Credit Crisis

Reality catching up to Goldman Sachs

Jim Kim — Tue, 04 Nov 2008 19:13:17 -0500

The Teflon is wearing thin, and the credit crisis is sticking it to Goldman Sachs hard. We noted this week that at least one analyst now predicts a fourth quarter loss, which would be the firm's first loss as a public company. The latest hit, of course, is the news that its much-hyped hedge fund, Goldman Sachs Investment Partners, was down about 15 percent for the year. Which isn't that bad. It's faring only slightly worse than the average hedge fund this year and better than the average mutual fund. But 15 percent on $6 billion is a whole lot of dough. And the expectations were really high. The fund was supposed to wipe away memories of Goldman's troubled Global Alpha fund. Instead, it has revived the bad feelings. Goldman Sachs Investment Partners is managed by Raanan Agus and Kenneth Eberts, former heads of proprietary trading desks at Goldman. They have some time to right the ship. The limited partners agreed to a two year lock up.

For more:
- here's the FT article on the hedge fund

Related Article:
End of an era: Goldman to post first loss?

Case study: How cities and states ended up being hedge funds

Jim Kim — Sun, 02 Nov 2008 09:04:50 -0500

The New York Times offers an interesting story of how cities and state entities ended up ensnared in the global credit crisis. We've noted that many of them face some severe financing hardships, even with the crisis abating a bit. The worst hit are those that invested in certain CDOs. The Times looks at a school district in Wisconsin that ended up borrowing $165 million from a free-wheeling bank in Ireland named Depfa, and using $35 million of its own money to invest in synthetic CDOs issued by the Royal Bank of Canada. In doing so, they were following the advice of a banker who had all of two hours of training on CDOs. I'm sure the commission was huge. Lots of other government entities are in the same boat. Much of this will end up in court.

For more:
- here's the article

Mortgage underwriter tells all about WaMu

Jim Kim — Sun, 02 Nov 2008 09:02:09 -0500

"At WaMu it wasn't about the quality of the loans; it was about the numbers. They didn't care if we were giving loans to people that didn't qualify. Instead, it was 'How many loans did you guys close and fund?'" This according to former WaMu underwriter Keysha Cooper. She could have worked at lots of companies and come to the same conclusion. She shares her story as one of 89 employees whose accounts are contained in a suit against the thrift by an Ontario pension. She says starting about 2006, the company started ramping up the pressure to close loans at all costs. No loan was suspect. "You were like a bad person if you declined a loan," she said. She was sure that a lot of fraudulent activity was taking place. She ended up being put on leave for refusing to sign off on a loan that was plainly just wrong. Brokers sometimes tried to bribe her to approve loans. This is akin to inviting regulation.

For more:
- here's the New York Times article

BlackRock's role in the crisis

Jim Kim — Fri, 31 Oct 2008 11:39:06 -0400

BlackRock CEO Larry Fink is dominating the headlines like he did a few months ago, when it seemed like he was a candidate for every high-profile open CEO position. His firm is playing an active role as the bailout industry gears up. BlackRock has been hired by AIG, Lehman Brothers, Fannie Mae and Freddie Mac--not to mention the Treasury Department.

Fortune notes the irony: "Keep in mind that 25 years ago [Fink] was an early and vigorous promoter of the CMO (collateralized mortgage obligation). Today the CMO and other asset-backed securities have become the monsters responsible for the credit crisis."

In some ways, that's unfair. You can't blame him for the recent decisions at some investment banks. He has his company poised to profit from the bailout process, and that strikes some as an enviable position.

For more:
- here's the article

Bank CEO cash payout raising brows

Jim Kim — Wed, 29 Oct 2008 12:44:39 -0400

South Financial Group chairman, president and CEO Mack Whittle stepped down with a $12 million payday that the company intends to honor. The twist here is that the resignation came a few days after the bank said it will apply for bailout money from the TARP, which of course intends to restrict golden parachutes. He founded the company back in 1986 and deserves credit for that. Of course you have to assume that he's been paid handsomely over that period for good performance. But just recently, the credit crisis really crunched it, hence its TARP application. What do you think? Does he deserve to have his compensation agreement honored, even in this tough economic (and political) season?

For more:
-here's more from TheStreet.com

Video: CNN's Culprits of the Crisis - Alan Greenspan

Dan Bowman — Fri, 24 Oct 2008 08:33:42 -0400

Check out the CNN video on Alan Greenspan below:

Wachovia's earnings: A shocking loss

Jim Kim — Wed, 22 Oct 2008 13:09:24 -0400

Wachovia's last earnings announcement was a doozy. It reported a massive $24 billion loss. That's $2.23 a share loss versus expectations of a 2 cents a share loss. Ouch! Portfolio wonders if Vikram Pandit was sitting back chuckling. His counterpart at Wells Fargo, John Stumpf, put the right spin on it: "We're more encouraged than ever by what we've seen in their franchise, and we're pleased that Wachovia's team continues to focus on serving customers." But clearly the carnage inflicted by the credit crisis was severe. "While average deposits were up 4 percent during the period, actual deposits at the end of it were down 2 percent over last year, which suggests a bit of a run on the bank during the final weeks of the quarter," Portfolio writes. And here's the shocker: Wachovia said it expects losses of various option ARM-type mortgages to hit $26 billion by the end of next year. Recall that it paid $27 billion for Golden West last year. Wells seems to know what it is getting into. We'll see.

For more:
- here's the article

Citadel among funds getting hit by crisis

Jim Kim — Wed, 08 Oct 2008 19:44:01 -0400

In many ways, Kenneth Griffin would appear to be type-cast as a hedge fund manager. He's made billions. He bought a Cezanne for $60 million. He was married at Versailles. But there is nothing ordinary about the way he built Citadel into a hedge fund power. Now, even Griffin is getting walloped by the credit crisis. His firm's two main investment funds are down 20 percent this year, reports the New York Times. The past few weeks have been especially hard." Now, the clock is ticking...If his funds close down for the year, Citadel will not earn its 20 percent profit fee," according to the article. Griffin's hopes of taking his company public seem distant. As did his claim that his firm might someday rival Goldman Sachs. Certainly, the firm is not alone in its pain. But that is cold comfort right now. By the way, he's scheduled to testify in Congress next week, which should be interesting.

For more:
- here's the article

A look at Fannie's demise

Jim Kim — Sun, 05 Oct 2008 09:40:53 -0400

So who's to blame for the credit mess the whole country is now in? Well, it would be too easy to point a finger at any single entity. The New York Times offers an insightful look at one of several easy targets, Fannie Mae. The GSE faced a lot of pressure from politicians and mortgage originators to start buying up really risky stuff. Angelo Mozilo played hardball to get Fannie to buy more high risk debt, and Fannie's Daniel Mudd caved. Lots of politicians wanted Fannie to expand the homeownership pie. Fannie didn't help it's cause one bit with its gross mismanagement. They fudged the books and never raised enough capital, the critics will tell you. And it still galls people that executives walked out of there with Wall Street-like pay. In the end, taxpayers lose. This will be debated for a long time to come. We need a new model for mortgage-oriented GSE. Any ideas?

For more:
- here's the article

On tap: Pain for cities

Jim Kim — Tue, 30 Sep 2008 17:41:26 -0400

In this credit crunch, corporations and consumers have gotten all the attention. But the credit crisis is also a really worrisome event for cities and municipalities. Consider Jefferson County, AL. It is on the verge of defaulting on an $84 million interest payment on its $3.2 billion in bond debt, reports the AP. Bankruptcy seems assured. This will rank right up there with the Orange County, CA, fiasco in 1994. I'm not sure we'll see a rush of similar defaults, but the costs of borrowing has soared. There are some definite short-term funding issues cropping up. In fact, many local and state projects are now threatened. Certainly, this suggests the far-reaching nature of the credit crunch. So much of the world runs on credit, and the spigots are off.

For more:
- here's the article
- here's a New York Times article