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

I just did a phoner on Bloomberg TV on Goldie, and I suspect this meme has just about run its viral course.

To me, the key takeaways are as follows:

• Publicly Traded Banks: When firms shifted from Partnerships to publicly traded banks, their priorities changed.
• Profits First: Meeting quarterly profit estimates became job 1; everything else, including the corporate culture, was secondary.
• Not Just Goldman: GS may have lost $3b in cap yesterday, but I doubt they will lose many clients. Where are they going to go, to the choirboys who work at Morgan Stanley, or to the philanthropic organization known as Deutsche Bank?
• Derivatives are Opaque: The issue with complex products is lack of transparency. Derivative fees are opaque, the products are complex, and muppets clients do not understand how much margin is built in.
• Counter-Party vs Fiduciary:  The complexity of these products often leads to clients relying on their salesman. They shouldn’t — they are not your adviser, they are your counterparty.

This is the last I plan on discussing this topic for the foreseeable future . . .

Some amusing items circulating Trading Desks today:

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Source: FT Alphaville

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Source: Business Insider

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Source: Flickr

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Source: Daily Bail

Everyone is all abuzz this morning about the acerbic resignation letter of Greg Smith, head of the firm’s United States equity derivatives business in Europe out of their London office.

Did I say letter? It was an OpEd published in the NYT, Why I Am Leaving Goldman Sachs .

“To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.”

I disagree with my colleague, Josh Brown, who writes: “The “culture” of Goldman Sachs was, is and always will be about making money, often at the expense of a client” (How to Quit a Job Without Publishing an Op-Ed).

Sure, profits matter, but Wall Street used to be about so much more than that. There was a culture of mentoring, developing, teamwork, a belief that doing the right thing for your clients was in your own best interest.

Firms that used to be Partnerships — as opposed to the publicly traded corporations of today — meant that you had to be more involved in what your partners were doing, as they had the ability to bankrupt the firm AND the individual partners. This was a huge factor in the dynamic –  and it made recruitment, training and mentorship all that much more important.

It was more than just Goldie — Think about Mother Merrill, and the generations of traders and investors who learned their craft in her embrace (Gone).

I hope I am not overly romanticizing the Wall Street of old. When you speak to some of the folks who have a long tenure in this business, you hear great stories of the old days. People I have been fortunate enough to meet and know in this business have painted quite a clear picture of what it once was like, and you cannot blame it all on the rosy glow of nostalgia. I have sat at the knee of people like Art Cashin and Doug Kass and Justin Mamis and Felix Zulauf and David Kotok and Walter Deemer and David Rosenberg and Barry Hyman. I have heard the stories — some bad, most of them good, quite a few of them hilarious.

Much of that is lost to the change to public companies — making quarterly numbers is a cruel taskmaster, one that makes such genteel ideas as culture and leadership passé.

Why do you think Bloomberg has never gone public . . . ?

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Source:
Why I Am Leaving Goldman Sachs
GREG SMITH
NYT, March 14, 2012
http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html

See also:
Why I am leaving the Empire, by Darth Vader (Daily Mash)

A Response from Goldman Sachs From Chairman Lloyd Blankfein (The Borowitz Report)

Awesome cover story in the March 2012 Research Magazine on my colleague Josh Brown:

“Joshua Brown is one angry former broker. The 35-year-old financial advisor, whose Reformed Broker blog has brought him wide acclaim in recent years, has just written a book meant to uncover the perfidy of Wall Street. Backstage Wall Street is part plea, part mea culpa, part screed. Brown unmasks the financial industry for all to see, revealing the less-than-honest sales tactics of boiler-room brokers and dressing down investment banks for running away with fees and riches while Mom and Pop retail investors are left holding the bag.

Brown makes some startling claims: wirehouse brokerage firms will be gone in 10 years, as will the “suitability” standard governing broker-dealers. Mutual funds? They’ll be gone too, replaced by their fast-rising cousins, ETFs. Brown takes his readers on the bumpy ride of Wall Street, from 2000 (when he started), through the credit crisis of 2007-2008, to the present day, when you can find him as a reinvented registered investment advisor, happily banking management fees instead of commissions.”

I already read his book (Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments), its a Molotov cocktail thrown at the brokerage industry.

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Source:
Breaking Ranks
Gerald Burstyn
RESEARCH MAGAZINE, February 24, 2012
http://www.advisorone.com/2012/02/24/breaking-ranks

A Dimon Repeatedly in the Rough who Demands Winter Rules (aka Preferred Lies)
By William K. Black
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Golf is one of the sports associated with the CEOs of big banks, so it is not surprising that Jamie Dimon is expert at seeking to invoke Winter Rules whenever JPMorganChase (NYSE: JPM) finds that its actions have placed it in an unfavorable lie.

Golfers know that they cannot unilaterally invoke Winter Rules – only the folks in charge of the course can put Winter Rules in effect. When Winter Rules are put in effect the golfer can improve his lies by placing his ball in a preferred lie.

A New York Times investigation by Edward Wyatt documented the depth of the rot at the SEC in a February 3, 2012 article entitled “S.E.C. is Avoiding Tough Sanctions for Large Banks.”

“JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.””

SEC investigations have found that JPMorganChase is a serial violator of the securities laws. The bank gets caught, promises to clean up its act, gets fined, signs a typically useless consent decree that has no admissions, creates no precedent, and undercuts deterrence, and gets waived out of the few detriments there are to banks with records of serial SEC staff findings of violations.

JPMorganChase exemplifies this pattern of the SEC winking at serial fraud by the systemically dangerous institutions (SDIs). The SEC routinely allows the SDIs to operate under Winter Rules and the SDIs routinely and repeatedly employ preferred lies.

But the metaphor is inexact for three reasons. First, Winter Rules are not supposed to be routinely available. They are reserved for unusual circumstances where the course is unusually unplayable due to weather. Second, Winter Rules are available due to problems with the course not caused by the player. Third, when Winter Rules are invoked by the golf course the course posts that information publicly and Winter Rules are available to all players rather than to a subset, i.e., the wealthiest players.

Consider what the world would be like if we had a “three strikes law” for corporations. Assume that the corporations were only assessed a “strike” if the violations were attributable to the actions of a senior officer. Assume further that the SEC and the Department of Justice (DOJ) actually brought actions against the SDIs and required admissions of violations of the law in settlements and pleas. The SDIs would have been dissolved (the equivalent of being sent away for life) decades ago.

Consider the chutzpah of JPMorganChase claiming “a strong record of compliance with securities laws” after SEC staff investigations found six violations in 13 years. But that kind of arrogance and indifference to complying with the law is inevitable under an SEC regime that allows the SDIs to play by Winter Rules. “Improved lies” captures perfectly the perverse incentives that the SEC has created.

The CEOs of SDIs who know that they can commit fraud with effective impunity (the SEC fines are typically chump change from the SDIs’ standpoint) develop a belief in their divine right to transcend the law and conventional morality. Jamie Dimon captures the mindset that Nietzche celebrated for the Superman. Dimon extends the logic of transcendence to its ultimate, absurd, extreme. He is enraged that the CEOs running the SDIs have been criticized. It turns out that the SDIs’ CEOs are sensitive types. Nobody exemplifies this Rich White Whine motif better than Dimon.

“I’ve disagreed right from the beginning of this blanket blame of all banks,” Dimon said in an interview with Charlie Gasparino of the Fox Business Network Tuesday. “I don’t like that. I think that’s just a form of discrimination that should be stopped.”

The interview was taped shortly before Dimon left for the World Economic Forum summit in Davos, Switzerland, where Dimon said he will be speaking with other attendees about financial regulation. At last year’s Davos summit, Dimon made similar remarks pushing back against the vilification of the banking industry, calling it “a really unproductive and unfair way of treating people.”

No serious critic has a “blanket blame of all banks.” The blame is focused on SDIs, particularly SDIs like JPMorganChase that investigations find engaged in recurrent fraud, yet were treated to Winter Rules because they were SDIs. These SDIs are not only the bane of the world economy; they are the bane of honest banks.

Dimon has also reached the logical, albeit absurd, conclusion about the legitimacy of investigating JPMorganChase. He is tired of the investigations finding fraud, so he has decided, in the context of the settlement negotiations of the widespread foreclosure fraud by five large mortgage servicers including JPMorganChase, to offer a settlement in return for prohibiting the government from investigating his banks’ mortgage origination and foreclosure fraud.

When news reports claimed that the federal government was reducing its disgraceful offer of widespread impunity from investigation and prosecution, Dimon responded that it was likely that JPMorganChase would not enter into a settlement that did not have a broad prohibition on investigating JPMorganChase’s frauds.

“The new unit “has a pretty good chance of derailing it,” JPMorgan Chase CEO Jamie Dimon told CNBC on Thursday, referring to the settlement. JPMorgan is one of the five banks involved in those negotiations.”

Dimon is the face and mindset of crony capitalism. It is long past time for the SEC to end selective Winter Rules and Preferred Lies for the SDIs.

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Bill Black is the author of The Best Way to Rob a Bank is to Own One and is an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog

Follow him on Twitter: @WilliamKBlack

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

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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!

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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,

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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.

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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
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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

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Contango_PCP2012

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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.

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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