Showing posts with label Goldman Sachs. Show all posts
Showing posts with label Goldman Sachs. Show all posts

Wednesday, May 27, 2009

"For Minority Firms, Crisis Opens Doors"

Wall Street Journal, May 22, 2009.

NEW YORK -- The financial turmoil that has weakened or
destroyed some of Wall Street's most prominent companies
is presenting an opportunity for some lesser-known firms,
especially those owned by women and minorities.

One company that is benefiting is Williams Capital Group
LP, an African-American-owned broker-dealer and asset
manager in New York. Earlier this week, Goldman Sachs
Group Inc. said it will invest $1 billion in a
money-market fund managed by Williams Capital, more
than doubling the amount of funds the firm has under
management and pushing it over a critical size
threshold that could help it attract additional
institutional investors.

Last month, Williams Capital was named as part of a
team assembled by Invesco Ltd. that applied to participate
in the Treasury Department's Public-Private Investment
Program, or PPIP, an effort to relieve banks of
toxic assets. Invesco, and its affiliate WL Ross & Co.,
which is controlled by money manager Wilbur Ross,
said it is willing to invest as much as $1 billion in
the program. Williams Capital is also showing up
more often as an underwriter on stock and bond offerings.

"Companies appear a bit more open to broadening their
universe of relationships," says Chris Williams, the
company's founder and chief executive. "We're not a major
firm so if someone only wants to do business with the
top four or five firms, we may not be on the list. But
as companies broaden their relationships, we are being
included more often than we had been in the past."

The nation's most powerful financial firms have long been
hesitant to forge strong ties with minority firms, in part
due to perceptions that the smaller firms lacked the
knowledge base or talent pool they required.

But as the financial crisis humbles some of the industry's
most storied firms, that view is being reassessed.
"The so-called smart money got too smart for its own good
and
got shot in the foot," says William Michael
Cunningham, a socially responsible investment adviser
who
tracks minority-owned financial firms.

In contrast, smaller firms tended to be more conservative,
which caused them to lag behind during the boom years but
is serving them well now.

Meanwhile, there is pressure on financial companies by
politicians and clients to broaden and diversify. That has
led to a recent flurry of large companies, from Pacific
Investment Management Co. in California to Northern Trust
Corp. in Illinois to publicly seek minority-owned and
women-owned firms that could be potential business
partners or service providers.

"As diversity has become a more important issue in this
country, many large pension funds are asking us to be open
to new ideas and new firms," said Lyle Logan, an executive
vice president at Northern Trust, which on Monday
announced that it is seeking "emerging" and minority-owned
broker-dealers to become trading partners.

Some members of Congress have been pressing the Treasury
Department to increase the participation of minority- and
women-owned firms in various asset-management and
bank-rescue programs, including the PPIP and the Troubled
Asset Relief Program, or TARP. The programs are expected
to provide millions of dollars in management fees and
investment possibilities for private companies.

Last month, the U.S. Treasury selected minority- and
woman-owned firm Piedmont Investment Advisors LLC,
of Durham, N.C., as one of three firms to manage
assets acquired by the Treasury through TARP.

One of the most prominent ways in which minority and
small firms have gained attention is through the PPIP
program. In response to pressure from Congress members
-- like Maxine Waters of California, Gregory Meeks of
New York and Keith Ellison of Minnesota -- the U.S.
Treasury asked asset managers to partner with
minority-and women-owned firms before applying
to manage PPIP assets.

A spokesman for Goldman Sachs said the firm's interest
in Williams Capital isn't specifically related to PPIP,
although Goldman hopes the partnership with Williams
Capital will expand to include other business areas.

Leading contenders for PPIP work, such as Pimco and
New York money manager BlackRock Inc., have tied up
with several such firms, according to a spokesman for
Rep. Waters. "This represents the first time in history
that we have opened up real opportunities for
well-qualified small, women- and minority-owned firms
to participate in this type of public-private
partnership," Rep. Waters said through a spokesman.

The smaller companies have been quick to seize the
opportunities coming their way. Maria Fiorini Ramirez,
the founder of New York-based macro research firm
MFR Inc., teamed up with money-management and
private-equity firm Paramax Capital Partners, to
apply for PPIP. "By adding our name to it, it made
the application I think a little bit more attractive,"
Ms. Ramirez says.

She notes that smaller firms like hers also are
benefiting from the holes caused by the collapse of
some large financial-services firms in recent months.
Revenues at her firm have increased 10% over the
past year, she says, thanks to new clients and
increased business from existing clients. MFR is now
building up its municipal-bond team by hiring seven
new executives in the past three months, and it is
looking to add more.

Minority-owned and "small firms, in particular,
have a great opportunity to take advantage of the
chaos that's still in the marketplace," Ms. Ramirez
says.

http://online.wsj.com/article/SB124286748215841675.html

See also: http://www.pionline.com/article/20090519/DAILY/905199976/1062

Wednesday, April 22, 2009

What happened. What now.

Commercial and investment banks used their size and money to make campaign contributions that allowed them to evade any meaningful effort to impose common sense and transparent risk controls in the public interest, known as regulation. One of the first regulations attacked dated from the Great Depression. This was the Glass-Steagall Banking Act, a law designed to separate commercial and industrial banking. Banks, commercial and industrial (the latter known as investment banks) could now combine operations to create products in fundamentally unstable ways.

Markets are ruled by two emotions: fear and greed, and these institutions got greedy, very greedy. They created financial products that served no real purpose, other than to generate profit for the bank. To keep customers (their only regulator) from understanding the bank’s true intent, they made these products horribly complicated. These products were, in part, simple bets. These bets were layered on top of each other until only the product designers had any hope of realistically estimating what little value actually existed in the products.

Commercial and investment banks came to act as if they understood that giving these products a veneer of social utility would help them hide their true motivation, so they tied a small fraction of these bets, now known as “derivatives,” to subprime lending and passed the bundle off as the invisible hand of the free market at work.

How Does This Impact Blacks

Financially, Blacks are worse off now than they were, on average, ten years ago. Subprime lending products allowed white banks to engage in highly negative and discriminatory practices. Such practices “intentionally assigned black customers subprime mortgages while giving whites better rates.” This leads to higher mortgage loan payments for black versus white borrowers. Given this reality, efforts by media outlets to blame the crisis on minority borrowers reveals a stunning level of racism. This negative campaign further fuels race-based resentment that will grow, as the economy continues to weaken, to a very dangerous level.

What to do now

We need to replace the elites that controlled the financial marketplace, both firms and people. This means a blanket prohibition covering the firms that created the crisis, and includes anyone working in a operational or senior level at any failed GSE, bank, insurance company or investment bank/brokerage house.

Relationship Map: Goldman Sachs and Treasury

See: http://muckety.com/Query

Tuesday, March 24, 2009

Who will profit from PPIP?

According to CBS MarketWatch,

"Representatives of Pimco, BlackRock Inc. and Colony Capital all told MarketWatch that their companies intend to offer their services to work on the effort." Other firms lining up at the trough:

Goldman Sachs
Wellington Management Co.
Och-Ziff Capital Management
Fortress Investment Group
Avenue Capital Group
Marathon Asset Management
King Street Capital
Blackstone Group

What is needed is new perspective, new ideas, new ethics. Sadly, these are all in short supply at the firms listed above.

One thing is certain. You will not profit. You will, however, be left with the bill.

Saturday, March 14, 2009

Why the market failed

For those of you wanting more of an explanation, read this.

"There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used (financial bets) to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when (hedge funds) bought a credit-default swap, (they) enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets (hedge funds) and others made with firms like Goldman Sachs and AIG. (Hedge Funds), in effect, were paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all."

“They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” (Eisman) says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans."

From The End by Michael Lewis, Portfolio Magazine. December, 2008 issue.

One part of the puzzle. This is, actually, a positive sign, meaning we may start to work our way out of this mess. Here is, also, what this means: blaming the crisis on CRA or subprime lending is flat out wrong. Others are (finally) beginning to see the problem in full light: there simply were not enough subprime borrowers to cause a catastrophe of this magnitude. For that, you needed greed-induced leverage, a complete lack of ethics, and a set of parasitic financial institutions.

As we noted in April, 2008:

"With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic."

You also need a compliant (non functioning) regulatory apparatus, something we warned about in 1998:

"“The nature of financial market activities is such that significant dislocations can and do occur quickly, with great force. These dislocations strike across institutional lines. That is, they affect both banks and securities firms. The financial institution regulatory structure is not in place to effectively evaluate these risks, however. Given this, the public is at risk.” WILLIAM MICHAEL CUNNINGHAM, UNITED STATES COURT OF APPEALS (CASE NUMBER 98-1459). OCTOBER, 1998.

Welcome to the solution, fellas...about time you got here.

Thursday, February 12, 2009

Summary of House Committee on Financial Services Hearing (Tian Weng, Debby Su)

1. Topic: TARP Accountability: Use of Federal Assistance by the First TARP Recipients
2. Date and Time: Feb 11, 2009, 10:00 am – 1:00 pm
3. Place: 2128 and 2172 Rayburn House Office Building
4. Chairman: Mr. Barney Frank, Chairman of the House Financial Services Committee
5. Witness List:
Mr. Lloyd C. Blankfein, Chief Executive Officer and Chairman, Goldman Sachs and Co.
Mr. James Dimon, Chief Executive Officer, JPMorgan Chase and Co.
Mr. Robert P. Kelly, Chairman and Chief Executive Officer, Bank of New York Mellon
Mr. Ken Lewis, Chairman and Chief Executive Officer, Bank of America
Mr. Ronald E. Logue, Chairman and Chief Executive Officer, State Street Corporation
Mr. John J. Mack, Chairman and Chief Executive Officer, Morgan Stanley
Mr. Vikram Pandit, Chief Executive Officer, Citigroup
Mr. John Stumpf, President and Chief Executive Officer, Wells Fargo and Co.

Eight bank CEOs from companies receiving the first TARP funds testified before the House Financial Services Committee. All testified that they distributed fund received in a manner that they thought would increase financial market liquidity, expand credits and lending in either residential or commercial loan markets, and generate enough revenues to allow them to return money to investors and US tax payers. All cited figures to confirm that they were distributing funds to the places they intended to. They denied TARP was used for dividend distributions or employee compensation.

Mr. Pandit, of Citigroup, pledged to cut his salary to $1 a year until the bank returned to profitability and took personal responsibility for the “mistake” of even thinking about buying a new $50 million private jet after getting government financing.

Mr. Lloyd C. Blankfein, Goldman’s chief executive, acknowledged “public anger at our industry.”

Mr. Lewis, CEO of Bank of America, who occasionally grew testy and red-faced at questions about lending, told lawmakers that his bank had “every incentive to lend.”

In the end, they all agreed to greater accountability on how they are spending money from the $700 billion fund.

Lawmakers struck hard on the lending issues, describing situations in which their constituents could not get loans and situations in which the rates for certain types of loans, such as credit card business and car loans, increased after the injection of the government funds intends to solve the liquidity problem. Several asked the bankers why there seemed to be a disconnect between their lending figures and the hundreds of ordinary people who continue to line up for loans. Some criticized bailout recipients like Bank of America and Merrill Lynch, who have continued to lobby--through trade associations--to block consumer protection measures, predatory lending regulations, and the Employee Free Choice Act, a measure that would ensure workers the freedom to form a union for a voice for improved wages, benefits, and working conditions.

Beyond the Troubled Asset Relief Program (TARP), some bailout recipients--who have failed to provide affordable healthcare or a living wage to their employees--are dipping into federal coffers through the backdoor, forcing thousands of employees to seek healthcare through taxpayer funded programs like Medicaid and forcing employees to apply for food stamps.

One lawmaker even suggested that banks paid fees to themselves for receiving TARP funds. Mr. Pandit denied such fee transaction. Another lawmaker pointed to the fact that top management at Bank of America received huge bonuses for the Merrill Lynch merger, when they were, in fact, actually responsible for losses that resulted from or were necessitated by the merger.

Tian Weng, Debby Su
George Washington University
Washington, DC

Tuesday, August 21, 2007

Motley Fool on GS Sustain

In an August 3rd article titled "Do Gooders Do Well" on the Motley Fool website, Selena Maranjian noted our concerns about the GS Sustain Index and methodology, Goldman Sach's list of “companies from established industries, which have been selected by incorporating our proprietary Environmental, Social and Governance (ESG) framework into long-run industry drivers and returns-based analysis and valuation in order to pinpoint structural improvement and sustainable competitive positioning.”

The article went on to say that "Of course, not every socially responsible investing advocate is anti-Goldman -- the Calvert Large Cap Growth Fund (CLCIX) recently had nearly 2% of its value invested in the company." (The stock is down 12.9% from 12/29/06 to 8/20/07. The S&P 500 is up 1.92% over the same period.)

For the record, we are not anti-Goldman. We correctly listed factual data concerning ethical and diversity lapses at the firm, and tied these to their work on SRI. As we stated, we applaud Goldman's incorporation of the ten principles of the UN Global Compact into an investment analysis framework and the firms’ tacit recognition of “socially responsible” investing.

Thursday, July 19, 2007

GS Sustain Focus List

On June 22, 2007, Goldman Sachs launched the GS Sustain Focus List, “companies from established industries, which have been selected by incorporating our proprietary Environmental, Social and Governance (ESG) framework into long-run industry drivers and returns-based analysis and valuation in order to pinpoint structural improvement and sustainable competitive positioning.” The list of stocks is "aimed at long term long only performance with low turnover.."

The creation of the focus list and the required methodology suggest that Goldman, like other firms, has come to see the value of incorporating a “socially responsible” framework into traditional investment analysis. While we applaud Goldman's incorporation of the ten principles of the UN Global Compact into an investment analysis framework and the firms’ tacit recognition of “socially responsible” investing, we feel the firm is ethically and ethnically challenged, and that these factors may negatively influence both the methodology and the composition of the GS Focus list. We explain our reasoning below.

Ethical challenges

We question a central thesis of the report: that Goldman has developed a superior ESG evaluation tool that allows investors, thru the firm, to “pinpoint sustainability and emerging players.”

Major Wall Street investment banks have a history of manipulating financial data in order to support business activities and to maximize short term profits. Consider the following:

On April 28, 2003, every major US investment bank, including Merrill Lynch, Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse First Boston, Lehman Brothers Holdings, J.P. Morgan Chase, UBS Warburg, and U.S. Bancorp Piper Jaffray, were found to have aided and abetted efforts to defraud investors. The firms were fined a total of $1.4 billion dollars by the SEC, triggering the creation of a Global Research Analyst Settlement Fund.

On September 4, 2003, Goldman Sachs admitted that it had violated anti-fraud laws. Specifically, the firm misused material, nonpublic information that the US Treasury would suspend issuance of the 30-year bond. The firm agreed to “pay over $9.3 million in penalties.”

On April 28, 2003, Goldman Sachs was found to have “issued research reports that were not based on principles of fair dealing and good faith .. contained exaggerated or unwarranted claims.. and/or contained opinions for which there were no reasonable bases.” The firm was fined $110 million dollars.

On January 25, 2005, “the Securities and Exchange Commission announced the filing in federal district court of separate settled civil injunctive actions against Morgan Stanley & Co. Incorporated (Morgan Stanley) and Goldman, Sachs & Co. (Goldman Sachs) relating to the firms' allocations of stock to institutional customers in initial public offerings (IPOs) underwritten by the firms during 1999 and 2000.”

In the report, Goldman notes that “Corporate governance is a key focus of investors, securities regulators and stock exchanges in recent years in the wake of corporate accounting scandals.” No mention is made of the behavior noted above.

The firm, fined $119.3 million by the SEC for various crimes (see: http://www.sec.gov/news/press/2002-179.htm and http://www.sec.gov/news/press/2003-107.htm) received a $75 million dollar New Markets Tax Credit (NMTC) award. In the NMTC Program application, firms must attest to the following:

"The Applicant and its officers, directors, owners, partners, and key employees or any other person that Controls the Applicant:

(a) have not within a three-year period preceding the date of this Allocation Application been indicted, charged with or convicted of, or had a civil judgment rendered against them for commission of fraud or a criminal offense;

(b) have not within a three-year period preceding the date of this Allocation Application been indicted, charged with or convicted of, or had a civil judgment rendered against them for violation of Federal or State antitrust statutes or commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, or receiving stolen property;

(c) are not presently indicted for or otherwise criminally or civilly charged by a governmental entity (Federal, State, or local) with commission of any of the offenses enumerated in paragraphs 10(a) and 10(b) of this certification;

(d) have not within the three-year period preceding the date of this Allocation Application been the subject of any formal investigation or disciplinary proceeding by a government agency, regulatory body, or professional association in connection with any matter; and

(e) have not within the three-year period preceding the date of this Allocation Application been found liable in any civil legal action involving creditor's claims of greater than $500,000."

We believe GS New Markets Fund - owned by Goldman Sachs Group, Inc., technically violated this certification, and was, therefore, ineligible for a NMTC award. Even if the firm was eligible to receive the award, the allocation of federal tax credits to a firm fined $119.8 million makes a mockery of penalties assessed under the SEC’s "settlement with Goldman Sachs to resolve issues of conflict of interest at brokerage firms."

From an ethical standpoint, the firm has repeatedly engaged in behavior that would cause a prudent person to question its objectivity and fairness. We note that a smaller firm engaging in similar conduct would have been severely sanctioned by the market. Goldman has escaped meaningful sanction, however.

Diversity challenged

The report states that “Employee indicators for pay, productivity and gender diversity are universal. We measure companies’ ability to attract, retain and motivate employees by assessing employee compensation and productivity, health and safety performance and gender diversity.” By measuring only gender diversity, Goldman’s ESG framework reflects a troubling racial bias and lack of true diversity. This, in turn, reflects practices at the firm: according to a study by Chicago United, Goldman has one of the least diverse Boards of any company in the Fortune 100. This lack of racial diversity, we feel, influences methodological matters governing the CS Sustain list. Given demographic trends, gender diversity is a necessary but insufficiently robust, just or fair sole criterion to use as “a proxy for companies’ ability to attach and retain highly skilled staff from all backgrounds.” This is a frankly bigoted approach to the issue that is consistent with the current global trend toward racial animus. The immigration “debate” in the U.S. and the active targeting of racial minorities for fraudulent loans are other indicators of this trend.

Origin of the approach

The report issued announcing the creation of the Focus list states that “..the poor performance of indexes such as Dow Jones Sustainability Index and FTSE4Good (both -10% since 2000) suggests that a simplified approach of picking stocks on an ESG basis alone will not lead to stock market outperformance.” We know of no major SRI/ESG mutual fund that selects stocks based on social, or ESG factors alone.

The report goes onto state that “Analysis of the environmental, social and governance issues facing companies is not new; socially responsible investors (SRI) and NGO’s have assessed companies on ESG metrics alone for the better part of three decades since the early 1970s. However, the integration of ESG with industry analysis and financial returns is a relatively new conceptual approach. SRI indices were originally designed to separate socially responsible and sustainability-focused companies from laggards on the basis of social, environmental and/or ethical screens alone; ESG analysis was separate from industrial and financial analysis.” This is incorrect on two counts. Economic development projects started or managed by Dr. Martin Luther King, like the Montgomery Bus Boycott and the Operation Breadbasket Project in Chicago, established the model for future socially responsible investing efforts. In that project King combined ongoing dialog with boycotts and direct action targeting specific corporations. Thus, assessing companies based on ESG metrics goes back to December 1, 1955, when the modern age of socially responsible investing began.

The second error relates to the integration of financial and social data. We first outlined this approach in 1991, when we created the Fully Adjusted Return™ methodology. Further, in 2001 and 2002 we participated in the SPI-Finance Project, linked to the Global Reporting Initiative and “undertaken by a group of financial institutions from Australia, Germany, the Netherlands, South Africa, Switzerland and the UK. “ We discussed the integration of financial and social performance measures for the financial services industry, based on our work creating the Fully Adjusted Return methodology.

Goldman’s work fall into this approach, first developed to aid in the selection of women and minority-owned banks, and takes it to a broader stage, but the core technique remains the same. Our concern is this: given the ethical and ethnic issues raised above, and based on our fifteen years of experience in the creation and application of SRI/ESG tools and techniques, we feel the application of this technique requires a fully objective third party, with no actual or potential conflicts of interest.

National bias is racial bias

The report discovers “country bias with regards to environmental, social and corporate governance performance.” We believe this is due to Goldman’s narrow and limited perspective on SRI/ESG issues. Excluding South Africa, no African countries are on the list. Excluding Japan, no Asian markets are included. Excluding Brazil, no Latin markets are included. Thus, areas representing the majority of the world’s population are excluded. This makes the report a non-minority (non-people of color) company and country exercise. This is consistent with the flawed diversity framework noted above. Certainly, data and capitalization issues represent a challenge, but given the firm’s reach and resources, these geographic regions could be included. Doing so sets the stage for the future and allows for a more realistic and consistent set of long term (50 year) forecasts, since at some point these regions will join the capital markets of the world.

Constructing the list

The GS Sustain Focus list contains “only companies for which we have completed our ESG analysis and companies under coverage in emergent industries.” While we believe it is important to know which companies on the list Goldman has current investment banking relationships with, a more important metric concerns Goldman’s strategic plan for future relationships. Because many of the industrial sectors and companies featured in the report are new (solar power, biotechnology) the report may be used to curry favor with potential future industries and clients. We note that being on the GS Focus list will have added value as institutional investors come to see the list as valuable. If SRI/ESG and sustainability issues have grown in importance, they have done so because they are critically important to the future of democratic capitalism and despite active opposition by most Wall Street firms, who, ten years ago, considered this type of analysis superfluous.

Action Steps

We have found these behaviors often the prelude to the development of a set of fraudulent business practices. In this specific case, we feel this may include manipulating or misrepresenting data used in ESG/social investing processes.

Security Notice

This communication (including all pages in this document) is for the sole use of the intended recipient and may contain confidential information. Unauthorized use, distribution, disclosure or any action taken or omitted to be taken in reliance on this document is prohibited, and may be unlawful. By inadvertent disclosure of this document Creative Investment Research, Inc. and William Michael Cunningham do not waive confidentiality privilege with respect hereto. This writing/publication is a creative work fully protected by all applicable copyright laws, as well as by misappropriation, trade secret, unfair competition and other applicable laws. The authors of this work have added value to the underlying factual materials herein through one or more of the following: unique and original selection, coordination, expression, arrangement, and classification of the information. No copyright is claimed in the text of statutes, regulations, and any excerpts from others’ reports or articles quoted within this work. Copyright©2007 by William Michael Cunningham and Creative Investment Research, Inc. William Michael Cunningham and Creative Investment Research, Inc. will vigorously defend all of their rights to this writing/publication. All rights reserved – including the right to reproduce in whole or in part in any form. Any reproduction in any form by anyone of the material contained herein without the permission of William Michael Cunningham and Creative Investment Research, Inc. is strictly prohibited. This document is registered with the US Library of Congress.