Goldman’s Mutual Friend

http://opinionator.blogs.nytimes.com/2011/01/04/friends-with-benefits/?hp

by robg • 16 years ago

75 103 16 years ago

opinionator.blogs.nytimes.com

Zak• 16 years ago

It bothers me that the sentiment of this article seems to be "this sort of transaction needs to be illegal" rather than "this isn't a good investment; don't invest".

jbooth10• 16 years ago

I read the sentiment as "this sector is hopelessly corrupt", which, assuming they're not making stuff up, seems to be the case.

Where'd you get to "should be illegal" from?

beoba• 16 years ago

"Goldman will be creating a “special purpose vehicle” to sell the stock to its wealthy clients and then will charge them a 4 percent initial fee plus 5 percent of any profits."

hahaha what a shitty trade, sounds like standard goldman to me.

jackfoxy• 16 years ago

There's an engineering principle, if you address a complex problem (or any problem) with a complex system, it's going to be buggy. Addressing complex social issues with complex legislation (Dodd-Frank, Sarbox, etc.) results in loopholes (bugs). Many lawmakers surely realize this, but their main goal is re-election, and doing something (the equivalent of Dilbert moving his mouse around) gives the media something to report, which in turn keeps the lawmakers' names in front of the public and feeds the perception of positive action.

The equivalent of engineers are the staff lawyers who actually write the legislation, and cycle between government and industry positions, much like contract programmers; but in their case they get rewarded for the bugs they write in their code by advising industry clients on how to exploit them. (That of course is a simplification. Goldman is using lawyers experienced in parsing complex security laws, not necessarily the same ones who wrote the laws.)

newt2• 16 years ago

Buggy software can be better than none.

treeface• 16 years ago

Sure, but it can also create bigger problems that didn't previously exist.

jerf• 16 years ago

"Many lawmakers surely realize this"

I'm not sure. They're lawyers, not engineers, and I don't see any reason for lawyers to conclude "It's fundamentally complex, impossible to get right, and going to have problems" rather than "Well, they just didn't try hard enough to make a good law". And certainly the belief that they can create a solid law through sheer staggering complexity rather than despite sheer staggering complexity is a more parsimonious explanation of what has been happening lately than the idea that they know that simpler laws are better.

There are few enough computer programmers who figure this out even with the math staring them in the face and great engineers all but spoonfeeding these tidbits of wisdom; I can't imagine this is anything like the common perception of law in lawmaker circles, and especially not in circles where people believe activist government is on average the solution to everything.

jbooth10• 16 years ago

If there's even a debate about having a law, it's because there's a real or perceived failure by the market to do the right thing. In this case, it'd be because Goldman's activities have nothing to do with the proper role of finance and everything to do with exploiting the already existing bugs in the market system.

Nobody's saying that the government should write laws regarding toilet paper manufacturing, for example. There's a difference between "make a working complex system even more complex", and "attempt to fix a completely broken system, with full knowledge that your fix won't be perfect either".

Yzupnick• 16 years ago

>They're lawyers, not engineers, and I don't see any reason for lawyers to conclude "It's fundamentally complex, impossible to get right, and going to have problems"

Very true, my brother who, is the press secretary for a relatively prominent senator, said to me when we were debating the health care bill, "Complex problems have complex solutions." and then... "Getting to the moon was a complex problem, and I'm sure it took lot more than 2000 pages to explain the process of getting there."

anamax2• 16 years ago

> Many lawmakers surely realize this, but their main goal is re-election, and doing something (the equivalent of Dilbert moving his mouse around) gives the media something to report, which in turn keeps the lawmakers' names in front of the public and feeds the perception of positive action.

You're assuming that they would "do good" if not for the pressures of re-election.

How about some supporting evidence?

krschultz2• 16 years ago

Funny, I can write the exact opposite of your point with that same argument.

A lot of engineers dealing with highly complex problems know that things are more intricate than they appear on the surface. (Compare the BP oil well disaster to a cut firehose, seemingly analogous, but almost every solution to the second will not work on the first) Often the elegant solution that works in theory fails in practice, and requires several iterations adding subsystems to deal with small problems that crop up in testing.

Politicians that see only in black and white really ignore these inconvient details while they espose rhetoric and focus on reelection. Their simplistic and naive view of the world doesn't allow them to tackle the hard problems that take nuance and balancing benefit against unintended side effects.

wccrawford• 16 years ago

Wait, isn't investing in something and then making a huge announcement like this called 'insider trading'? The same people who are investing are also purposefully changing the value of the stock through non-market means.

T_S_• 16 years ago

Insider trading is a legal term, and is not always illegal. This issue is more about the election of public versus private status (another legal issue) and the rules about who can invest in various forms of private investment (yet another legal issue).

It would be nice if we could ever get to discuss the economic issues of information and efficiency as it relates to investing, but the amount of heat around these issues these days prevents a lot of calculated reasoning about what is best for our economy.

IgorPartola9• 16 years ago

So how can Facebook's IPO affect chumps like me who are not silly enough to try to buy either Goldman or Facebook stock? How likely is this to blow up on Wall Street? Or when the dust settles will it be just the "private wealth" investors that will have lost some of their fortunes?

gus_massa• 16 years ago

You will have to pay for it at the BailedOut 2.0. Is Goldman "too big to fall"? Is Facebook "too big to fall"??

wmeredith• 16 years ago

It looks like you weren't paying attention to the last time Wall Street blew up and tax payers footed the bill to the tune of hundreds of billions of dollars.

IgorPartola9• 16 years ago

Oh, I did. I was just wondering if others thought that a second bailout was a likely scenario.

yummyfajitas9• 16 years ago

Wow, I've really got to hand it to Goldman. From the article:

Thanks to Goldman’s imprimatur, Facebook’s value increased 20 percent virtually overnight....The other benefit for Goldman in leading the public offering — aside from major bragging rights — is that it can use its marketing, sales and distribution muscle to make sure the value of Facebook at the time of the offering exceeds the $50 billion valuation at which Goldman invested.

Increasing the value of the firm they are investing in? Great job guys.

While on paper it seems that these high rollers would be foolish to invest in Facebook at such a lofty valuation, they will still most certainly feel increased loyalty to Goldman for making such an exclusive opportunity available to them.

Giving their other clients investment opportunities not available elsewhere? Awesome. Wish I were Goldman's client. (Note: all of Goldman's clients are accredited or institutional investors, and are fully capable of making their own decisions on whether to buy this Facebook SIV.)

Further, if the value at IPO will be at least $52B ($50B + 4%) (as an earlier paragraph suggests it might), all the clients who purchase this SIV will at least break even.

Overall, it looks like Goldman is doing a great job for all their clients. Keep up the good work guys.

Also, the conflict of interest is nonexistent. Goldman holds a long position in Facebook. So do all their clients. Everyone has the same goal here: increase the value of Facebook.

As for the "average investors" who the article claims will be hurt by all this, there is a very simple way to avoid that: don't buy FB. If everyone does this, the IPO will be a failure, and Goldman + Zuckerberg + Goldman's clients will all lose money. If you are very sure FB is overvalued, short it. If you are right you will be taking money from Goldman and Zuckerberg.

IgorPartola9• 16 years ago

One correction: Goldman did not increase the value of Facebook, just the appearance of their value. Who knows how much Facebook is actually worth? Their profits are tiny compared to the latest valuation. They are up to their ears in invested money. Their business model is showing ads that nobody clicks on. Goldman and the private investors might make out all right. But their recent investment has done little in my eyes to make Facebook more valuable.

endtime• 16 years ago

Facebook's worth exactly as much as people are willing to pay for it. If Goldman gets people to invest at a higher valuation then they've increased Facebook's value by definition.

revorad4• 16 years ago

Their business model is showing ads that nobody clicks on.

And they still make a large chunk of $2 Billion off them?

jbooth10• 16 years ago

I have to agree on your last point regarding average investors. Hard to have sympathy for anyone who buys something at a certain price and loses money.

That being said, it seemed like there were several aspects of "pump and dump", rent-seeking (we can get FB, noone else can, so we charge a totally made-up premium), as well as "make a big transaction at an improper valuation in order to get the inside track with FB's CFO for big fees on other transactions later" to the deal. That's not really how markets are supposed to work..

Meanwhile, it's still damn near impossible to a get a business loan, I hear.

yummyfajitas9• 16 years ago

I agree with you, a more public process for creating liquidity in stock would be great.

Unfortunately, while Sarbox may have prevented another Enron/Worldcom, it also prevented/delayed the Facebook IPO. (Interestingly, that's exactly what assorted limited government crackpots were worried about back when Sarbox was passed.)

tptacek14• 16 years ago

It has always been damn near impossible to get a business loan. It was damn near impossible to get a line of credit, even for a business with steady cash flow and multiple years track record, in the mid-late 1990s†. Debt financing for IP-driven businesses whose only physical collateral depreciates at near the speed of sound sucks. Don't blame Goldman for that.

† Unless the companies I was at that tried were doing something wrong, but, before you whip out the snark, I wasn't the one running those companies.

va_coder• 16 years ago

I don't know about you guys but I'm already seeing Facebook looking more like MySpace in the sense that a lot of people got on, but I see less and less usage by most people in my circle. Of course a few people use it heavily, but the majority of my circle seems to have lost interest.

Just an anecdote.

revorad4• 16 years ago

Another anecdote: I'm using it more. I'm even using a Facebook group to share my wedding plans with my friends. It is really good. And it's completely private.

yters2• 16 years ago

I killed my account a long time ago and haven't missed it.

byteclub2• 16 years ago

"Increasing the value of the firm they are investing in? Great job guys."

Did Goldman increase the number of Facebook's users or add a new awesome feature? Did they address the privacy concerns of Facebook's users? Did they make Facebook experience better for the users? No, no and no.

All they did is increase the "perceived financial value" of the company, which as we know from not too long ago, is intangible and fleeting at best, and total BS at worst (Reminds me of the $100bn "valuation" that 37signals got http://37signals.com/svn/posts/1941-press-release-37signals-...)

As far as I am concerned, Goldman can do whatever it wants as long as its actions don't have negative effects on the rest of us. Internet bubble of 90's hurt many people, and so did mortgage bubble of late 2000s. I don't want Goldman to contribute to and profit from another one of those. How do we make sure it doesn't happen?

tptacek14• 16 years ago

No, because GS isn't an engineering firm; they're a finance firm, so what they do is decrease the cost of capital for Facebook's own investments, which might include:

* Rolling up other companies in their space (Yelp, Twitter, 4square, Instagram, Rdio, who knows)

* Buying their way into a strategic but lateral market (search, advertising, mobile, hardware, ISP, who knows)

* Drastically improving hiring and retention by improving comp packages and adding headcount

* &c &c &c

Your comment seems basically nonsensical, suggesting as it does that there is no way to improve Facebook that isn't visible in a commit log.

I also object to the comparison between the Internet bubble and the mortgage bubble; the structural causes of both were different, the underlying value of the tulips being sold in both were different (at the end of the Internet bubble we had, you know, an Internet), and most importantly the mortgage bubble was a financial black hole that sucked every homeowner involuntarily into its gravitational field, whether or not they were jackass speculators.

brown9-2• 16 years ago

"perceived financial value" - is there another? All measures of "value" are based on perception.

patrickgzill5• 16 years ago

I can understand Apple, Xbox, PS3, iPad, Linux, Solaris, etc. fanbois ... but can't understand the Goldman Sachs variety.

GS is one of the scummiest of Wall Street's firms, which is saying something.

That they were selling MBS tranches to clients, then simultaneously taking out options that would pay GS money when those exact same tranches failed, really tells you all you need to know.

GS' crimes are so varied and so well documented, I find it hard to believe you could not be aware of them.

Simply asking yourself "what part of this investment is something you would expect a commercial bank to invest in" as you reflect that GS is classed as a commercial bank in order to have access to Fed lending at essentially 0% interest, should perhaps give you pause.

EDIT: note for clarification, that the MBS tranches were assembled/packaged by GS themselves; GS was not simply selling a third-party product.

ShabbyDoo5• 16 years ago

"That they were selling MBS tranches to clients"

Did they tell their clients that these investments were sound? In 1999, I could have called my financial advisor and told him I wanted to buy Pets.com (or whatever) stock. He might advise me against it, but would have sold it to me. And, he might have had it shorted in his personal portfolio at that time without disclosing this to me. Does that make him a bad guy?

allertonm• 16 years ago

My theory is that the set of GS fans and the set of Ayn Rand fans is very similar. The appeal of GS to the randroid mindset seems obvious.

(Update: amused by the accusations of blasphemy.)

RickHull• 16 years ago

> That they were selling MBS tranches to clients, then simultaneously taking out options that would pay GS money when those exact same tranches failed, really tells you all you need to know.

No, it doesn't. This not necessarily scummy or a conflict of interest. GS could have hedged its own long positions, for one (i.e. still net long). Or GS could even be net short, overall, and still have independent divisions, advisers, or traders who are individually long.

cynicalkane3• 16 years ago

GS' crimes are so varied and so well documented, I find it hard to believe you could not be aware of them

I'm aware of the Abacus incident and something involving a relatively small number of subprime loans in Massachusetts. Since this is hardly variety, I have to ask, what other "crimes" are you referring to? Can you provide some of this extensive documentation? Because in all the time I've been following this crisis, I haven't seen anything else, and would love to learn more.

Caveat--the documentation must be actual evidence of crime.

tptacek14• 16 years ago

Goldman was scummier than Lehman, how?

maxklein• 16 years ago

I believe facebook shares will be the biggest share rise ever in history. You know why? Because it will run across facebook virally. Anyone who makes money on facebook stocks will announce it to his 450 friends, and so on. The facebook IPO will be huge.

shawnee_• 16 years ago

First, Goldman’s cost of capital is close to zero as a bank holding company, it can borrow from the Federal Reserve at negligible interest rates so any capital gain it makes on its venture in Facebook will be sheer profit.

And here we have a very interesting data point reminiscent of an era preceding a previous .com valuation implosion.

Does not compute. Weighted Average Cost of Capital (WACC) is one of the most important metrics for determining a value of a company. This free capital is equivalent to giving Goldman Sachs preferred stock in a pre-IPO. If Goldman-Sachs is given unrestrained liberty to not only determine the "market value" of the company AND the "insider's trading" right to determine the value of individual shares, we have most of the ingredients for another recipe for disaster.

chailatte2• 16 years ago

The good news: it's the last bubble.

The bad news: it's the last bubble.

The ugly news: massive failures across startups, high unemployment for programmers, dried up funding for years to come.

kragen• 16 years ago

I see a lot of people crying "bubble". By my calculations, it doesn't look like a bubble price; it looks like a relatively conservative price, one incorporating a substantial risk that Facebook will collapse. I posted them at http://news.ycombinator.com/item?id=2062222 a couple of days ago.

My calculations could, of course, be wrong. But I'd like to see comparable calculations from the "it's a bubble" crowd, instead of just sneers at the idea that Facebook could really be more valuable than Time Warner, Du Pont, and Morgan Stanley.

To me, of course Facebook is more valuable than Time Warner. It already intermediates the friendships and owns the private information of almost 10% of the world's population, including nearly its entire upper class, and it's an unregulated monopoly. The question is only how much more valuable.

waterlesscloud3• 16 years ago

Everyone seems to ignore Facebook Credits as a revenue source. That market is still in the very early stages of development, but it doesn't take a lot of imagination to see some very profitable directions for it to go.

In the short run, how much is FB extracting from Zynga alone with the Credits scheme?

mhb• 16 years ago

So buy Goldman and short Facebook. Since shorting Facebook can't be done, maybe Goldman can create a derivative to facilitate it.

Goldman’s Mutual Friend

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