pay no attention to the banker behind the curtain

i have to give goldman sachs credit. everytime i think they are completely cornered and have no where else to go other than into the dustbin of history, they manage to pull off another trick. i still believe you can't fool all the people all the time (this is not an endorsement of david einhorn).

but this time i gotta give the wizards at goldman extra credit because this one is obvious and yet no one seems to notice. that's the best kind of trick. goldman announced earnings yesterday which surpassed guidance and by most accounts was a blow out quarter.

but check this out - they reported net income of $1.66 billion from january - march. however, they changed their fiscal year. their year end used to be november but they switched to january. the net effect was they reported their quarter for the last three months and separately reported december as an "orphaned" month. and guess how they did in december? they lost $0.8 billion. so it seems goldman took all its losses and crammed it into the orphaned month which won't show up on any specific quarter.

bravo goldman! i don't think you can use that trick again, so i wonder what you will do for an encore.

how can banks possibly be doing well? banks traditionally make money from the following sources: investment banking advisory work (this business is basically dead except perhaps restructuring), loaning money (they likely made money on this since they can borrow from the government for almost nothing and lend out at higher rates - but that's what caused this whole mess to begin with - so i doubt they are doing much lending), trading (with major hedge funds blowing up and the rest all hating on goldman sachs this cannot be doing well) and wealth management services (this has to be going terribly). so besides some chicanery, how is goldman making its numbers?

lastly, i want to point out that the real problem at Goldman and Citi and all the other banks is the toxic assets which are not marked correctly. with the suspension of mark to market accounting we are likely to create zombie banks that never make money as they slowly trickle out the losses on their balance sheet. think of it like this - if you have a loan portfolio that you've said is worth $100 billion but if you went to sell it, would only fetch $80 billion, then what does $1 billion or $2 billion in profit really do for you? you're still $20 billion in the hole. so when citi reports earnings for the quarter, how does it matter when their assets are massively mismarked? it reminds me of my friend who reported winning $3,000 in blackjack. so i said, "congrats, drinks on you tonight!". he responded, "no way, i lost $10,000 on blackjack this morning". i don't see how you can call any of these banks profitable.

the PPIP is a giant scheme

the PPIP (public-private investment program) is designed to take toxic assets off the books of banks. i'm not even sure this is a severe issue for the banks anymore, but let's just assume it is.

one thing a bank could do is bid on its own assets. let's say a bank offers to buy its own asset at t $84 million. by putting up just $6 million in risk, (with the government putting in the other 6 and borrowing 6 to 1), they could buy the asset from themselves. if the real value of the loan of the asset is anything less than $78 million, it's in a bank's best interest to do this.

in this scenario, let's say the $84 million asset would have gone for $50 million in a real auction - well that would be $28 million less ($84 million - $6 million they had to put up - $50 million that it is worth) than what they got by buying it from themselves. further, to show the silliness, they could actually bid $840 million, putting up $60 million (which they would lose) but still getting $780 million net up front.

i have no doubt that there will be rules in place such that a bank cannot bid on its own assets however to think that there will not be related party transactions among these clearly morally corrupt institutions is silly.

so the banks get made more than whole, the taxpayer loses a ton and the dumb hedgefunds / banks who bought up the assets, salivating at the 13 to 1 leverage lose a bit too (though i'd bet that anyone who is putting up real money is going to get a kickback along the way from the banks that foist the toxic assets on them).

once again, goldman sachs wins.

post updates

i got a lot of flack for suggesting Geithner was a crook. however, i'm apparently in good company. even the left wing huffington post published an article essentially comparing him to nixon.

What Did Geithner Know and When Did He Know It?

the pitchforks are beginning to come to goldman sachs. about 100 to 150 people protested outside of goldman's NY headquarters yesterday. i would like to include this in the i told you so category but since the protest was planned (although unknown to me) before i wrote the post, i don't think it quite makes it.

goldman - where's the outrage?

i had planned to write a post on AIG counterparties but then i found this article which is short but articulate

It's not the bonuses. It's that AIG's counterparties are getting paid back in full.

in 20 years, when they write the history of the "bailout", the AIG part will go down as the largest theft in human history.

further thefts the government has helped perpetuate include the no bid contracts in Iraq. this is not partisan. all sides are stealing from taxpayers and giving to their friends. with one hand, Obama is trying to cancel the no bid contracts in Iraq, with the other he is giving money to banks and failing industries.

the AIG thievery is appalling. so was Hank Paulson's institution of the "no short rule". while mere mortals like you and me could not sell short companies like Goldman Sachs, existing owners of the shares could sell with impunity. this effectively let owners of Goldman shares (and other financial institutions) cash out before the free markets were able to really put a price on the shares. and who were the big owners (and therefore sellers) of those shares? why, it was Goldman employees! (Hank Paulson, before enabling his friends to steal taxpayer money was CEO of Goldman Sachs).

there is so much nastiness going on in the financial world, but one company keeps showing up. it's goldman sachs. perhaps they never get busted for their thievery, but hopefully we will get justice, in this world or the next. probably will have to wait for the next since goldman seems all powerful.

for example, goldman can even bully around the new york times

NY times in a long line of people who refuse to tell Blankfein and Co where they can shove it

not only is goldman screwing over the US taxpayers directly, but they also have no problems hammering their own investors. while we were forbidden from short selling their stock, they were busy donkey punching their own customers

Goldman Targeted by Investor Complaints of Naked Short-Selling

instead of investigating the $165 million in bonuses paid at AIG, i would rather the senate investigate the $10 billion that went to goldman at the same moment they paid out $11.4 billion in bonuses. that is absolutely egregious. it's 100x the bonus pool at AIG. where's the outrage?

Goldman Crimes