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 Could the Goldman Legal Woes Signal a Market Top?

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Batman

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PostSubject: Could the Goldman Legal Woes Signal a Market Top?   Tue May 04, 2010 1:36 pm

Via HFN Daily Report:

From the Feb. 5th market bottom, where the S&P got as low as 1046 intraday, the market shrugged off any piece of negative news and rallied on anything remotely positive.

Problems in Greece that could spark a round or European bank failures? Who cares, not interested. Home foreclosures, defaults and short sales continued rise? Oh look, we got a pop in new home sales from a program due to end the last week of April. Marginal improvements in employment numbers even as we hover close to 10%? Sounds like a good reason to rally or use the last hour of trading to reverse any intraday down move. The light volume melt up continued unabated, taking chunks of flesh out of hedge fund's short exposure side and those long volatility.


Then on April 16th, which happened to be Option Ex Friday, the news of an SEC investigation of Goldman hits the wires and the market took a dive. The S&P went 53 days, including weekends, without a 1% sell off, and a rare extended up move that has happened fewer than 15 times in the last 10 years.


The following week we get a double Goldman whammy with a profanity laden Senate hearing and the announcement of a criminal investigation on Friday. The market responded with its first down week in two and half months.

Whether Goldman is found guilty or innocent is up to the courts to decide and the actual outcome would take months to years to play out. What we can observe though is that this news seems to have stopped this latest rally of market exuberance dead in its tracks, at least for the moment.

I'm sure anyone paying attention to this ordeal has to think that this multi- pronged attack on the financial services industry's highest profile shop, at a time when a financial reform bill is being debated and Democrats are on the hot seat with voters ahead of the November elections, is no mere coincidence.

The conspiracy theorist in me says Goldman is going to play the role of the villain, a face politicians can point to and say "that's the bad guy, and watch what I'm going to do to him, and by the way if you liked that, here comes a set of laws that will stop us from ever using your money to bail them out again."

If that is how things end up playing out, it could signal a negative chain of events for this nascent recovery. Bare in mind that investor and consumer psychology are highly subjective things that can move markets to highs seen in tech and housing bubbles, and can move them even faster to the downside as seen in 2008.

Goldman is not likely to be the only institution with dirty laundry that will be aired publicly (and 27-year-old CDO specialists admitting that that they are peddling garbage in between cheesy attempts at romance over company email). Where there's one problem there's usually more, and if market participants get in the mindset of looking for problems, chances are they are going to start finding them, making it harder for the market to climb higher.


On Sunday, Greece received their $147 billion loan package and Manufacturing ISM numbers came in this morning at a six-year, well above the 50% demarcation line between recession and recovery. The S&P is up for the day, as of May 3, but is still off of its April high. Perhaps the Friday unemployment data will be the catalyst to take us upwards to new levels, and not just be a rally off of a bigger downward move.
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PostSubject: How Fares Goldman's Administration Services?   Sat May 08, 2010 8:09 pm

It was not the best week to be Lloyd Blankfein.

On April 27, Blankfein, Goldman Sachs' chief executive officer, had to sit through his executives' grilling by a Senate subcommittee over the banks' participation in the kind of structured investments that were the beginning of the end of the subprime mortgage blowout.

All of them, including Fabrice Tourre, the young Goldman executive who is personally named in a Securities and Exchange Commission civil case against the bank for fraud, were forced to sit through Senatorial scorn that was rarely backed by a thorough understanding of the markets.

Claire McCaskill (D.-Mo.) was particularly eloquent in toting up the populist position on Goldman and structured credit instruments.

"You are the bookie and you are the house. You had less oversight than a pit boss in Las Vegas," McCaskill said.

Following that dog-and-pony show came the news that the government had opened a preliminary investigation into possible criminal charges against Goldman.

One of the deals being examined by the Senators was something called ABACUS, which were a bunch of collateralized debt obligations that were sold by Goldman through a third-party marketer ACA.

The SEC complaint alleges that on one of those deals, Goldman told ACA and German bank investor IKB that hedge fund manager John Paulson had an equity interest. Paulson, however, was on the short side of the deal, as he generally thought the subprime mortgage market was about to go south.

Senators and the court of public opinion aside, Goldman, being a publicly held company, has other things to worry about, like clients and shareholders.

When the SEC announced its lawsuit on April 16, Goldman stock dropped about 15% to $160.70 per share in one day. It has continued to sink since.

Then, there is the hedge fund client side of Goldman's business.

Although Goldman Sachs Administration Services' revenues dropped 21% in the first quarter of 2010 to $395 million as compared to $503 million the same time the year before, the bank was still a force to be reckoned with. (Goldman reported Q1 net earnings of $3.46 billion overall.)

Goldman's fund services didn't want to talk to HedgeFund.net. However, broadly speaking, clients have been supportive, a spokesman said in an e-mail.

Marc LoPresti, a partner with Tagliaferro & LoPresti, who specializes in representing market participants in the alternative investment industry, says he doesn't expect hedge fund clients to exit the Wall Street giant anytime soon.

"Hedge fund clients that we're talking about have a more sophisticated view of the case and the alleged conduct," LoPresti says. "They're skeptical about whether the SEC has a strong case."

That view is seconded by Duncan Hennes, cofounder of Atrevida Partners (and also the man who headed up the banking consortium that helped unwind Long Term Capital Management).

"This is more of a political issue than a legal issue. First, the actual legal case against them is rather contained; it's one transaction," Hennes says.

For hedge fund assets under administration, Goldman ranked third in the Q4 2009 HFN Administrator Survey with $173.3 billion in AUA as of Dec. 30.

First is Citco Fund Services with $395 billion in AUA; second was State Street Alternative Investment Services with $241 billion in AUA. (Those figures include only hedge fund AUA.)

"[Goldman has] strong capital ratios," Hennes says, "As long as they do the right thing and cooperate I think it's unlikely it will have a longterm impact on their business."

LoPresti says that if criminal charges develop (the investigation is reported to be in a very preliminary stage), there could be pressure on hedge fund firms from institutional investors.
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PostSubject: Goldman CEO Safe For Now   Mon May 10, 2010 5:29 pm

Goldman CEO Safe For Now

A motion to split the two head positions at Goldman Sachs was defeated at the bank's annual shareholder's meeting. That means that, at least for now, Lloyd Blankfein retains both his chief executive officer and chairman role, as Goldman struggles to come back from the one-two punch of an SEC civil fraud lawsuit and Congressional hearings.

The SEC lawsuit focuses on Goldman's structuring of a collateralized debt obligation called Abacus that was sold to investors in 2007. The SEC is alleging that Goldman misled investors by telling them that hedge fund manager John Paulson had an equity stake in the CDO, when he was actually shorting the portfolio.

The SEC case, and other Goldman securitized transactions where the bank appeared to be on both sides of the deal, were the subject of a Senate hearing looking into the causes of the financial crisis.

According to reports from The Wall Street Journal, which was covering the annual meeting, the SEC case was barely mentioned. There was some, perhaps, unintended humor, when Blankfein announced, "I like shopping at Walmart," according to The Journal. That came after a colloquy about Walmart CEO H. Lee Scott, who is a member of Goldman's board.
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