MONEY AND WORK

News from the Progressive Review, providing alternative news and comment for over four decades.

April 14, 2009

CRASH REPORT

Fortune - Goldman Sachs reported a much stronger-than-expected first-quarter profit, bouncing back from its worst quarter as a public company.
Goldman also set plans to raise $5 billion through a sale of stock, saying it wants to become the first big bank to repay the federal loans extended during last fall's financial sector meltdown.

In reporting its results a day earlier than expected, New York-based Goldman said it earned $1.81 billion, or $3.39 a share, for the quarter ended March 31. Analysts surveyed by Thomson Financial were looking for a profit of $1.64 a share.

Goldman shares have surged more than 70% during the past month. . . The firm said the latest quarter's gains were driven by big profits in its fixed income business, where revenue surged to $6.56 billion - 34% above the previous record. . .

Goldman received $10 billion in funding from the Treasury Department last year as part of the government's Troubled Asset Relief Program.

Karl Denninger, Market Ticker - You don't think being paid by the taxpayer through AIG's "conduit" for losses that didn't (yet) happen at 100 cents on the dollar might have anything to do with that, do you?

And further (and potentially much worse) there is the repeated statement by Goldman executives that they were "fully hedged" against a potential counterparty default by AIG.

One wonders - was that "hedge" to be short the equity on AIG itself, perhaps?

Why is this important?

Because if that's how Goldman hedged they got paid twice and the taxpayer literally got robbed.

Someone in Congress needs to look into this now; there are already rumblings of investigation. Those rumblings need to get a lot louder and turn into subpoenas, not "polite inquiries."

Forbes - The superstars at Harvard defied markets for years-- until now. . . Stocks were tumbling last fall as the new school year began, but at Harvard University it was as if the boom had never ended. . . Budgets were plump, and students from middle-class families were getting big tuition breaks under an ambitious new financial aid program. The lavish spending was made possible by the earnings from Harvard's $36.9 billion endowment, the world's largest. That pot was supposed to be good for $1.4 billion in annual earnings.

Behind the scenes, though, a different story was unfolding. In a glassed-walled conference room overlooking downtown Boston, traders at Harvard Management Co., the subsidiary that invests the school's money, were fielding questions from their new boss, Jane Mendillo, about exotic financial instruments that were suddenly backfiring. Harvard had derivatives that gave it exposure to $7.2 billion in commodities and foreign stocks. With prices of both crashing, the university was getting margin calls--demands from counterparties for more collateral. Another bunch of derivatives burdened Harvard with a multibillion-dollar bet on interest rates that went against it. . .

It would have been nice to have cash on hand to meet margin calls, but Harvard had next to none. That was because these supremely self-confident money managers were more than fully invested. As of June 30 they had, thanks to the fancy derivatives, a 105% long position in risky assets. The effect is akin to putting every last dollar of your portfolio to work and then borrowing another 5% to buy more stocks.

Desperate for cash, Harvard Management went to outside money managers begging for a return of money it had expected to keep parked away for a long time. . . And now, in the last phase of the cash-raising panic, the university is borrowing money, much like a homeowner who takes out a second mortgage in order to pay off credit card bills. . .

Harvard has oversize positions in emerging market stocks and private equity partnerships, both disaster areas in the past eight months. . .

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