Blackstone Rallies and Goldman Sachs Huddles 9 comments
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Congrats! Another win to the "trading huddle" (allegedly) - while the last few posts have been about stocks going up for reasons they did in the old days, the upgrade of Blackstone Group (BX) is more likely a representation of the new "financially innovative" and "fair and balanced" stock market. I just got lucky I added to the position Wednesday, but generally "luck" has nothing to do with these things of late.
If you are unfamiliar with the Goldman Sachs (GS) trading huddle please, see this post [Aug 27, 2009: Goldman Sachs Trading Huddle] - now before I get into conjecture let's see what Goldman sprung on us today.
- Goldman Sachs added Blackstone Group (BX) to its "Americas conviction buy list," and raised its price target on the asset manager's stock, citing a better M&A cycle and an improving lending and investing environment.
- Analysts at Goldman view Blackstone as capable of seizing M&A and restructuring opportunities via a growing advisory business, and see robust earnings possibilities in its distressed funds and fund-of-funds businesses, which they feel are taking market share and driving assets under management (AuM) levels higher.
- Goldman expects Blackstone's advisory business to account for about 35 percent of revenue in 2009. "Blackstone benefits from improving capital market trends... with ample dry powder to deploy," the brokerage said, and raised its price target on the company's stock to $18 from $16.
Sounds great, and I appreciate the 5% move, Goldman Sachs. But let's wonder out loud how much better we could of done if we were one of the Goldman Sachs top clients.
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Based on the Wall Street Journal story, there is basically a 1 week lag between when Goldman gets its "top clients" into a stock, along with a very special trader who attends the trading huddles - he/she is called a franchise risk manager. Now let it be known that there is supposed to be a Chinese Wall between the trading side of the business and the research side, but I guess if you put fancy names on traders (hey look its a F.R.M.!) they don't count.
Anyhow long story short - the excuse is, as long as Goldman gives counsel to its client list first, then the trader can act on the information... even though traders are not supposed to interact with the research department per "landmark" regulation passed earlier this decade. The conflicts of interest are countless. So if you have these "morning huddles" at 8:30 AM, I suppose you have to wait to 9:31 AM to begin trading on the information because that allows your top clients a minute to act on the information before you.
So following the model as stated in the WSJ story for Janus and MetLife (this is of course all alleged as is the timeline I post below) a very cool meeting happened last Thursday (perhaps Wednesday), when Blackstone stock was trading in the low $12s. The analyst who covers Blackstone (allegedly) could say on the call (which only the top 20-40 hedge funds listen in on) "hey I sort of like this Blackstone Group but certainly not enough to publicly upgrade it - but just enough to recommend it to you, my friends".
So everyone on the call quietly nods and winks in a virtual sort of way at each other, and quickly scurry to get those orders in for Blackstone Group stock. The Franchise Risk Manager of course goes back to his trading turret and waits for 9:31 AM to allow Goldman's hedgie clients to buy first... he doesn't want to break any rules mind you. Then said trader can begin buying for the Goldman account at 9:31 AM. He of course is taking a 50/50 chance (cough) that the stock could go up...
Of course no other traders ask the FRM what was said at the morning huddle... because traders don't talk to each other. (ahem) So in no way, shape or form did a host of other Goldman traders perhaps buy Blackstone Group that day... in the low $12s. Nope.
As we know, this was just a short-term trading call (allegedly, if such a meeting occurred) but if the Janus and Metlife examples in the WSJ story are the model, a week later the analyst has a "come to Jesus" moment and decides I want to go public with an upgrade! I only liked it enough last week to tell our best clients, but this week I'm ready to tell the world! In fact, I like it so much (like the Metlife upgrade) I want to put it on the Goldman conviction list. ZOOM ZOOM! This morning, we can be certain cheers could be heard on hedge fund desks and on the Goldman trading floor as Blackstone was upgraded! Boo Yah! Free markets working their charms yet again. The stock got as high as $13.85 Thursday morning.
If an alleged trading huddle happened last week, following the exact same model as the Janus and Metlife trading huddles, then this short-term call generated a resounding 14% gain in a week as the hedge funds and internal Goldman Sachs traders can sell (if they choose) into the public upgrade. Not that this would ever happen...
And this boys and girls is how (a) you claim your success is based on being smarter than anyone else in the world and (b) derive a 97% win percentage which frankly is impossible. [Aug 5, 2009: Goldman Sachs Q2 Winning Percentage: 97%] Unless the board is tilted in your direction.
Of course all this is alleged, and I have no idea if a trading huddle happened last week in which Blackstone was passed around as a "great short term" play. But that is the exact same way Janus and Metlife were played. Now extrapolate this on a daily basis, week after week, month after month.
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Now I don't want you to worry about this being unfair. Once the Wall Street Journal uncovered this practice, the SEC woke up and said "thanks for doing our job! We'll take it from here!" If past patterns are any indication the path from here is
(1) the SEC will find no wrong doing (generally a 99.99% probability)
OR
(2) the SEC will find wrong doing, at which time Goldman will pay a fine equal to about 1 hour of trading profits, while of course admitting doing nothing wrong. The fine is being paid out of generosity.
Just remember, whatever the outcome - Goldman Sachs employees are smarter than everyone else, and that's how they almost always win.
************************
Frankly, I am just flabbergasted Goldman has the guts to put a trader into these meetings and then say there is nothing wrong with it, because we allow our clients (only the top few) to trade off this information ahead of our trader. But when you have a captured regulator, I suppose you are the fox with the keys to the hen house and do as you please. I would just love to have records of every trading huddle and how many days later the same stocks recommended in the huddle were upgraded to the public. That would be fascinating. Maybe the attorneys at the SEC can work on this in their free time.
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But I'm glad that this is being discussed, all the same.
Its fair warning for the uninitiated, and it needs to be out there.
Hahaha, you are funny man.
So where are our trusty government regulators there to protect us?
For example the financial institutions demand that major companies give them regular updates on their trading, thus ensuring they have a massive competitive edge over the ordinary punter.
Another sharp practice concerns the stacking-up of their orders ahead of the opening times of the exchanges, which becomes the 'Futures' predictions of the market for that day, once again giving themselves a major competitive edge over the ordinary punter.
Its about time the playing-field was levelled and the SEC should ensure that it is but then again it seems bankers migrate to the SEC to protect the status quo.
It always amuses me that the term Chinese Walls is used to indicate protection of valuable information between divisions within an institution whereas most real chinese walls are paper thin so everything can be easily overheard. Clearly the Bankers are having a laugh over ordinary punters.
On Sep 11 01:58 PM Ray Winter wrote:
> Sharp practices are endemic within all financial institutions and
> clearly permitted by the SEC as they do nothing about them.
>
> For example the financial institutions demand that major companies
> give them regular updates on their trading, thus ensuring they have
> a massive competitive edge over the ordinary punter.
>
> Another sharp practice concerns the stacking-up of their orders ahead
> of the opening times of the exchanges, which becomes the 'Futures'
> predictions of the market for that day, once again giving themselves
> a major competitive edge over the ordinary punter.
>
> Its about time the playing-field was levelled and the SEC should
> ensure that it is but then again it seems bankers migrate to the
> SEC to protect the status quo.
>
> It always amuses me that the term Chinese Walls is used to indicate
> protection of valuable information between divisions within an institution
> whereas most real chinese walls are paper thin so everything can
> be easily overheard. Clearly the Bankers are having a laugh over
> ordinary punters.
Well, Goldman is acting in their best interests and those of a few select clients who are willing to pay them big fees..... but it's just not in the best interests of everyone else in the world. It is always in an oligarchs best interest to utilize any and all methods (front-running, misinformation, fraud, nepotism, regulatory capture, political payoff, or anything they can get away with) to accumulate weatlh and power irregardless of the effect on anyone else. Many others in history have also acted in their own self interest such as the mafia, the Nazis, or the Inquisition ... but self interest of the powerful and corrupt few hardly had any lasting benefits for the rest of the world.
The fatal flaw of libertarians, self-interest zealots, Ayn Randians, and many free-enterprisers is simply that a presumtion of honesty, morality and ethical behavior is somehow inherent in self-interest and the theory of captialism/free-enterp... In fact history shows the exact opposite in that over time absolute self-interest, over time, degerates into massive corruption and total dysfunction.
That is why regimes are overthrown and revolutions happen. When self-interest moves to the extreme and a tiny minority of the elite have maximized their own self-interest , then the masses finally figure it out and realize that sheer numbers will prevail over the tiny minority who have captured society and turned it into a system for the enrichement and benefit of the few.
On Sep 11 11:01 AM John Galt wrote:
> > So everyone on the call quietly nods and winks in a virtual sort
> of way at each other
>
> Hahaha, you are funny man.
>
> So where are our trusty government regulators there to protect us?
Libertarians would probably respond by telling you that Capitalism is a bad economic system except when you compare it to all other economic systems. They might also respond by saying "Trust but verify".
> In fact history shows the exact opposite in that over time absolute self-interest, over time, degerates into massive corruption and total dysfunction.
Care to cite some examples or are you just going to rant against capitalism?
> Many others in history have also acted in their own self interest such as the mafia, the Nazis, or the Inquisition ... but self interest of the powerful and corrupt few hardly had any lasting benefits for the rest of the world.
So the government can act in their self interest too? Stealing property, killing/torturing people, and intimidation all at gun point? Legalized theft?
Can you show me some businesses that throw people into death camps, kill people, steal their property, and do business through involuntary transactions? Is that what you'd rather have?