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Reggie Middleton is the personification of the freethinking maverick — the ultimate nonconformist as it applies to macro strategies, investment, and analysis. He uses his background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate,... More
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  • Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!

    This is the Facebook valuation exercise that I promised to release to the professional (NYSEMKT:HNW) blog subscribers (File Icon FB note final). As is customary, I am including a material amount for the public blog to chew on. I think most will find it quite the engaging read, at the very least. If you haven’t read my first three pieces on this topic, please do so for you will easily be able to glean my overarching opinion on this most recent Facebook “investment”:

    1. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
    2. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
    3. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models

    As reported by Bloomberg, the Facebook stock sale throws new light on the Goldman Sachs potential conflicts of interest – conflicts which we have illustrated in full detail in the past. By offering shares to its most favored clients and forcing them to commit or decline in less than a week, Goldman not only made investing in Facebook seem like a precious privilege from a marketing perspective, but made due diligence nearly impossible for those who did not have a dedicated staff with the free resources to throw at the problem in near real time. We, at BoomBustBlog would like to remedy such an issue as what I see is the new face of  investigative reporting and analysis on the web, and will offer consulting services to HNW and UHNW clients who find themselves in similar binds in the future. Simply drop us an email.

    Goldman warns, ‘We’re probably going to dump this load, but we may also need you to remain behind to hold the bag!’

    In its offer for the $1.5bn stock sale of privately held social-networking company Facebook, Goldman Sachs disclosed that it might sell or hedge its own $375m investment without warning clients. Under the deal, private wealth-management clients would be subject to “significant restrictions” limiting their ability to sell stakes while Goldman Sachs own holding can be sold or hedged at any time, and without warning. One would hope that astute clients and investors would be put on guard by such conflicting and restrictive liquidity measures! In addition, it appears as if Goldman Sachs failed to disclose its clients that it had offered Facebook shares to its internal investment group, Goldman Sachs Capital Partners, headed by one of its star fund managers, Richard A. Friedman. Since 1992, GSCP has invested its own balance sheet as a principal (that is, on behalf of Goldman itself and its employees) in private equity and has leveraged that investment through funds raised from its institutional clients which include pension fundsinsurance companiesendowmentsfund of fundshigh net worth individuals, and sovereign wealth funds. Unlike most of its (and Wall Street’s) client orientated investment funds, this vehicle actually puts a significant amount of Goldman’s skin in the game (see Even With Clawbacks, the House Always Wins in Private Equity Funds for an example of the implicit call option private equity investors give these fund managers, absolutely free, and the perverse incentive to do deals regardless of the investment outcome that the options create). The most recent vehicle, GS Capital Partners VI, closed with $20 billion in committed capital, $11 billion from institutional/high net worth investors and $9 billion from Goldman Sachs and its employees. That breaks down to a 55:45 split, much too rich a contribution from the GS side in order for them to play the games detailed in Even With Clawbacks, the House Always Wins in Private Equity Funds. Thus BoomBustBloggers should take note that GS Capital Partners VI is the current primary investment vehicle for Goldman Sachs to make large, privately negotiated equity investments in which they are serious about actually making investment gains in, versus churning and overpricing in the attempt to generate fees and bulge the bonus pool.

    With this backgrounder in mind, be aware that GS Capital Partners rejected the Facebook deal as inappropriate for its clients (its clients being 45% Goldman employees and Goldman’s own balance sheet girded for longer term principal investment), in part due to valuation concerns. Mr. Friedman apparently has the very same valuation concerns that Reggie Middleton and BoomBustBlog hold.

    Goldman attempts to circumvent SEC policy, or clearly signals that Facebook is to issue an IPO – or both!

    The special-purpose vehicle (SPV) created by Goldman Sachs is yet another demonstration of how the firm is giving  the impression that it is skirting SEC regulations. The SPV is intended to pool several investors’ money into single investment vehicle to create the legal effect of a single shareholder as each SPV is counted as single shareholder despite several thousands of investors participating in the vehicle. The SPV is an attempt by GS to skirt securities regulations that require any company with more than 499 investors to meet SEC reporting requirements. According to the private-placement document, Facebook plans to increase its number of shareholders above 500 this year which would force the social-networking company to begin disclosing reams of financial information or go public by April 2012.

    Facebook:  Is it just a fad? Online social trends are completely unpredictable. If a new trend comes along that would start engaging people, then Facebook could become the old way of social networking just as quickly as it became the new way (if not quicker). It’s not as if it hasn’t happened already, ex. AOL, MySpace, Orkut and Hi5. Facebook does have an advantage that its predecessors didn’t in that they attempted to create barriers to entry for competitors with the “Facebook connect” api (application programming interface) that allows for sites across the web to authenticate through Facebooks user community rather than have a user type in repetitive login usernames and passwords. While this is an advantage in that it offers some barrier and is quite popular, it is not an insurmountable barrier for if the tide changes, all users need to do is enter one more username and password combo to switch over to another platform.

    A high profile IPO commanding a premium valuation before the trend fades away is the best way to create excess proceeds from retail investors. We don’t believe that the Goldman Sach’s investment materialized to meet Facebook’s opex or capex requirements. The whole idea behind the investment was to set a ground floor for a “knock ‘em out of the ballpark” valuation in the eventuality of IPO and put Goldman Sachs as a front runner candidate to manage IPO. An IPO of that order would mean that Goldman has a chance to collect significant investment banking fees which typically range between 4-5% of the size of a flotation and to take part in windfall profits during a (successful) IPO. With its $450m investment, Goldman Sachs would own 0.8% stake in Facebook while Digital Sky Technologies with $50m investment alongside its previous stake would end up with c10% stake.

    Although, Facebook has lot of potential opportunities and is yet to fully address (it has begun to implement some of the following) several markets including mobile-ad market, ads on partner sites, the launch of e-mail and location features, one has to remember before paying a 100x PE multiple that the despite its cult monopoly status, as an operator of a social networking site, Facebook operates in a highly vulnerable, highly volatile market that is quite susceptible to changing social trends. From AOL, to MySpace, to Twitter, to Yahoo to Facebook, we have sign roaring fires and spectacular flameouts, sometimes within the span of just a couple of years.

    Facebook: A great social networking site for users but does it translate for advertisers?

    Social networking websites are a great place to make new friends and interact with old ones. However, from a revenue perspective they have been lagging. People log into social networking websites to interact with their friends and play online games, and its members as such appear indifferent to advertising. According to industry sources, Facebook click-through-advertising rates (NYSE:CTR) are much lower than Google and Yahoo, and even lower than its social networking peers, MySpace. Google has CTR of 8% while MySpace’s has CTR is about 0.1%. Facebook on comparison has just 0.04% CTR. Explanations for Facebook’s low CTR include the fact that Facebook’s users are more technically savvy youngsters and are better at ignoring advertisements. On MySpace users spend more time browsing through content. While on Facebook, users spend their time communicating with friends hence, diverting their attention from advertisements. However, Facebook fares much better in video content. According to a study, it was found that for video advertisements on Facebook, over 40% of users viewed the entire video compared with 25% for the industry average.

    In addition, Facebook’s low CTR belies its best in category reach, which compensates for the lower CTR. This is both a blessing and a curse. Althouth the raw money does manifest from the larger numbers, the fleeting and ephemeral nature of the nascent social media business means there is really no way to know of Facebook can keep those numbers or if it will go the way of AOL or Myspace.

    Valuation

    Despite having given its clients just a week to decide to invest $2m as a minimum investment (word has it that due to demand, the effective minimum was $5 million) and given the dearth of available information about Facebook’s operations and financial condition, Goldman Sachs was reportedly able to close the deal a day early. The overwhelming investor response amounting to several billions of dollars for just a $1.5bn stake sale is a clear sign of investor fascination with Facebook, or a testament to the marketing fortitude of Goldman Sachs. The truth most likely lay somewhere in between.

    Given the dearth of financial information under scenario one, we have estimated FB revenues based on subscribers growth and average revenue per user, and have assumed constant profit margin.

     

    To put the amount of optimism used in our analysis in perspective, there are 6,892,839,222 people in the world according to the US Census Bureau’s World Clock. Facebook currently claims 9% of that world population. Take into consideration a material percentage of that population are elderly or very young, infirm, illiterate, poverty stricken or located in remote rural areas and do not have iPhones and Androids, broadband connected computers and Facebook accounts, and may not have these things for some time, if ever. For the extremely optimistic benefit of the doubt, let’s assume that all children down to the age of infancy, the infirm, the illiterate and the Australian outback settlers all are frequent or likely Facebook users. Even with this assumption, Facebook will have to hit 65% of today’s total (as in the ENTIRE) world population (not factoring in population growth/shrinkage) by c.2020 to justify anything approaching a $50B valuation – and that’s assuming they captured 65% of every single man, woman and child in the world along the way – not 65% of those who have access to an internet connected computer.

    Thus, it is highly unlikely one can legitimately factor in the type of growth needed to justify the current Goldman $50B valuation – particularly when you consider that Facebook’s growth is already slowing!

     

    I make this point in an attempt to illustrate the absurdity of the valuation presented to investors as a once in a lifetime opportunity that you have to make a $2-5 million valuation decision on in a couple of days without audited financials. You may be able to make some money, but the chances are greater that you will trail the average ROR or outright lose a bunch of money than it is you will hit that grand slam. Those Goldman clients would have been better off investing in BoomBustBlog!

    Those who wish to subscribe to our research services should click here! You can contact me, Reggie Middleton, here. Professional & Institutional subscribers can download the full Facebook valuation analysis, complete with several valuation scenarios here: File Icon FB note final. And finally, and most ironically – here is the debut of Reggie Middleton’s BoomBustBlog Facebook page!



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: GS, facebook
    Jan 12 3:06 AM | Link | 1 Comment
  • Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB!

    The day after I posted “As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The “New” Tobacco Companies” wherein I made clear my opinion that the legal and litigation risks that the banking industry faces is woefully underestimated, theMassachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifies and vindicates my post from the day before, which also contained links to other posts which any declared sensational just a few days before, ex., The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. This is a very big deal since it actually unravels many thousands of foreclosures and sets precedent to be examined across the country (all 50 state’s attorney generals are looking into fraudclosure issues) that will really cause material damage to the banks that are pursuing (have pursued) said foreclosures. As reported in the Massachusetts Law Blog:

    Breaking News (1.7.11): Mass. Supreme Court Upholds Ibanez Ruling, Thousands of Foreclosures Affected

    Update (2/25/10)Mass. High Court May Take Ibanez Case

    Breaking News (10/14/09)–Land Court Reaffirms Ruling Invalidating Thousands of Foreclosures. Click here for the updated post.

    None of this is the fault of the [debtor], yet the [debtor] suffers due to fewer (or no) bids in competition with the foreclosing institution. Only the foreclosing party is advantaged by the clouded title at the time of auction. It can bid a lower price, hold the property in inventory, and put together the proper documents any time it chooses. And who can say that problems won’t be encountered during this process?… Massachusetts Land Court Judge Keith C. Long

    “[W]hat is surprising about these cases is … the utter carelessness with which the plaintiff banks documented the titles to their assets.” –Justice Robert Cordy, Massachusetts Supreme Judicial Court

    Today, the Massachusetts Supreme Judicial Court (SJC) ruled against foreclosing lenders and those who purchased foreclosed properties in Massachusetts in the controversial U.S. Bank v. Ibanez case…

    … For those new to the case, the problem the Court dealt with in this case is the validity of foreclosures when the mortgages are part of securitized mortgage lending pools. When mortgages were bundled and packaged to Wall Street investors, the ownership of mortgage loans were divided and freely transferred numerous times on the lenders’ books. But the mortgage loan documentation actually on file at the Registry of Deeds often lagged far behind.

    In the Ibanez case, the mortgage assignment, which was executed in blank, was not recorded until over a year after the foreclosure process had started. This was a fairly common practice in Massachusetts, and I suspect across the U.S. Mr. Ibanez, the distressed homeowner, challenged the validity of the foreclosure, arguing that U.S. Bank had no standing to foreclose because it lacked any evidence of ownership of the mortgage and the loan at the time it started the foreclosure.

    Mr. Ibanez won his case in the lower court in 2009, and due to the importance of the issue, the Massachusetts Supreme Judicial Court took the case on direct appeal.

    The SJC Ruling: Lenders Must Prove Ownership When They Foreclose

    The SJC’s ruling can be summed up by Justice Cordy’s concurring opinion:

    “The type of sophisticated transactions leading up to the accumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgaged-backed securities, are not barred nor even burdened by the requirements of Massachusetts law. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court’s opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.”

    The Court’s ruling appears rather elementary: you need to own the mortgage before you can foreclose. But it’s become much more complicated with the proliferation of mortgage backed securities (MBS’s) –which constitute 60% or more of the entire U.S. mortgage market. The Court has held unequivocally that the common industry practice of assigning a mortgage “in blank” — meaning without specifying to whom the mortgage would be assigned until after the fact — does not constitute a proper assignment, at least in Massachusetts.

    This is a very interesting development, and I would like to make note that the buck stops here since this is Supreme Court. I normally do not excerpt or quote this much of another blog or news source, but since the content is legal in matter and this particular blog (Massachusetts attorney) appears to have put a strong legal analysis on the topic,  I will continue. I urge others to visit the Massachusetts Law Blog for more info. Back to his write-up…

    • Despite pleas from innocent buyers of foreclosed properties and my own predictions, the decision was applied retroactively, so this will hurt Massachusetts homeowners who bought defective foreclosure properties.
    • If you own a foreclosed home with an “Ibanez” title issue, I’m afraid to say that you do not own your home anymore. The previous owner who was foreclosed upon owns it again. This is a mess.
    • The opinion is a scathing indictment of the securitized mortgage lending system and its non-compliance with Massachusetts foreclosure law. Justice Cordy, a former big firm corporate lawyer, chastised lenders and their Wall Street lawyers for “the utter carelessness with which the plaintiff banks documented the titles to their assets.”
    • If you purchased a foreclosure property with an “Ibanez” title defect, and you do not have title insurance, you are in trouble. You may not be able to sell or refinance your home for quite a long time, if ever. Recourse would be against the foreclosing banks, the foreclosing attorneys. Or you could attempt to get a deed from the previous owner. Re-doing the original foreclosure is also an option but with complications.
    • If you purchased a foreclosure property and you have an owner’s title insurance policy, you have a potential claim against the title policy. Contact our office for legal assistance.

    Here he puts in some self promotion, but hey… I’m one to talk. I actually appreciate the legal analysis and am glad to have him offer services in the arena.

    • The decision carved out some room so that mortgages with compliant securitization documents may be able to survive the ruling. This will shake out in the months to come. A major problem with this case was that the lenders weren’t able to produce the schedules of the securitization documents showing that the two mortgages in question were part of the securitization pool. Why, I have no idea.
    • The decision, however, may not prove to be anywhere near the Apocalypse it’s been hyped to be. The Court said that “[w]here a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder. However, there must be proof that the assignment was made by a party that itself held the mortgage.” This opens the door for foreclosing lenders to prove ownership with proper documents. Furthermore, since the Land Court’s decision in 2009, many lenders have already re-done foreclosures and title insurance companies have taken other steps to cure the title defects.

    I am not a lawyer and this is not my purview, but things may not be quite that simple. The securititized trust documents themselves have timing issues that may come into play. See the email chain conversation below for more on this topic.

    • The ruling may be limited only to Massachusetts and states operating under a non-judicial foreclosure and “title theory” laws. The Court was careful to point out that Massachusetts requires very strict compliance with its foreclosure laws. The reason for that is Massachusetts is a non-judicial foreclosure state–meaning lenders don’t need a court order to foreclose–and that the state operates under the “title theory” which is a fancy way of saying that the bank is really the legal owner of your house.
    • Watch for class actions against foreclosing lenders, the attorneys who drafted the securitization loan documents and foreclosing attorneys. Investors of mortgage backed securities (MBS) will also be exploring their legal options against the trusts and servicers of the mortgage pools.

    It appears as if he contradicted his statement above. I can practically guaranteed that this significantly increases the risk. volume and velocity of litigation. Think about it. If you were a REMIC investors, would you be sitting pat, or calling your attorney.

    • The banking sector has already dropped some 5% today (1.7.11), showing that this ruling has sufficiently spooked investors. (But Merrill Lynch just went on a buying spree on the banking sector–showing that the real experts are betting that this decision and others which will follow will not substantially affect banks’ profitability).

    I have absolutely no idea what he means by Merrill Lynch going on a buying spree – actually using their (BofA’s) balance sheet? I seriously doubt so. I also take umbrage to the assertion that Merrill Lynch constitutes a “real expert”(s) in terms of mortgage and real estate valuation and risk assessment, since they “experted” themselves into a near collapse over these very same assets.

    Interested parties may download the actual ruling here: Ibanez-Case-JAN-2011. I actually engaged in an interesting email exhange with a BoomBustBlogger over this fraudclosure issue, and would like to share the email chain with the blog.

    10/21/10

    Reggie,

    You see that the various large shoes we were discussing have begun dropping.  Multi-billion dollar demands by non-agency bondholders for putbacks, and now the government is being forced to take action.  I read elsewhere that a group of hedge funds is organizing for a similar demand.  I view with interest the tiny levels at which the banks are reserving against these events in comparison with the present (and probable future) size of the put-back demands.  Again, this is only ONE tentacle of the monster.

    So far, the putback demands appear to be merely rep and warranty driven, i.e, the failing loans do not meet the underwriting requirements as represented in the prospectus.  This does not implicate the REMICs’ tax-exempt status.  However, as claims for wrongful foreclosure based on the failure of loans to be properly deposited into trust are proved true — or as the same facts are brought to light by 50 state attorneys general — it will be implicated.  This may produce a larger wave of claims by bondholders, both because of the loss of tax structure as represented and warranted, and because the knowing failure to properly deposit the loans (which will be inferred from the systematic extent of the failure) may support securities fraud claims.  I will be very interested to see how you quantify the size of the problem for the banks.

    1/1/10

    Reggie:

    … I assume you saw stories on the Mass. Court ruling in Ibanez.  The obvious question was, “Why didn’t they just back up and start over after getting the assignments done correctly?”  The answer:  They had no choice but to either litigate the homeowners into submission or pay the homeowners to go away.  They chose the former strategy and it failed.  Why did they have those choices?  As you and I discussed awhile back:  the REMIC.  If the loans were not originally assigned to the trust by the deadline, the REMIC lost its special tax status, and the banks were forced into the argument that an after-the-fact assignment had the effect of an original timely assignment (so that, getting a state court to bite on this, they could then go argue the same point to the IRS, i.e., “no harm no foul”).  The Mass. Court, to its credit, saw through the bullshit and upheld the rule of law.

    The implications of this for the REMICs (actually, the banks that created and sold them) and homeowners going forward are huge.  Homeowners can now see the light, and if there’s any question about the ownership of the loan, stick a hot poker in that issue (demand proof of ownership, either directly before litigation or in discovery when litigation has started) until the banks cry uncle, meaning pay through the nose to buy off the homeowners and save the REMIC’s tax status.  The banks face the prospect of enormously increased costs, for any of: (a) litigation expenses as this issue becomes harder fought by the homeowners; (b) increased settlement costs as homeowners realize their advantage and demand more pounds of bank flesh to go away; or (c) payments to REMIC investors for losses caused by the banks’ failure to properly assign the loans in the first place. Who’s going to suffer the worst?

    Again, JPM et. al. have been much too optimistic in reserving for these occurrences, as clearly detailed in my post As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. The legal costs looked bad before this decision, as stated in As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The “New” Tobacco Companies and it simply looks much worse now. To think, so called experts wonder why I am bearish on JP Morgan and the big banks…

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    … There is no chance for appeal in the Mass case; the decision came from the state’s highest court.  This quote from the court illustrates that this was not rocket science; the banks’ lawyers never should have taken the risk of the appeal rather than settling and leaving the record with an unreported trial court decision of much less import:

    “The legal principles and requirements we set forth are well established in our case law and our statutes. All that has changed in the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.”

    … I agree with everything in your post [“As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The “New” Tobacco Companies”].  I noted someone’s comment about BAC’s settlement with Fannie and Freddie (paying about 2 cents on the dollar to eliminate hundreds of billions of putback claims, a bailout in disguise for which somebody should go to jail).  Otherwise, I think the banks differ from the tobacco companies in a couple major respects: (a) they don’t sell an addictive product which may be somewhat economically insensitive; and (b) they don’t have access to overseas growth like the tobaccos do.  By failing to adequately reserve and kicking the can, they’re making the end only that much bloodier (or betting on TARP II, III and IV, which may not be a bad bet).

    Actually, the banks did have an overseas growth model, the sales of securitized products. One would have thought that that model had come to an end due to the crash and burn effect, alas it has not and the reason is because the banks due sell what appears to be an addictive product.

    1. The reach for unrealistically high yields in the case of yield hungry institutional investors such as pension funds. As stated Reggie Middleton vs Goldman Sachs, part 1, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and “Blog vs. Broker, whom do you trust!”, Goldman’s peddling of products often spells doom for the consumer (client) and bonus for the producer (Goldman). Goldman is now underwriting CMBS under a broad fund our $19 billion bonus pool “buy” recommendation in the CRE REIT space  reference Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off .Now, after all of the evidence that I have presented against the CRE space, who do you think would be better for clients net worth, Reggie’s BoomBustBlog or Goldman? There is also the most recent evidence from just last week: Morgan Stanley Jingle Mail: Loses Properties To John Paulson Investment Consortium & Itself.
    2. The satisfaction of the get rich quick(er) urges to be had in their retail, HNW and UHNW clients. A perfect example is the Facebook offering, of which I am preparing an extra special analysis for my blog’s subscribers to be released in a day or two wherein I will show how those Goldman clients are throwing their money into the Goldman bonus pool/Facebook working capital fund abyss – that is if I haven’t demonstrated such already:

    Now, back to the email exchange…

    The limiting factors on the homeowner side are: (a) an imbalance of knowledge of their options as compared to the banks; and (b) an imbalance of resources ($) to pay lawyers to fight the banks.  Although I think the internet and its democratic access to information changes the equation for the first issue, it’s still like retailers selling gift cards – they make money because they know a large percentage of people will stick the card in the drawer and forget about it, and in doing so will have given the retailers free money.  Many homeowners who are in position to challenge a foreclosure, and thereby squeeze a bunch of money out of the banks, never will.  The $64 question is, how many will?

    I have a very strong feeling that many distressed homeowners that read BoomBustBlog can be considered to be amongst that educated elite.

    Now there’s a state appellate court decision for every other state appellate court to look to for guidance.  Stupid.  This is like a case I had in federal court several years ago against the U.S. gov’t.  We obtained a ruling imposing estoppel against the gov’t – which is nearly impossible to get.  The gov’t did NOT appeal that decision, only the decision granting us fees (which it lost).  It avoided an appeal for the same reason – it did not want a Xth circuit decision upholding estoppel against it sitting out there for the rest of the world to model from.

    The only logic that I see in the bank’s decision to litigate was that if you pay off one homeowner, you create a pattern where you will end up having to pay off others until it get’s to the point where you will have to litigate the issue to its ultimate conclusion anyway. Hard to say which route would have been more efficient and cheaper, but I do know that this is far from a desirable outcome for the banking industry.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: C, BAC, JPM, WFC
    Jan 11 3:55 AM | Link | 1 Comment
  • The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldmans Facebook Fund Marketing Brochure Into Our Models

    This is part three of my opinion and analysis on Goldman’s apparent ramp up of Facebook shares in the face of, and in direct contravention to, SEC rules to the contrary. See Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private! and Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure. For the first two installments. Here I will outline the actual costs as reportedly explained in the fund marketing material, and next I will illustrate the ramp ups in actual valuation, as compared to the  private equity vehicle mechanics that can prevent Goldman from taking a loss, as was illustrated in the previous piece. Before I go on, here a few interesting tidbits from the mainstream news flow:

    Bloomberg: Goldman Sachs May Sell, Hedge Facebook Stake Without Warning to Investors

    Goldman Sachs Group Inc. clients considering whether to buy shares in closely held Facebook Inc. should take heed: Wall Street’s most profitable securities firm could unload its own holdings without letting them know. In the last sentence of a one-page investment profile sent to private wealth clients, the firm explains: “GS Group may at any time further reduce its exposure to its investment in Facebook (through hedging arrangements, sales or otherwise), without notice to the fund or investors in the fund.”… “There may be conflicts of interest relating to the underlying investments of the fund and Goldman Sachs,” according to the Facebook offering document’s disclosures section. Material in the documents “is not guaranteed as to accuracy or completeness.”

    The phrasing in bold is all an astute investor needs to know in order to come to the conclusion that Goldman itself should be treated as an adversarial trading partner. For those with shorter term memories, Bloomberg assists with the reminisce…

    Goldman Sachs paid $550 million in July to settle fraud charges filed by the Securities and Exchange Commission relating to the 2007 sale of a mortgage-linked investment called Abacus. The company said it made a “mistake” by failing to inform clients in the 2007 deal that it allowed a hedge fund betting against the investment to help put together the deal.

    Here’s is what the privileged HNW clients get to pay in order to buy the Facebook shares from Goldman with a retail brokerage price markup as opposed from the actual secondary market sites that have popped up…

    To get a stake in Facebook, Goldman Sachs clients are required to make a minimum investment of $2 million by Jan. 7 in what’s described as limited partnerships based in the Cayman Islands and Delaware. Goldman Sachs is charging 0.5 percent of any capital committed to the partnership as an “expense reserve” as well as a 4 percent placement fee and 5 percent of any gains, according to the document.

    Facebook has more than 600 million monthly active users, of whom more than 230 million access the site on mobile devices, the document shows. Statistics available on Facebook’s website indicate it has more than 500 million monthly active users and more than 200 million access from mobile devices.

    A letter addressed to “potential investor” that introduces the Facebook investment profile ends with a two- sentence paragraph. The first asks potential investors to contact a Goldman Sachs representative for further information. The second says:

    “Do not contact Facebook.”

    Is it me, or is this deal expensive as hell? We are not even taking into consideration the markup on the shares that Goldman is guaranteed to make, which will probably trump all of the numbers above. For those who don’t agree with my assertion that this is a RIPOFF tad bit costly, let’s plug said numbers into the online private equity model that I made available to subscribers in my last posting on this topic.

    Basically, 'nuff said. If you don't get it by now, you actually deserve to be one of those special Goldman clients that get access to this very special fund to pay all of those very special fees. Again, this is not hate on Goldman. More power to them for juicing the marketing machine for all its worth. Goldman is the Apple of the investing world. I'm sure if I worked for Goldman I would be doing the same thing. The fact of the matter is that I don't work for Goldman and I'm sure I can structure said investments in Facebook at those volumes for a whole lot less., as can many other institutions.

    Don't get me wrong. I don't necessarily think these investments will crash and burn for the investor (LPs). Its really all a matter of pricing, valuation and timing. It does appear evident that the LPs will inevitably be trading against Goldman, though. You had better be ready and prepared, and you won't have that management fee and markup to cushion your fall like Goldman will. As a matter of fact, you will be the one paying it.

    Next up (on this topic), I will post another live online spreadsheet model and opinion/analysis that gives an illustration of prospective Facebook private equity valuations in anticipation of an IPO. I know I said  I would do it yesterday, but a glitch came up in the forensic evaluation of a high leverage short candidate and 3 prospective yet lesser known long candidates - all of which have set the team back a few days. I am also working on a massive update to our European contagion model. That is a lot of work for the blog, when I could be hyping Facebook shares without full disclosure and registration to an unsuspecting public at outrageous markups/fees who may have more money to burn than spreadsheets to utilize, all with the intent of shorting the hell out of hedging positions at the very top of the hype marketing campaign, right? Okay, I'll stop - seriously!

    Kudos to the Goldman team that put this together. It will be a blockbuster deal if it passes muster with the SEC. I actually think this is an ingenious and potentially very profitable set up.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 06 1:10 PM | Link | Comment!
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