Do People Really Think Wall Street Guys are that Smart???

Thursday, 17 December 2009 00:00

Do People Really Think Wall Street Guys are that Smart??? ^Featured

Written by Reggie Middleton

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I really wonder what possesses people to believe these sales pitches, hook, line and sinker... Seriously, what the hell was this guy thinking??? From Bloomberg:

Dec. 17 (Bloomberg) -- For California Treasurer Bill Lockyer, the offer from Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. was too good to refuse.

If California were willing to forgo competitive bidding for a $4.5 billion bond offering, the banks promised more orders from individuals and a lower bill to the taxpayers. The firms insisted that by negotiating with them, the state would benefit from its special relationship with the Wall Street troika and wind up with what two underwriters called a salutary “buzz” to boost demand for the debt.

When the October offering failed to sell as planned, California was forced to accept 8 percent less money than it needed and to pay as much as $123 million more in interest than the banks said was sufficient for the market. And the threesome made $12.4 million on the deal, contributing to record bonuses in the securities industry a year after getting a total of $80 billion in a federal bailout.

“Just because someone earns a big wad of money doesn’t mean that they can do what they say they can do,” said Marilyn Cohen, who watched the sale unfold from Los Angeles as president of Envision Capital Management, which oversees $250 million in bonds for individuals. “And shame on the state if they were drinking that Kool-Aid.”

The California sale helped send the municipal-bond market to its worst month in a year. It ended a rally that had pushed borrowing costs for cities and states to a 42-year low, as measured by the Bond Buyer’s index of 20-year general obligation bonds.

Mr. Lockyer, the next time someone promises you something, get it in writing, reviewed by competent counsel and independent financial advisors. Be sure to have the vendors supply a capital reserve to back up their promises. Most banks probably wouldn't do that, which should tell you something in and of itself.

Then there is "Goldman Sachs Driving Trucker YRC Into Bankruptcy, Teamsters' Hoffa Says":

Dec. 17 (Bloomberg) -- International Brotherhood of Teamsters President James Hoffa said Goldman Sachs Group Inc. is creating derivatives trades that would benefit from the bankruptcy of YRC Worldwide Inc., the trucking company trying to avert failure with a debt exchange.

The most profitable securities firm in Wall Street history “is actively soliciting bond trades for clients and underwriting credit-default swaps to benefit from a failed exchange and resulting bankruptcy,” Hoffa, the union leader, wrote in a letter dated yesterday to Goldman Sachs Chief Executive Officer Lloyd Blankfein.

YRC, the biggest U.S. trucker by sales, has faced opposition to its plan to exchange $536.8 million of notes for equity from bondholders who also own derivatives that pay out in a default, according to people familiar with the matter. The Teamsters’ pressure comes as Goldman Sachs is under fire from other labor groups over its role in the subprime mortgage crisis.

Investors holding 75 percent of YRC’s debt agreed to the exchange, below the 95 percent required by bank lenders, the Overland Park, Kansas-based company said yesterday in a statement. YRC, which has posted more than $1.7 billion in losses in the past five quarters, must complete the exchange offer as part of agreements with its bank lenders, the Teamsters and multi-employer pension funds, according to a Nov. 24 regulatory filing.

YRC, which extended its exchange offer to 11:59 p.m. today in New York, joins companies including Yellow Pages publisher Idearc Inc. and newsprint maker AbitibiBowater Inc. that met opposition to restructuring outside of bankruptcy court from creditors that hedged their holdings with credit-default swaps. Such creditors will typically get paid whether a borrower defaults or not, and sometimes can make more in a bankruptcy.

Maybe it's time to make CDS more like real insurance by limiting the upside of the contract to the loss of the underlying asset or exposure - exposure of which you would HAVE to directly and exlicitly in order to benefit from the contract. Oh, how I can imagine the bankers are hating me now. Hate me or not, does this not solve half of the CDS problems? The other half will be solved by clearing them through an exchange and demanding reserves for selling the CDS, you know, just like that boring old insurance industry. You don't see non-CDS sporting insurers blowing up like cherry bombs and running to the government for TARP funds and bank holding status, do you???

For those who really want to speculate, short the bonds and stocks of the companies and accept your market risk like real men (and women, of course). More from this story:

Union Opposition

The Teamsters aren’t the only union taking on Goldman Sachs. Workers United, which represents 150,000 people in the U.S. and Canada, sent letters on Dec. 14 to 10 state attorneys general that urged them to investigate the role played by Goldman Sachs in the subprime mortgage market. The union noted that Massachusetts won a $60 million settlement from the firm in May when it undertook such a probe.

Andy Stern, president of the 2.1 million-member Service Employees International Union, has led a letter writing campaign to Goldman Sachs board members demanding information on the firm’s part in the mortgage crisis and whether the companies they’ve invested in are cutting jobs.

‘Too Much at Stake’

Hoffa wrote that “the relatively small benefit Goldman would derive for itself in fees or for clients from such a position is unconscionable given the fact that the 50,000 livelihoods could be ruined by a bankruptcy filing,” according to the letter obtained by Bloomberg News.

Michael DuVally, a spokesman for New York-based Goldman Sachs, confirmed the bank received the letter.

“Goldman does not have a position in the company, nor are we making markets in the company’s bonds or credit-default swaps,” DuVally said in a telephone interview yesterday afternoon.

Goldman Sachs sent e-mails to debt investors at around 11 a.m. yesterday, after the deadline for the exchange was extended, offering pricing levels on YRC bonds and credit- default swaps, according to people familiar with the matter.