

Goldman’s Mutual Friend - robg
http://opinionator.blogs.nytimes.com/2011/01/04/friends-with-benefits/?hp

======
yummyfajitas
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.

~~~
patrickgzill
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.

~~~
ShabbyDoo
"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?

~~~
patrickgzill
I believe the best known of the ones that failed was called "Abacus" - there
is a lot of documentation publicly available.

From my viewpoint, representing an investment aas having a particular rating
from Moody's or S&P would indicate that they told their clients the
investments had a certain ratio of risk/reward.

Common stocks have no ratings from Moody's or S&P; these are interest-bearing
investments that supposedly have a certain rate of return per year; though
unlike CD's they do not have a fixed lifetime as mortgagees can repay a
mortgage early, or refinance, without penalty.

~~~
ShabbyDoo
I wasn't so concerned with the specific nature of the investment vehicle in
question as it seemed the complaint about GS was simply that they had sold to
a client a product which they implicitly had deemed a poor choice.

~~~
patrickgzill
Not being a securities lawyer I don't have a 100% accurate answer for you;
however I would say there is a difference between common stocks which have no
performance guarantees and bonds/warrants/etc which do have guarantees (with
risk/reward taken into consideration of course).

------
jackfoxy
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.)

~~~
jerf
"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.

~~~
jbooth
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".

------
kragen
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.

------
shawnee_
_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.

------
maxklein
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.

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Zak
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".

~~~
jbooth
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?

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beoba
"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.

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IgorPartola
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?

~~~
wmeredith
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.

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

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

------
waterlesscloud
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?

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wccrawford
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_
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.

------
chailatte
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.

