Goldman's Former 'Masters of the Universe' Are Starting to Look Like Regular Bank Employees

| About: Goldman Sachs (GS)

From CNBC/NY Times:

Goldman Offers Loans to Stretched Employees


The New York Times

| 17 Mar 2009 | 07:39 AM ET

Goldman Sachs (NYSE:GS) got its bailout. Now some of its bankers, those aristocrats of Wall Street, apparently need a bit of a bailout too.

Goldman, which accepted billions of taxpayer dollars last fall and, as learned Sunday, was also a big beneficiary of the rescue of the American International Group, is offering to lend money to more than 1,000 employees who have been squeezed by the financial crisis. The loans, offered via e-mail last week, could range from a few thousand dollars to hundreds of thousands.

Working at Goldman has long been regarded as a sure path to riches. But Goldman’s employees are losing money on their personal investments — particularly in Goldman’s own elite investment funds, which have been considered one of the perks of working at the bank.

I have many friends that work on Wall Street. I believe that the layperson actually believes that working on the Street qualifies you for being an "astute investor" or adept at personal finance and money management. This is actually far from the truth. The culture of the Street is to think with your income statement, not your balance sheet. Many try to keep up with the Joneses vs. staying down low with the Middletons. Living income statement centric can cause a shock to the system when said income is disrupted in a poor credit environment. This is why I try my best, and try my best to teach my 3 children, to think off the balance sheet vs. the income statement.

Now these funds have stumbled, and some Goldman employees who financed their gilded lifestyles by borrowing in good times are suddenly short on cash needed to meet commitments to their personal investments in the funds. “It’s a problem with the culture of spending,” said Gustavo Dolfino, the president of Whiterock Group, a Wall Street recruitment firm. “No matter how much you have, you spend like you have a lot more.”


At least one of the vehicles, in a group known as the Whitehall funds, sank more than 50 percent last year. Another let its investors withdraw their money this year — at a significant loss.

With a focus on real estate and private equity investments, the funds — which also include Goldman Sachs Capital Partners — have traditionally performed extremely well, sometimes increasing sevenfold in a few years.

It has performed extremely well during private equity (PE) and real estate (RE) bull markets and consequent bubbles. Haven't most PE and real asset funds performed well in thier resepctive bull markets and bubbles, though? I know mine certainly has. The key is to know when the bull run is about to end. It's not what you make, it's what you get to keep that counts!

Goldman even promoted its employee participation in the funds as a selling point to outside investors.

Some Goldman employees got rich before the markets collapsed, allowing them to invest several million dollars in the funds, often on a leveraged basis. Only three years ago, Goldman paid more than 50 employees more than $20 million apiece. In 2007, its chief executive, Lloyd C. Blankfein, collected one of the biggest bonuses in corporate history — nearly $70 million.

Again, I believe that was a raging bull market and bubble speaking.

But one former Goldman partner estimated that a quarter of the bank’s roughly 100 partners are now worth $5 million or less because of losses on their company stock and other investments.

This is a significant statement! Piercing the penta-millionaire mark to the downside puts Goldman Sachs below the demographics of this Blog! Beware of living your life and basing your decisions off of just your income vs. your net worth! Another nugget of wisdom: deleverage often, and diversify regularly!

Last year, the bank’s seven top executives received no bonuses. One of them, Jon A. Winkelried, resigned from his position as co-president a few weeks ago, saying he wanted to spend more time with his family. His estate on Nantucket is on the market.

It is unclear how many Goldman bankers and traders will take up the bank’s offer. The funds periodically require investors to add more money, and late last year, Goldman’s most senior management and board began to realize some employees might have trouble living up to this obligation after receiving low bonuses, according to a person briefed on the situation.

Employees in the funds are contractually obligated to meet requests for more capital. Several funds have such capital calls scheduled for April. Employees who fail to make the payments risk losing their jobs, according to a person familiar with the situation.

The new loans at Goldman are being offered to help employees meet capital demands from the internal funds and cannot be used for other personal needs, according to people familiar with the matter.

This will simply put the Goldman employees further in the hole. They may be better off losing their jobs. Borrowing money to meet margin calls on rapidly depreciating assets bought at the top of the largest RE and PE bubble since the GOLD RUSH is simply flushing good money after bad. It will be decades, if that soon, before we reach those real asset nominal prices again, and on a real (inflation adjusted) basis, considerably longer than that! This should be readily apparent to those who really know their real estate! Again, just because you are a banker, trader or analyst doesn't mean you are an astute investor or are adept at managing your personal or family finances. I am quite sympathetic towards these employees and their families. I don't want to seem callous or cold and don't want anyone going through hard times who doesn't deserve it, but I would like to point out what I see as facts.

A spokesman for Goldman Sachs confirmed the existence of the loan program but declined to elaborate. The funds that are the most troubled were raised right before the financial crisis. Goldman raised $20 billion in its most recent private equity fund and some $9 billion in the Whitehall real estate funds in 2007 and 2008.

This is a problem. The bubble was massive and painfully obvious in both PR and RE! To raise these funds and invest on a leveraged basis at these times was simply foolhardy, plain and simple. To think, this is considered the bastion of western Finance! In 2006, you could have walked down any number of litter strewn street in Alphabet City, NY and see homemade posters on telephone poles touting, "Private Equity Courses for $550, learn the Private Equity Game and earn millions!" 'Nuff said! As for real estate, reference my warnings throughout 2007 and 2008. Goldman should cough up a few thousand dollars and get a site license to BoomBustBlog.

Thoughts on the US Publicly Traded Homebuilders, Sep 01, 2007: I noticed that many pundits are focusing on single family residential market, most likely because it is in the news so often. It is bad, very bad. I am an ex-residential real estate investor who sold off in 2005 due to fundamentals that were totally out of whack. It appears that many do not see how precarious the commercial sector has become, with many deals being done at 2-5% cap rates (net profit yields) in Manhattan and many major metro areas, which is absolutely ridiculous considering the risk and illiquidity of these deals. The compensation for these deals are coming no where near justifying the risk. I am sure the excessive liquidity coupled with significant demand caused the cap rate compression, but the buyers fell for it assuming liquidity and demand would continue for some time. Well, corporate liquidity has just dried up, and many are stuck holding the bag with buildings that are yielding as low as half that of treasuries, yet easily quadrupling the risk. Some are even selling at lower cap rates in successful flips (reference the Blackstone purchase of Sam Zell's portfolio, which was totally overpriced, yet Blackstone managed to flip much of the portfolio over to speculators, some of which actually flipped it over to someone else at a profit - ALL in a period of a few months). This has now become nigh in impossible, but in an attempt to raise the cap rates, commercial rents have skyrocketed to all time highs in the major metro areas, causing significant pressure on corporate profits (I have inside knowledge of this affecting MAJOR public and private firms who are looking to expand and are getting squeezed).

And now, on to small residential (single family and 1-4 family residential)...

How Far Will US Home Prices Drop?, Sep 01, 2007: I do not know, and I doubt anybody else does either. How much they will drop nationwide is a fools question, and to hazard a guess would be an exercise in futility due to the extremely geographic nature of the housing industry. Remember, no one lives in a nationwide home!!! There are some areas where I would bet the farm on a 20-25% drop though from peak to trough, Vegas doesn't look to good and Southern Florida is in for a lot of pain (re: condos). There are southern Florida condo developers who have been foreclosed upon because they could not sell above their cost and the land was too expensive to convert into a rental. That, in itself represents a 25% drop, retail, so it has already started happening in some areas at a rate that is higher than the historical average - and we have just started the real estate bust. Florida is an interesting area due to the inherent demand for clear water, good weather and the pretty women night life effect, not to mention favorable homestead laws. It also has laws that favor condo development for you don't need a red herring in the same fashion as cities such as NYC, hence you can pre-sell condo units with a set of plans and then finance the actual construction with a bank loan and deposits from pre-sales.

Listen, if a lowly blogger can figure this out, then the world's most respected global investment bank should have been able to as well. The fact that they will lever up and plunge into what I clearly saw was a crashing market makes it quite plausible that they probably made similar timing and valuation errors in other overvalued and over leveraged asset classes as well. These are most likely held in SIVs and off balance sheet vehicles. For those who don't follow me regularly, I have released a lot of research on Goldman and have shorted them quite profitably since the $180s.