Goldman’s WaMu Short Call Raises Eyebrows

by StockJockey

Thursday, April 17, 2008 - 10:25 am

Goldman Sachs’ research call last week to short the stock of Washington Mutual (WM-NYSE), just after its investment bankers had completed a lucrative transaction to re-capitalize the bank, was bold even by Goldman standards.

Goldman certainly has chutzpah, as Roddy Boyd notes over at Fortune:

Goldman Sachs recently provided a glimpse of one of the rarest occurrences on Wall Street: an analyst recommended that clients bet against a company by selling its shares short. In this case, the company was struggling Seattle thrift Washington Mutual, which happens to be a Goldman banking client.

Goldman’s short call last Friday made headlines in part because Goldman had just earned millions of dollars in fees for arranging a costly $7 billion recapitalization of WaMu. Fortune

Washington Mutual’s management team is probably too busy fending off the circling buzzards to give Goldman much grief over the incident; they are essentially powerless at this point and might not offer Goldman much in the way of future business, making the call to short the stock easier for Goldman to make. Certainly TPG, the lead investor in the recap, could not have been too pleased.

Perhaps my suspicions are baseless, but the sequence of events were the talk of the investment community. Much of what Goldman does is intensely scrutinized, by its peers and clients, and the animosity against them seems to run deep.

As a frequent commenter at the New York Times said:

GS made a fortune last year being short the CDO market. Since GS derives 60% of its income from principal transactions it is in their interest to “push” the market in the direction of the big bets they are taking. It would be interesting to note what their position in WAMU is and their position in Western-based mortgage heavy banks. It wouldn’t be the first or last time the analysts kowtowed for the traders or investment bankers.

GS likes to portray the image as a customer/client focussed investment bank. But, in reality they make their money by taking proprietary positions in active moving markets like currency, commodities, equities and fixed income. Once upon a time when John Whitehead was running the firm they were a white gloved firm. But, under the stewardship of Blankfein they are a “boxing” glove firm. The firm is run for and by Blankfein loyalists. Just look at all the commodity guys in prominent positions in sales and trading. He can easily buy off the investment bankers and asset managers with the extraordinary gains they have made from trading. Clients should beware of the wolf that hides behind the clothes of a sheep.

Yes, those comments pretty much sum up how a lot of people feel about Goldman. Andy Kessler might be right that SellSide analysts, in 2008, need to make louder noises to be heard above the din, but my takeaway was far different.

Although we will never know how Goldman’s prop book was positioned ahead of the call.

Goldman makes the short list
Fortune
----------------------------------------------------------------------------------------------------------------------
The content contained in this blog represents the opinions of underthecounter. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Comments:

Well, that’s one hell of a biased post! Shouldn’t you, instead of attacking Goldman Sachs & Co’s right to publish the bearish call, criticize Washington Mutual Bank’s failure to legally handcuff GS in it’s natural prerogative to issue such a recommendation?

In its retention of GS as advisor in that $7 billion injection, WM should have had the chutzpah to see that the dolphin pouring over its books while performing the due diligence required to structure the deal had the teeth and behavior of a starved-out shark.

That WM’s top honchoes failed to secure the most primitive legal agreement ("thou shall not trade, nor issue recommendations to trade shares of my stock or bonds for the next x months") between them and Goldman prior to the deal is yet another proof of WaMu’s amateurism in just about anything they do. I mean look at the way its executives ended the takeover negotiations with JPMorganChase (which they, themselves, had initiated with a nightly phone call from Kerry Killinger to Jamie Dimon)!

I’d bet a million dollars that, as it opened its books for the JPMorgan bankers to review, WaMu made the same mistake as with Goldman and that armies of traders in New York know enough to go short the stock. I’d even bet another million (with 1/100 leverage, please) that this is exactly the reason why Goldman didn’t hesitate to publish that call: the blood had already tainted the water.

If, after the smoke cleared, Goldman found itself legally unbound from any restraint in its freedom to trade or to issue recommendations to trade WM’s bow-wow stock, then it had the most absolute right to do so. WaMu’s obligatory duty to its shareholders was to tie Goldman’s hands with iron-clad legal restrictions before, during, and after the recapitalization transaction. If they failed to do so, then the blame is theirs and only theirs to carry. Not Goldman Sachs’.

If they weren’t so busy screaming “whoo-hoo!” on national TV all day and had taken that most elementary precaution, they wouldn’t be sitting spiced-up, pan-seared, and well-done in Goldman traders’ lunch box today.

On another point (your clearly antagonistic and half-thought comment on Lloyd Blankfein’s style at the helm of Goldman), my question is this: when you, yourself, admit that the firm’s profits under his (and his croonies’) guard are “extraordinary”, who can take you seriously given the fact that, in public companies, profitability is more than an obligation to shareholders: it’s a debt owed to the tens of thousands of people whose daily bread is directly or indirectly linked to a salary paid by Goldman Sachs. What’s the flip-side of that obligation to be profitable at all costs in financial darwinism? Simple: go ask the folks at Bear Sterns.

Posted by on 04/18/2008 at 01:43 AM

Those were Hammer’s comments about Blankfein but I think he speaks for many people. Now you know-I do not expect everyone to agree with them.

Yes, the blood was in the water. And how Killinger keeps his job I will never know, although I do not follow his company very closely.

My concerns at this point are more in this vein; on whether valuations in the financials can materially improve given the looming regulatory environment. We have been at the point were you have to consider buying them, but many people hate them here and I get jeered everytime I suggest it. Although I think Goldman’s valution premium is excessive, particularly given their balance sheet strategy.

You have to do business with, but only to keep your enemies closer than your friends.

Perhaps you do not see the animosity that people have for Goldman in your day to day life. I get bombarded with it all day long as people debate the ethics of behavior they, and others, display on Wall Street.

From what I see, people think they skirt the edge closer than anyone.

And now you know.

Posted by on 04/18/2008 at 10:10 AM

Looks like Bankers are ethically challenged. Great post about how JP Morgans European bankers are ethically challenged...shameful, at least the bankers and traders I knew at 277 park were solid citizens.

http://blogs.wsj.com/deals/2008/06/03/banking-ethics-101-jp-morgan-and-dow-chemical/

Posted by on 06/03/2008 at 11:38 PM