March 08, 2007

Ah-Choooo! Goldman, Merrill Almost `Junk,' Their Own Traders Say

Goldman, Merrill and Morgan Stanley.

Now if ANY those three had ANY kind of trouble, the impact on the world markets would be devastating.

Yes, even celebrities can catch AIDS and die. Which is what the Subprime Contagion is to the banks and investment houses these days.

Goldman, Merrill Almost `Junk,' Their Own Traders Say March 2

(Bloomberg) -- Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.

Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk.

Traders of credit derivatives are more alarmed than stock and bond investors that a slowdown in housing and the global equity market rout have hurt the firms. Merrill since 2005 has financed two mortgage lenders that subsequently failed and bought a third, First Franklin Financial Corp., for $1.3 billion.

``These guys have made a lot of money securitizing mortgages over the years in a mortgage boom time,'' said Richard Hofmann, an analyst at bond research firm CreditSights Inc. in New York. ``The question now is what is the exposure to credit risk and what are the potential revenue headwinds if they're not able to keep that securitization machine humming along.''

``There's been a little bit of a reappraisal of the financial sector, with a strong desire to get away from subprime exposure,'' said Scott MacDonald, director of research at Aladdin Capital Management LLC in Stamford, Connecticut, which manages $16.5 billion in assets.

Merrill equity analysts two days ago cut their recommendations on Goldman, Lehman and Bear Stearns shares as well as that of European banks Deutsche Bank and Credit Suisse Group to ``neutral'' from ``buy'' because they said earnings will probably decline next month as investors become wary.

Bear Stearns's stake in non-investment grade retained mortgage securities, or what its keeps from packaging loans into bonds, represents about 13 percent of the firm's ``tangible'' equity, according to CreditSights.
For Lehman, it's 11 percent. Goldman, Morgan Stanley and Merrill don't disclose how much of their total retained securities are rated below investment grade, or junk. Overall, their exposure is in ``the low- to mid-teens,'' CreditSights said.

Disclosures are kind of lacking,'' Hofmann at CreditSights said in an interview. ``They don't tend to break out the subprime piece of their retained interest.''


Anonymous said...

Keith, ever hear of the PPT? Ever hear the phrase "too big to fail"? Hank Paulson isn't at the Treasury because of his intelligence or good looks, he is there to kiss some Chinese a$$ and pump up the markets. This isn't Kansas anymore.

Jambu said...

Amazing that you MENSA member HPers can figure it all out but all those dumb Wall St fools can't.

MER is up 2% today. GS is up 2.3% Wonder why?

Could it be that they actually know something about investing since they like uhm you know do it for a living and stuff? I mean come on. They don't come to your place of business and criticize your latte making skills, I think you should show the same respect back to them.

How's that gold and silver you all bought last week for $690 doing these days?

Nic C said...

Anybody know what happened to Casey Serin? His website has been down all day.

I'd hate to have that trainwreck of a website go away. It is so painful to read about his delusions you almost get addicted to it.

Anonymous said...


BUT who has the keys to the Treasury? Could it be the former head of Goldman?

Anonymous said...

Credit Crunch + Cantarel = Crisis Grande, Hombre.

Anonymous said...


Seriously, you need a good, long vacation. I can't figure out why you still get up in the morning.

You must be taking some serious amounts of Prozac.

Hudson Valley, NY said...

Mid Hudson Valley, NY
still in 'Denial' stage...
I cant wait for the spring flood of For Sale signs.
House prices in this area still need to drop about 50% for the average person to afford one.

BTW.. i am not a renter, and have been following this market very closely since 1997...

Anonymous said...

Scary Stuff Indeed! I don't think the plunge protection team can fix this. I am far from a financial guru but saw this train coming and positioned for it. I hope!

Everybody in housing bubble blog-land knew this was going to end badly. The big guys didn’t! Is greed so blind that the smartest money managers on the planet don’t have a clue?

Perhaps the conspiracy guys are right! Maybe this is an intentional sinking of the ship to merge our economies into a North American Union. We gotta meet Mexico half way to make the Amero possible..

Butch said...

So, who are you going to believe, the guys who actually have to pay up in the event Goldman or Merrill default, or the Moody's, who give these "Too Big Too Fail" bank a much higher credit rating?

For my money, I'll stick with the opinion of the people with the money at risk, NOT the rating agencies, who are PAID to give their clients a favorable credit score.

This news speaks volumes about what is going on behind the scenes at the heart of the money center banks.

Pay attention folks. Pay strict attention.

Batman said...

Yep, when somebody is calling Gold-men Sacks junk, there must be a shit-storm brewing.

Just sold half my portfolio to cash.

Lash yourselves to the mast folks, those clouds look awfully dark up there...

wall st huckster said...

Amazing how the MENSA Wall St members couldn't figure out there was a dotcom bubble until the NASDAQ dropped 75%

you stupid homedebtor said...

Amazing how the MENSA Wall Streeters couldn't figure out that giving $500K loans to felons, homeless, drug addicts, dead people, bums, drunks and other homedebtors wasn't a good idea. I'm glad they tightened the bankruptcy laws so the FB's will be really screwed for their stupidity in buying an overpriced asset that is falling in value and will cost a ton to maintain

Anonymous said...

Now that's some scarey ass shi&

Anonymous said...

Yet all those dumb Wall St folks are laughing all the way to the bank with their $5M bonus.

What was your year end bonus a sa Starbucks barrista HPers?

Anonymous said...

LMAO Wall Street banks got suckered by a bunch of dirtbag grifters like Casey Serin and lost hundreds of billions of $$$$$ HAHAHAHAHA

Anonymous said...

I am missing a critical distinction in the original
story - are the bonds that
have become junk the
corporate bonds of GS/MER OR are they the mortgage backed securities which have been packaged and sold by GS/MER - I suspect that the MBS stuff may be isolated from GS/MER in the sense that they are not responsible to pay of defaults - they will not be hurt by their MBS stuff unless they hold some of it in their own portfolios. They tend to be smart that way.

Westchester Chick said...

It would be really cool if some of those guys got a dose of reality. I work in the same complex as a Morgan Stanley office - maybe if there were less of those smug pricks compensating for their you-know-what size with their status symbol cars I could actually get a parking spot in the morning. Okay - I know they're not all bad -- but some of these guys are pretty fxxxin' arrogant and then they go and spawn and have all these little arrogant Juicy-clad kids

Batman said...

Actually, the MENSA guys probably all got out before the last crash so, yeah, they are smart. It's the morons getting in now that get their asses handed to them.

Why can't people figure out that money doesn't come out of thin air? Either the Fed prints it (thus shrinking the value of the ones in your pocket), or it's some loser last-guy-in giving it to the MENSA guys like Bob Toll who cashed out last year.

Make fun of those crooks who gave the hot potato to John Q. Public as much as you want man, until they spend some hard time in stir, they're the ones laughing.

Anonymous said...

Traditionally, Morgan has been far more conservative than GS and MER. They should fare much better through this shakeout.

Budvar said...

"How's that gold and silver you all bought last week for $690 doing these days?"

I don't know about you, but the gold & silver I bought at $350 and $5 respectively are doing mighty fine thank you.
Also as the £1 against the $1 took a bit of a drubbing this week, the value of my PMs in £1s has actually gone up about 2.5% due to exchange rate fluctuations alone.