Changes Afoot in Goldman’s Mortgage Department

What the heck is going on with Goldman Sachs' (GS-NYSE) mortgage department? There has been quite a bit of turnover the past few months. Is it just business as usual? A ten-year veteran I know recently decamped for greener pastures right about the time Josh Birnbaum left to pursue life after Goldman.

The mortgage desk was credited was sidestepping the subprime slime that wiped out the rest of the Street, and perhaps the traders felt slighted, monetarily, after writing one of the more successful chapters in Goldman's recent history:

December 2007
The subprime-mortgage crisis has been a financial catastrophe for much of Wall Street. But at Goldman Sachs, thanks to a tiny group of traders, it has generated one of the biggest windfalls the securities industry has seen in years.

The group's big bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year that ended Nov. 30, according to sources familiar with the firm's finances. Those gains erased $1.5 billion to $2 billion of mortgage-related losses elsewhere in the firm. WSJ

Of course, Goldman paid these guys enough to take a sabbatical. But Goldman has seemingly dismantled part of its mortgage team, and is even bringing in an outsider, a rare move for a company known for growing its own; will hiring a Bear Stearns alum sit well with the rank and file at 85 Broad?:

Merrill Lynch Springs More Leaks as Stock Sinks to a 52-week Low

Merill Lynch (MER-NYSE) is printing new 52-week lows on the heels on Bank of America's guesstimate that Mother Merrill will take a $3.5 billion writedown:

Analyst Michael Hecht expects continued markdowns on troubled asset inventories, tough comparisons and weakness in a number of sales and trading areas for the second quarter.

Hecht forecast a quarterly loss of $1 a share for Merrill, compared with his earlier view of a profit of 21 cents a share, saying the marks on its collateralized debt obligations and mortgage-related exposures would be more severe than prior expectations. Reuters

Nine months ago Merrill was being hailed as the most forthright of the bulge brackets, with many claiming they had taken their medicine. Wrong. Of course, John Thain needs to raise capital in one way or another; will he go back on his mid-April promise?

April 17th
“For those of you who like to blog,” said Thain, “We do not have any plans to raise any additional common equity and [chief financial officer Nelson Chai] actually agrees with that.”

Thain might have left the door open to other forms of capital raising, but it would be rather amusing if he relents, much like Erin Callan. The clock is ticking, and with an equity raise becoming more prohibitively expensive by the day, Thain is in a bind. On June 13th he hinted their stakes in Bloomberg LP and Blackrock Inc (BLK-NYSE) could be monetized, but they are not in a strong negotiating position vis a vis Bloomberg and Blackrock has traded heavy in anticipation of a full or partial sale. While Goldman is giving Blackrock's stock a boost today with constructive comments, the impact could be short-lived.

Of course, raising fresh capital might not be so easy, even if Thain decides to move forward:

Fuld Festers While Takeunder Talk Transpires

What is Lehman (LEH-NYSE) worth in a takeout?

That is a good question, but you are not going to find the answer at this address. Technicians might be working on the assumption that the stock is range bound between the 52-week low of $20.25 and the $28 level where the recent capital raise was priced, at least for the time being. Cracking either side of the range would certainly lead to spirited trading, however.

But regulators seem to be backing away from Lehman at a measured pace. Washington might let someone go down, but want to minimize the fallout to counterparties. Will Dick Fuld drown despite his $45 billion liquidity pool? Many people are beginning to claim he should go, but I have never given the idea much credence, and Dick seems to be dug in deeper than Jimmy Cayne ever was.

And while Fuld's future is up in the air, or not, the dirty vile gossip that Jim Chanos so abhors continues unabated. Is Lehman, at best, a takeunder from the current $24 quote?

RBS’s Janjuah Expects “Crash” in Stock and Credit Markets

Royal Bank of Scotland is expecting a market rout to commence shortly that will take the S&P 500 to the 1050 level, wiping out anything that is still left standing:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets. Telegraph

While Americans have an addiction to oil, Bob Janjuah is addicted to making high profile market predictions that draw attention.

His call on FAS 157 was only 6 weeks behind my warning, which received little or no attention at the time, despite coming directly from a hedge fund legend who specializes in short selling:

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