Consider the risk of getting caught. One or two of these overheard snippets would help triangulate who the eavesdropper is — but post 100s and the risks of getting found out go up exponentially. Goldie’s security people could geolocate the Tweeter to their exact longitude and latitude, floor and desk seat in a day. Too many people would see these clips and be able to tag the 3rd man in the elevator as the source. Hence, they are most likely fictitious.

The final piece of evidence comes with this column: Your Average Business Trip…Gone Horribly Wrong. It screams professional (or aspiring professional) comedy writer, attempting to follow the Twitter trail blazed by Justin Halpern’s @ShitMyDadSays to sitcom glory. It is clever, well written, and rather hilarious. It also so obviously identifies its author to the rest of the folks in the tale that he would immediately be outed. That is before we even get to the publication site, Total Frat Move — a tell this is no Goldman alum.

We can deduce that at best, this is someone who worked in a large office — law firm, bank, etc., and has an ear for ddialogue and a sharp sense of humor. My money is on an MBA drop out, who has enough jargon to pass to laypeople, but uses it awkwardly enough that it fails the sniff test.

Regardless, Your Average Business Trip…Gone Horribly Wrong an outrageous and funny piece of writing, an excellent calling card for networks looking for an original new series. It is simply way too funny to be written by a real banker.

Good luck, @GSElevator with your career in Hollywood — I look forward to your first take-no-prisoners  movie/sitcom. Just be forewarned — they are as blood thirsty in LaLa land as anyone who works for the Vampire Squid.

>
Update 1, Feb 9, 2012 10:41am:
The Epicurean Dealmaker reached the same conclusion 6 months ago . . .

Update 2, Feb 10, 2012 1:22pm :
@GSElevator responds here
>

Source:
Roadshow Gone Horribly Wrong
By gselevator 23 days ago

http://totalfratmove.com/782530

See also:
Tweets that feed into Wall St elevator gossip (FT.com)

Investment Banking Meet the Goldman Sachs Banker Behind @GSElevator  (Dealbook)

I like a legal department that has a sense of humor. This is the standard disclaimer that Contango Oil & Gas Company (MCF) includes with their quarterly earnings reports:

Lawyer Stuff

The future is unknowable. We have good intentions but all of our projections and estimates will be wrong, and could be materially wrong. Wildcat exploration is expensive, speculative and potentially dangerous. An offshore spill or explosion would be enormously expensive. We have insurance but it may not be enough. You could lose your entire investment. Don’t be lazy – read our 10-Q’s, 10-K’s and press releases, and if you lose money – please no tears.

“Don’t forget about risk-free T-bills in your portfolio…After inflation and taxes you’ll likely only lose 5-10% of your investment.”

- Contango V.P. Investor Relations

Great stuff!

Hat tip Aurelian Management

~~~

Contango_PCP2012

>

There is a absurd yet fascinating article in the Sunday Times by Gretchen Morgenson, titled A Mortgage Tornado Warning, Unheeded. It is is stirring and emotional.

What makes it fascinating is yet another story told about prescient warnings in advance not heeded about the coming mortgage crisis.

What makes it absurd is its complete lack of recognition of how large companies operate, how businesses interact with the public, how humans behave.

Consider the reality of how businesses operate in the world. No (bizarrely according to this column) huge corporations do not sift through an enormous volume of incoming communications, including emails, letters, and phone calls to pull out that one important warning from non-clients, and make major shifts in their business models and operations. This is not how firms whose goals are to profit maximize on behalf of their shareholders operate.

I speak from experience. I spent the better part of 2005-06 discussing the imminent housing collapse, warning about valuations, showing how the collapse would play out into the broader economy. These were with clients I had an existing relationship with, a good track record and an established degree of trust.

How did that work out? I ended up getting the following Hugh McLeod line printed on the back of my business card: “I can’t take this shit anymore, he said, mistakenly.” Its now a print hanging in my office.

They had their models, they thanked me for the color, but there was simply too much money to be made.

The thing to blame companies for is not that they ignored some outsider’s warnings; Rather, it is  that they themselves failed to recognize the many warning signs of the coming housing collapse. This is the true failure of the Mortgage Lenders, Wall Street Secritizers, GSEs, Real Estate Agents, Appraisers, and of course, Central Bankers. Their expertise should have alerted them to the obvious coming tornado. Or worse — and IMO criminally — they saw it all coming and went about running up risky exposure regardless. The massive smash and grab, break the bank, snatch huge IBGYBG bonuses, and split before anyone noticed was the order of the day.

It is not that they ignored the public warnings.  If the economy is dependent upon large companies recognizing broad warnings of economic danger coming from the public, we are all doomed. Rather, it is that they should have known better on their own. That was their massive failure.

>

Previously:
Mistakenly (April 7th, 2011)

More Ignored Warnings About Bad Mortgages circa 2003 (October 11th, 2008)

Putting an end to Wall Street’s ‘I’ll be gone, you’ll be gone’ bonuses (March 12, 2011)

Source:
A Mortgage Tornado Warning, Unheeded
Gretchen Morgenson
NYT: February 4, 2012
http://www.nytimes.com/2012/02/05/business/mortgage-tornado-warning-unheeded.html

How do you feel about brands you use?

Click to enlarge:

Source:
The Future Wealth Report
January 2012

Authorities believe they have traced more than 90% of client monies prior to subsequent transfers from MF Global.

Here’s Dealbook:

“Investigators have determined what happened to nearly all of the customer money that disappeared from MF Global around the time of its bankruptcy last Oct. 31, but have not publicly disclosed their progress, fearing that doing so might cripple efforts to recover the cash and pursue potential wrongdoing, people briefed on the investigation said.

While authorities have traced hundreds of millions of dollars to banks, MF Global’s trading partners and even the firm’s securities customers, investigators remain uncertain about whether they can retrieve the money.

Some recipients were entitled to payouts from MF Global, which could make clawing back the money difficult. For instance, securities customers withdrawing their money as MF Global began to collapse were paid from accounts that belonged to futures clients, according to other people briefed on the matter.”

I expect we will see JPMorgan (JPM) as a counter-party recieved lots of that cash.

>

Source:
After a Delay, MF Global’s Missing Money Is Traced
By BEN PROTESS and AZAM AHMED
Dealbook, January 31, 2012, 9:42 pm
http://dealbook.nytimes.com/2012/01/31/mf-globals-missing-money-is-slowly-being-tracked-down/

Thu 26 Jan 12 | 06:00 AM ET

click for full image

full graphic after the jump
Read the rest of this entry »

Last month, I noticed this WSJ article, Merrill’s 2012 Pay To Drive Advisers To Richer Clients.

I didn’t think much about it over the holidays, but it started gnawing at me. Perhaps it was reading a draft of Josh Brown’s book, Backstage Wall Street over the weekend that started me thinking about that piece. This may be a little Inside Baseball for those of you who do not work in the industry, but bear with me. It is rather instructive of a certain mindset that has broader implications.

The article notes that Bank of America’s Merrill Lynch division will no longer pay its advisers on business done in new relationships they establish that are under $250k. Previously, the cut off was $100,000 dollars. What this means, quite simply, is that no Merrill adviser is going to pursue such business.

Note that the firm did not say they won’t accept such accounts; they are happy to take them and the 2% fees they generate. What they are saying is that they just won’t pay their employees on these accounts — which amount to 4% of the $2.2 trillion in client assets managed by 15,000 financial advisors.

A quick back of the envelope calculation is that this is $88 billion in assets that are no longer generating fees for employees. That is $1.76 billion is payouts that the bank has just decided to keep for itself, screwing their own employees of their fees. (UPDATE: No it is not; See details below)

I have spoken to a few Merrill employees, and they are livid. This is not policy, they inform me, it is simply a billion dollar theft. A few gents I spoke with are already looking at other shops. Another told me he considers this voiding his employment contract, and is speaking to his attorney about his options. This could end up being a recruitment windfall for Morgan Stanley and UBS.

Regardless, it is yet another example of what happens when incompetent institutions are kept alive by government bailouts, instead of the preferred route of prepackaged bankruptcy reorganization.

I expect two current trends to continue:

1) The exodus of advisors from the big bulge bracket wirehouses towards smaller independent firms;
2) Clients and their assets (regardless of size) will continue to gravitate away from big firms and towards do it yourself discount brokers and independent advisors.

Regardless of the outcome of this foolishness, it is rather telling about the state of Bank of America’s (BAC) finances. A stupid idea this short term and self-destructive can only mean their financial position is even more precarious than I previously believed . . .

>

UPDATE: January 9th, 2012 10:12am

Merrill Lynch tells me that the existing accounts are grandfathered — they will continue to be paid on. The new accounts are the problems MER reps have been screaming about.

>

Source:
Merrill’s 2012 Pay To Drive Advisers To Richer Clients
Jennifer Cummings
WSJ, December 23, 2011 http://blogs.wsj.com/financial-adviser/2011/12/23/merrills-2012-pay-to-drive-advisers-to-richer-clients/

Yesterday the Federal Reserve released its quarterly Flow of Funds data, current through September 2011. One of the more popular headlines from this data concerns the record amount of “cash on the sidelines“. Through Q3 2011, nonfarm nonfinancial corporate businesses held $2.11 trillion in liquid assets on their balance sheets. As the argument goes, this must be a sign of pent-up demand just waiting to be unleashed on the market.

Liquid assets held on companies’ balance sheets is a nominal number, much like the nominal level of GDP, that rarely decreases. Of course cash on the sidelines is at a record nominal level, it usually is. This series must be compared to other balance sheet items for relevance. The chart below shows liquid assets as a percentage of total nonfarm nonfinancial corporate business assets since 1952. By this measure, the “cash on the sidelines” argument is far less compelling.

When examined over a shorter time frame, as shown below, the percentage of cash on the sidelines is at the upper end of its range of the past 30 years. Given the uncertainty in the markets, rampant volatility and the lack of good investment opportunities, this should not come as a surprise.

While it is true that cash on the sidelines, as defined above, is at its highest level in roughly 30 years, should this be taken as a sign of pent-up demand that could lead to a huge rally once unleashed? We would still argue it is not. If and when investment opportunities become more enticing, we will see these levels fall from 14.24% to the historical norm of the past 30 years of 10%-11%. It is not as though companies currently have 40% of their assets in the form of cash waiting to be invested, as was the case in the 1950s.

Source: Arbor Research