Goldman’s Mutual Friend
opinionator.blogs.nytimes.com
opinionator.blogs.nytimes.com
Thanks to Goldman’s imprimatur, Facebook’s value increased 20 percent virtually overnight....The other benefit for Goldman in leading the public offering — aside from major bragging rights — is that it can use its marketing, sales and distribution muscle to make sure the value of Facebook at the time of the offering exceeds the $50 billion valuation at which Goldman invested.
Increasing the value of the firm they are investing in? Great job guys.
While on paper it seems that these high rollers would be foolish to invest in Facebook at such a lofty valuation, they will still most certainly feel increased loyalty to Goldman for making such an exclusive opportunity available to them.
Giving their other clients investment opportunities not available elsewhere? Awesome. Wish I were Goldman's client. (Note: all of Goldman's clients are accredited or institutional investors, and are fully capable of making their own decisions on whether to buy this Facebook SIV.)
Further, if the value at IPO will be at least $52B ($50B + 4%) (as an earlier paragraph suggests it might), all the clients who purchase this SIV will at least break even.
Overall, it looks like Goldman is doing a great job for all their clients. Keep up the good work guys.
Also, the conflict of interest is nonexistent. Goldman holds a long position in Facebook. So do all their clients. Everyone has the same goal here: increase the value of Facebook.
As for the "average investors" who the article claims will be hurt by all this, there is a very simple way to avoid that: don't buy FB. If everyone does this, the IPO will be a failure, and Goldman + Zuckerberg + Goldman's clients will all lose money. If you are very sure FB is overvalued, short it. If you are right you will be taking money from Goldman and Zuckerberg.
GS is one of the scummiest of Wall Street's firms, which is saying something.
That they were selling MBS tranches to clients, then simultaneously taking out options that would pay GS money when those exact same tranches failed, really tells you all you need to know.
GS' crimes are so varied and so well documented, I find it hard to believe you could not be aware of them.
Simply asking yourself "what part of this investment is something you would expect a commercial bank to invest in" as you reflect that GS is classed as a commercial bank in order to have access to Fed lending at essentially 0% interest, should perhaps give you pause.
EDIT: note for clarification, that the MBS tranches were assembled/packaged by GS themselves; GS was not simply selling a third-party product.
No, it doesn't. This not necessarily scummy or a conflict of interest. GS could have hedged its own long positions, for one (i.e. still net long). Or GS could even be net short, overall, and still have independent divisions, advisers, or traders who are individually long.
I'm aware of the Abacus incident and something involving a relatively small number of subprime loans in Massachusetts. Since this is hardly variety, I have to ask, what other "crimes" are you referring to? Can you provide some of this extensive documentation? Because in all the time I've been following this crisis, I haven't seen anything else, and would love to learn more.
Caveat--the documentation must be actual evidence of crime.
There is also the $650K fine and the $27 million fine impoosed by the British over the same issue: http://topnews360.tmcnet.com/topics/associated-press/article...
Perhaps I should ask you to comment on the HFT issue, which from some perspectives, appears to be front running of legitimate trades, and which GS is involved in?
There is plenty more, just a few samples from e.g. http://en.wikipedia.org/wiki/Goldman_Sachs#Controversies
include:
1. Insider trading resulting in 2 convictions
2. Helping Greece cover up (lie about) their true debt positions - since Greece is a country, rather than a human or corporation, criminal charges are a near-impossibility;
Further, there are many bloggers who are examining pieces of GS behavior - you may or may not choose to believe them.
Some of the ones that are critical include zerohedge.com and http://boombustblog.com/ run by Reggie Middleton (part free, part subscription).
A TV journalist named Max Keiser, rarely seen on American stations, is also critical; books such as "Chasing Goldman Sachs" also have their own take on GS.
It seems like whenever finance is brought up, the standards for what constitutes information just die. All I need to see is, Goldman can be clearly shown to have done X, where X is either a) illegal or b) unethical according to some standard philosophy of finance[1]. If Goldman is so evil as people say then this shouldn't be hard.
[1] For example, consider the repacking of low quality housing debt and selling collateralized debt based on it. The underlying assertion is that Goldman should have stopped selling them when many of the most sophisticated buyers didn't understand how dangerous they were--to say nothing of the salesmen.
If you have Firefox as a web browser, I suggest you have a look at the little bar that pops up when you hit "Ctrl + F" ... note the two citations, one for Der Spiegel and the other from USA Today, in the below section...
"" Goldman Sachs between the years 1998-2009 has been reported to systematically help the Greek government to mask its national true debt facts.[72] In September 2009, though, Goldman Sachs among others, created a special Credit Default Swap (CDS) index for the cover of high risk national debt of Greece.[73] ""
By assisting Greece in hiding this information, the apparent level of risk of the debt was lower; people who bought Greek debt as a consequence under-priced the risk. This can be demonstrated by reality, as when the info got out, Greece's cost of borrowing went up rather than going down.
Therefore, GS' involvement in this matter led to investors losing money they otherwise would not have, which is ... unethical.
Helping a country or company withhold information that is known to be material from investors, is unethical.
No different than telling someone the tires they are buying are rated to last 60K miles when actually they are only rated to last 30K, except you have blotted out the big sticker on the tire that states that.
That the SEC, as for example in the case of Madoff, was told explicitly for years beforehand of the fraud, and did nothing, is a matter of public record.
A more skeptical person might therefore wonder what else the SEC is remiss at investigating. However you have the right to be incurious if you so choose.
> "[That article] I have little comment on, because it provides no useful contextual information. Trying to read this account of financial engineering is like trying to read about a science study in the daily paper. All the details are left out, and a newspaper cannot be trusted to get the big picture right. The phrase "special kind of swap with fictional exchange rates", for example, might be accurate, but it just smells like the writer misunderstood a forward contract or something."
I did some more digging and apparently the financial instruments in question are actually currency swaps (which one paper incorrectly calls forex swaps). Currency swaps are a legitimate financial instrument used by governments all over the place, and they come in different flavors. What are these swaps, how precisely are they sinister, and why?
I actually kind this find of stuff fascinating and will probably do more digging today, instead of working. I'd be surprised, though, if it turns out to be anything more than just another swap.
Did they tell their clients that these investments were sound? In 1999, I could have called my financial advisor and told him I wanted to buy Pets.com (or whatever) stock. He might advise me against it, but would have sold it to me. And, he might have had it shorted in his personal portfolio at that time without disclosing this to me. Does that make him a bad guy?
From my viewpoint, representing an investment aas having a particular rating from Moody's or S&P would indicate that they told their clients the investments had a certain ratio of risk/reward.
Common stocks have no ratings from Moody's or S&P; these are interest-bearing investments that supposedly have a certain rate of return per year; though unlike CD's they do not have a fixed lifetime as mortgagees can repay a mortgage early, or refinance, without penalty.
To be fair, some information leaks over the walls. For example, consider investment advice. Within a bank, you have "Investment Advice", and you have !Investment Advice. IA doesn't really get to talk to traders, all they do is provide unbiased recommendations to clients.
However, there is another department, which I'll call "Conflict of Interest Watch" (CIW, the name varies from bank to bank) which tags every report from IA with possible conflicts of interest. So if someone in IA writes a report about Facebook, some computer system in CIW will apply the label "Warning: GS has a business relationship with Facebook." So an analyst can write a report, submit it, and read the tags to determine if Goldman is doing business with Facebook (of course, reading the newspaper is also permitted).
The SEC fines the company $200k per report if they fail to report a relationship and $80k if they report a nonexistent relationship (to prevent companies from just tagging every report as "conflict of interest", a response to Wachovia doing exactly this). A certain investment bank (maybe Goldman, maybe not) is currently devoting tens of millions of dollars to doing a better job of this.
(Update: amused by the accusations of blasphemy.)
Note that I have not made any argument in favor of being a "randroid", and I'm not looking to argue with you about whether Rand was right or not about anything. I'm just pointing out that you've made an utterly ignorant statement.
That being said, it seemed like there were several aspects of "pump and dump", rent-seeking (we can get FB, noone else can, so we charge a totally made-up premium), as well as "make a big transaction at an improper valuation in order to get the inside track with FB's CFO for big fees on other transactions later" to the deal. That's not really how markets are supposed to work..
Meanwhile, it's still damn near impossible to a get a business loan, I hear.
† Unless the companies I was at that tried were doing something wrong, but, before you whip out the snark, I wasn't the one running those companies.
I mean, I guess that's where the money is, so shame on us.
By the way, curious: how did you find this out? When your pizza place gets a new oven, do you just go ask them about how they financed it? Do you ask these kinds of questions of business owners in general? How do they respond?
I don't ask questions like this of that many people, but I'm on friendly terms with my local pizza guy. I'm often his last client of the night. He didn't seem to mind telling me about running a pizza place, at least in broad generalities. On the occasions when I've asked small business owners about such things, they are usually happy to talk about it, provided they aren't busy and don't think I'm a salesman.
Unfortunately, while Sarbox may have prevented another Enron/Worldcom, it also prevented/delayed the Facebook IPO. (Interestingly, that's exactly what assorted limited government crackpots were worried about back when Sarbox was passed.)
Everything that I can see (as an outsider) about FB's corporate DNA tells me what they want to stay private for as long as possible regardless of whether it costs them an extra 100k in accounting to go public. I mean, they just picked up 500 million. I bet they could scratch up the money to bring in Accenture and have them do a bunch of excel sheets once a year.
I don't really have any solutions, here, aside from some ill-conceived and emotionally satisfying proclamations of "destroy the IPO underwriting industry!". I'm just noticing that, if things are working the way the article says they are, it seems like Goldman's job in this case is all about creating exclusive deals and making insider connections, and very little of it is about evaluating Facebook's proper worth. Although maybe they think they're making a value investment. Who knows.
If you want transparency from companies, you have to see them go public. It is not reasonable to demand public-company transparency from a private company. The word "private" means something. If the markets worked today like they did in 1996, do you seriously believe Facebook would be a private company? Why or why not?
Fannie Mae and Sarbox are tiny, tiny pieces of their respective puzzles. Blowing them up because it's ideologically satisfying is thinking with your amygdala.
(BTW, the "big government / little government" argument exists entirely in the heads of the ideologically pure. The rest of us are more concerned with the "works / doesn't work" argument, on a case by case basis.)
Do you think more companies should go public?
If not, do you think private companies should be forced to be more transparent? Why?
If so, do you not believe that it's become more expensive to be a public company in 2010 than it was in 1995?
Sarbox's additional costs are a very small part of the equation compared to the fundamental difference between public/private, not to mention all of the costs that existed prior to Sarbox. If you're making the decision to go public or stay private, Sarbox is very unlikely to be a deciding factor. Hence, bringing it up is something of a red herring IMO.
EDIT: In response to below, I haven't read Sarbox, but I'm pretty sure it has no provisions regarding building a new HBase messaging system or online user privacy.
Which Facebook has. So why arent they public? Obviously not the monetary cost of SOX. It could be one of the toher parts of SOX (such as the regulations on public company execs) but I find it hard to believe the cost of the accounting department is the reason Facebook isn't public. There are thousands of companies smaller than Facebook being traded every day and they're not going backrupt because of the accounting costs.
Even without SOX, there were a lot of reasons to remain private. On the margins some companies remain private because of SOX costs. (If SOX is preventing useless companies with 0 revenue from going public I see that as a feature and not a bug). But on the scale of Facebook, the costs are not important. So there are other reasons driving this, not SOX.
What I'm suggesting happened was, SOX took the IPO mechanism, which was a common and easy path to liquidity for VC, and made it a much bigger deal --- not just because of the regulatory burden that it imposes, but also because it washed out many hundreds of companies that might have gone public instead of taking a C round.
Being one of a small number of standard bearers for tech's return to the public markets is a different thing than being one of the best of hundreds of tech companies at varying stages of growth on the market.
Are you saying SOX tripled the cost? 10X?
If not for SOX, are you suggesting that pets.com would have a successful IPO today?
I'm sure Facebook could afford several million/year on Sarbox compliance. But what is the benefit to them? As you said, connected insiders (such as Zuckerberg and Goldman's clients) are doing just fine with Facebook remaining private. So why bother with the hassle of Sarbox, potential minority shareholder lawsuits, and liquid markets that might go down more quickly than the current illiquid one?
I'm certainly not saying that FB is under any obligation to go public if they don't want to. Just that in this particular case, Goldman is primarily trading on them not being public rather than trading on their value. I mean, good for them for exploiting a bug, I guess, but this is why I think the financial industry are, in the large, a bunch of charlatans :)
Could you elaborate? (I'm genuinely curious)
The contention is that these additional procedures disincenvitize companies from going public. My counter-contention is that they're a very small drop in the bucket compared to the pre-existing incentives and disincentives.
And Facebook isn't exactly "at the margin" either, where that drop in the bucket might make a difference.
Getting back to my original point: I believe FB is overvalued, but apparently someone out there is willing to buy their shares at these prices. Eventually, it will come to light that while FB is profitable, etc. they are not going to grow much and their stock will plummet. Until then, the FB stock craziness will continue.
First, have you really done the math on how much money Facebook earns for each penny it extracts from end-users? Do you use Facebook today? I do, and I couldn't tell you what they're really making money on. They don't appear to have turned on the money spigot yet.
Second:
When you cry "bubble", you have to be talking about the market as a whole. It makes less (some, but less) sense to me to talk about there being a "Facebook bubble".
With that said: it's not just about how much money Facebook gets; it's also a question of what Facebook does with the money. During the Internet bubble, companies went public and spent the cash on Super Bowl ads with no revenue, or go-for-broke ship-free-hardware-to-all-of-America schemes. But Amazon was also a product of the Internet bubble. Were they a bad investment?
No. I was talking about revenue, not profit. From the OP: $50B valuation vs projected $2B revenue this year. No idea what they do with what they get to keep.
> When you cry "bubble", you have to be talking about the market as a whole. It makes less (some, but less) sense to me to talk about there being a "Facebook bubble".
FB is a private company. The distinction is that it's a huge company that now major players on Wall Street are trying to invest in. These types of dealings could potentially put Goldman in a compromising position with another bailout just over the horizon. Also, could this trigger a bunch of inflated valuations of other companies in this industry?
I think it's going to be difficult to get our hands on that until hindsight clears everything up for us a few years hence. There's just too much that we don't know right now.
Goldman increased the value of facebook stock by 20%. Directly linking market cap to intrinsic value would require the Efficient Market Hypothesis, which I'm pretty sure no one believes anymore.
How else can Warren Buffett make so much money investing in undervalued companies if their value is identical to valuation?
[1]albeit not one that non-omniscient investors are ever likely to know
And they still make a large chunk of $2 Billion off them?
Did Goldman increase the number of Facebook's users or add a new awesome feature? Did they address the privacy concerns of Facebook's users? Did they make Facebook experience better for the users? No, no and no.
All they did is increase the "perceived financial value" of the company, which as we know from not too long ago, is intangible and fleeting at best, and total BS at worst (Reminds me of the $100bn "valuation" that 37signals got http://37signals.com/svn/posts/1941-press-release-37signals-...)
As far as I am concerned, Goldman can do whatever it wants as long as its actions don't have negative effects on the rest of us. Internet bubble of 90's hurt many people, and so did mortgage bubble of late 2000s. I don't want Goldman to contribute to and profit from another one of those. How do we make sure it doesn't happen?
* Rolling up other companies in their space (Yelp, Twitter, 4square, Instagram, Rdio, who knows)
* Buying their way into a strategic but lateral market (search, advertising, mobile, hardware, ISP, who knows)
* Drastically improving hiring and retention by improving comp packages and adding headcount
* &c &c &c
Your comment seems basically nonsensical, suggesting as it does that there is no way to improve Facebook that isn't visible in a commit log.
I also object to the comparison between the Internet bubble and the mortgage bubble; the structural causes of both were different, the underlying value of the tulips being sold in both were different (at the end of the Internet bubble we had, you know, an Internet), and most importantly the mortgage bubble was a financial black hole that sucked every homeowner involuntarily into its gravitational field, whether or not they were jackass speculators.
Just an anecdote.
The equivalent of engineers are the staff lawyers who actually write the legislation, and cycle between government and industry positions, much like contract programmers; but in their case they get rewarded for the bugs they write in their code by advising industry clients on how to exploit them. (That of course is a simplification. Goldman is using lawyers experienced in parsing complex security laws, not necessarily the same ones who wrote the laws.)
I'm not sure. They're lawyers, not engineers, and I don't see any reason for lawyers to conclude "It's fundamentally complex, impossible to get right, and going to have problems" rather than "Well, they just didn't try hard enough to make a good law". And certainly the belief that they can create a solid law through sheer staggering complexity rather than despite sheer staggering complexity is a more parsimonious explanation of what has been happening lately than the idea that they know that simpler laws are better.
There are few enough computer programmers who figure this out even with the math staring them in the face and great engineers all but spoonfeeding these tidbits of wisdom; I can't imagine this is anything like the common perception of law in lawmaker circles, and especially not in circles where people believe activist government is on average the solution to everything.
Nobody's saying that the government should write laws regarding toilet paper manufacturing, for example. There's a difference between "make a working complex system even more complex", and "attempt to fix a completely broken system, with full knowledge that your fix won't be perfect either".
Very true, my brother who, is the press secretary for a relatively prominent senator, said to me when we were debating the health care bill, "Complex problems have complex solutions." and then... "Getting to the moon was a complex problem, and I'm sure it took lot more than 2000 pages to explain the process of getting there."
Yes, but how many of those pages were written by congressional staffers?
> "Complex problems have complex solutions."
Not necessarily. Besides, the question is not whether the solution is complex, it's whether the proposal is a solution. The fact that a proposal is complex doesn't tell us whether it is a solution.
A lot of engineers dealing with highly complex problems know that things are more intricate than they appear on the surface. (Compare the BP oil well disaster to a cut firehose, seemingly analogous, but almost every solution to the second will not work on the first) Often the elegant solution that works in theory fails in practice, and requires several iterations adding subsystems to deal with small problems that crop up in testing.
Politicians that see only in black and white really ignore these inconvient details while they espose rhetoric and focus on reelection. Their simplistic and naive view of the world doesn't allow them to tackle the hard problems that take nuance and balancing benefit against unintended side effects.
You're assuming that they would "do good" if not for the pressures of re-election.
How about some supporting evidence?
My calculations could, of course, be wrong. But I'd like to see comparable calculations from the "it's a bubble" crowd, instead of just sneers at the idea that Facebook could really be more valuable than Time Warner, Du Pont, and Morgan Stanley.
To me, of course Facebook is more valuable than Time Warner. It already intermediates the friendships and owns the private information of almost 10% of the world's population, including nearly its entire upper class, and it's an unregulated monopoly. The question is only how much more valuable.
And here we have a very interesting data point reminiscent of an era preceding a previous .com valuation implosion.
Does not compute. Weighted Average Cost of Capital (WACC) is one of the most important metrics for determining a value of a company. This free capital is equivalent to giving Goldman Sachs preferred stock in a pre-IPO. If Goldman-Sachs is given unrestrained liberty to not only determine the "market value" of the company AND the "insider's trading" right to determine the value of individual shares, we have most of the ingredients for another recipe for disaster.
Where'd you get to "should be illegal" from?
hahaha what a shitty trade, sounds like standard goldman to me.
In the short run, how much is FB extracting from Zynga alone with the Credits scheme?
It would be nice if we could ever get to discuss the economic issues of information and efficiency as it relates to investing, but the amount of heat around these issues these days prevents a lot of calculated reasoning about what is best for our economy.
The bad news: it's the last bubble.
The ugly news: massive failures across startups, high unemployment for programmers, dried up funding for years to come.