--Thursday is Steve Schwarzman's birthday. He claims he doesn't want to do anything big, just a few close friends over to the manse, and if it turns be mostly couples, perhaps they'll put some keys in a bowl, but nothing too crazy. He's also supposedly telling people "no gifts"; this is a trap. You know he's full of it and if you don't READ HIS MIND and tally ho on over to Brookstone and snatch up one of those fancy $200 ass-hair trimmers he's been eyeing for months (sources say Crab Hands was just relating the other day how he needs to 'deforest the Schwarzwald') and hand deliver it to l'office, along with the perfectly worded card, you'll be looking at the business end of a hissy fit.

--The Fox Business commercial. Remember? We found out that it only costs $250-$900 to buy a 30-second spot on FBN, depending on when it airs, and delineated tasks to the group. I repeat: You: Make a video and send it to us. We: Pick the best and our publisher will send it to Fox's ad sales team. They: Either a) air it, and earn you a piece of quasi-immortality along such leading FBN lights as Fat Boy Cavuto; or b) shitcan it, and we'll reprint a transcript and audio clip of how Fox, who would blow a goat for a few extra shekels, all of a sudden got all 'integrity' on us. I love the idea of sending the ValueStockTips guy, and it may very well come to that but seriously, show me what you can do.

-- Goldman Sachs is still firing people. So sayeth:

A friend and associate in equity derivatives got let go from GS this morning. He's on his way to Maiden Lane to get his severance package. The reason? "Re-organization"

The source said the last thing he saw was a few schmattas throwing the guy in a car with Eddie Dane, who told him, "Everyone's so goddamn smart. Well, we'll go to Maiden Lane. And we'll see who's smart."

Bear Stearns has more than $1 billion of short positions on subprime, up $400 million from the end of November, Bloomberg reports. Of course, since Bear Stearns got the subprime trade so wildly wrong last year, people are already wondering if this might be a signal that it is time to go long subrime.

Over at The Big Picture, Barry Ritzholz writes, “While I do not expect us to be done with the subprime slime yet, I do get a ‘Is this a bottom indicator?’ sense from Bear on this.”

JPMorgan Chase, which emerged relatively unscathed from the credit market debacle, is apparently taking the opposite position. Yesterday Jamie Dimon was reported to have said that the bank plans to expand its role in the subprime mortgage business. Goldman is also rumored to have reversed it’s position on subprime, taking a net long position.

Bear Stearns Is `Short' Subprime Mortgages $1 Billion [Bloomberg]

Unusual perks: Goldman Sachs covers sex changes [Fortune]

Goldman Sachs’ latest hedge fund, which was the largest launch in the history of the industry, had a rough first month. The fund is down 6% for January, according to a source familiar with the results.

Goldman Sachs Investment Partners fund recently raised $7 billion, according to a report in the Financial Times. The figure was substantially lower than the rumored $10 billion that had been whispered about in December but higher than the target of between $4 billion and $6 billion. Unlike Goldman’s quant driven offerings, GSIP is a stock-picking hedge fund—the first of its kind at Goldman. It is run by former global proprietary trading chief Raanan Agus and former U.S. prop trading head Kenneth Eberts.

January was reportedly a rough month for many hedge funds of all variety of investment strategies.

We totally forgot to ask Goldman Sachs about this when we were badgering them about the now debunked layoff rumors earlier today.

We’ve gotten to the bottom of the rumors we were following up on this morning about the rumored layoffs at Goldman Sachs. It turns out our skepticism was justified. There have not been across the board cuts at Goldman, and certainly not the type of layoffs we’ve seen at places like Citigroup and Bank of America.

But people are weeping into their keyboards, and a spat of “this is my last day at the firm” emails have been flying through 85 Broad Street today. This is the result of Goldman’s recently completed annual review process in which the people who come out in the bottom 5% are given a stern talking to and often leave the firm. Those in the dead pool have just been given notice—thus the resulting heartbreak, tears, rage and strangely dispassionate emails.

We hear the hideously unthinkable-- layoffs at Goldman-- are happening today. We have no other information*, other than that "the guy sitting next to me was crying." A Jew crying over money-- BFD (follow me into an ATM booth whenever if you'd like to watch this live). Until someone coughs up something interesting, we'll be watching Jiminy Glick clips (February is Jiminy Glick Month). We will begin with the following:

So who is on this list of 14 companies under investigation by the FBI for their involvement in the subprime mortgage crisis? The FBI apparently intends to keep us in suspense because they won’t give details. All we know is that they are looking into “allegations of fraud at various stages of the mortgage process, from companies that bundled the loans into securities to the banks that ended up holding them.”

So let’s recklessly speculate. Two companies that are sure to be on the list are Bear Stearns—which is already under investigation by federal prosecutors and the SEC—and Countrywide, which is both the biggest home loan lender and also facing an SEC inquiry. Goldman Sachs is very likely on the list. It was accused on the pages of the Sunday New York Times of misleading clients by packaging CDOs while shorting the mortgage market. We know that at least one Senator read the article and has been making a stink, and we know that federal investigators often get their leads by reading the paper. What’s more, Goldman Sachs has said that it is cooperating with an unnamed government agency.

Morgan Stanley has also admitted to cooperating with unnamed government authorities. At first, everyone assumed this was the SEC. But why wouldn’t they come out and say that? More likely they declined to name the agency out of fear that saying they were cooperating with the FBI would tar them with serious criminality—rather than the everyday Wall Street shenanigans implied by an SEC investigation.

So that gives us four good leads. Who else is a cylon on the list? No doubt some additional mortgage companies and some home builders. Maybe the ratings agencies are also. Leave your guesses in the comments section below.

FBI Launches Subprime Probe [Wall Street Journal]

According to John Mack’s assistant (I kid, of course, though the tip was anonymous so it’s a fifty-fifty chance it could’ve come from her), Morgan Stanley’s population restructuring project will affect “more than just [the rumored] 1,000 brokers,” with cuts occurring in all departments but most heavily in IBD, and impacting 10-15% of total employees. But layoffs, these things happen all the time, and I don’t want to say I’m not beside myself with this news, but I’m not losing any sleep over it. Know what I am losing sleep over? Know what’s seriously cutting into my mid-morning nap schedule? Weighing on my mind? Distracting me from my Mark Haines fantasies? Infringing on my ability to stare off into space? This news (smut, rather) about Goldman Sachs—GOLDMAN SACHS—being forced into this pedestrian layoffs business. Cutting one person—VP, associate, analyst, trader, CEO, secretary, janitor—from Goldman Sachs is too many; according to Reuters, GS will be cutting a whopping 5 percent of its global workforce. I would like to know where the hell God, Goldman Sach’s co-pilot, is during all of this. What he could possibly be doing that’s more important than protecting his children. The only plausible explanation that I can come up with is that he was busy ghost writing this. If that happens to be the case, cool. It was worth it and “Who knows how many men unwittingly dropped their pants under the government's watchful eye”? That was inspired my friend. Otherwise, we have a problem.

Wall Street, even Goldman, faces '08 slowdown [Reuters]
What Happens in Men's Room, Stays in Men's Room [Bloomberg]

Now hear this Alan Schwartz. John Thain knows how to play this game, he studied at school of GSBS and he's got a Ph.D. Merrill Lynch is taking a $15 billion write down. You see that, that's called covering your ass. Analysts expected a $12 bn write down, but Thain said "No No" you have not lowered your expectations enough. So now he only has to live up to his newly self-lowered expectations Alan. Get that, UPOD. U "Under" "P" Promise "O" Over "D" Deliver. Do what Johny Thain does. Don't be a hero. Take the write downs now.

--Everett Stuckey, DealBreaker's advisor to newly minted CEOs.

Goldman Sachs's FLAGSHIP fund--i.e. the central showcase for the unbridled abnormal genius that is Goldman Sachs Asset Management-- Global Alpha, lost more money last year than almost any other major hedge fund, according to Financial News. Maybe it's a sign that I need to leave my job (or just get out more), but the fact that this highly prestigious investment bank has in its possession a hedge fund as shitty as GA, which started 2007 with $10 billion and posted a loss of 39 percent is endlessly amusing to me. ThinkEquity Global Alpha down almost 40%? Not that funny. Goldman Global Alpha down almost 40%? Hysterical. But then again, these are the same jokesters who brought you Global Equity Partners (worst performing global equity manager in the third quarter of last year, down 2.8 percent; not sure how badly they lost it in Q4, perhaps you do) and Global Equity Opportunities (don't make me look it up), so hilarity was bound to ensue.

Anyway. I think we all know what time it is:

We like to think our time working for this e-rag has given us, if not company-supplied dental insurance, a strong stomach, able to withstand the most hideous, funky tasting spunk of news. But this truly makes us want to gag: Goldman employees getting shit bonuses. Makes you want to gag, too, doesn’t it? According the Post cost center employees at the Broad, expecting to receive 75 percent of their salary as bonus this year, got fifteen. On a day when I woke up specifically wondering if I should get out of bed or not, and more generally asking, what the hell am I doing with my life, this is not the kind of news I want to hear. When you can’t count on the lowest of Goldman Sachs workers—IT, back office, etc.—to at least be compensated on par with the senior executives at, I don’t know, Bear Stearns, what can you count on? Nothing. If I were born with normal functioning tear ducts, I’d probably be shedding a few right about now (rest assured that there’s an almost embarrassing amount of wet ones rolling down Carney’s face).

Goldman Sack-Cloth Bonuses [NYP]

Unfortunately for the Yankees' obsessed boys at 85 Broad, it does not look like the Bronx Bombers will be playing in the “Goldman Sachs Stadium” anytime soon

Sorry to inform our loyal Goldman Sachs readers, but despite the impending opening of a new stadium for our beloved Yankees, the Yankee’s chief operating officer, Lonn Trost, is quoted as saying that the team “[will not] change the name of Yankee Stadium.” Perhaps George Steinbrenner, in his dementia-like state, failed to realize that Citi Group paid $800 million for the naming rights of the Mets Stadium. A price tag like that would certainly come in handy when in 2007 you pay Roger Clemens $1 million per game.

The naming rights, however, for the new Giants/Jets stadium is up for sale. The privilege for the naming of the stadium could easily top $1 billion. A mere drop in the bucket for Goldman. My intuition senses “Goldman Sachs Football Stadium”?

--Davey Bachs, DealBreaker Intern

How the Business of Corporate Naming Rights is Changing [Fox Business]

Remember the Craigslist guy from Monday? The one who made exactly $772,000 and was spending Christmas alone. The guy who sounded a bit too American Psycho-ish with his detailed description of his furniture and appliances? Mentioning "custom made oak dresser" and his "viking stove." This one?

Well, guess what? You were right. It's a fake. But it was so brilliantly faked that the author got dozens of responses from women interested in spending the holidays beneath his fifteen foot tall Christmas tree and other outsized objects he mentioned. The author, who writes at a blog called Cajun Boy In the City, has experimented with fake Craigslist in the past but seldom gets responses from women. Until now. Apparently, even bitter, self-centered materialistic guys can get teh attention with women as long as they're hitting the right numbers and work for Goldman Sachs.

So now we're going to send Bess out on a date with the Cajun Boy, as long as he agrees to spend the evening in character.

my holiday gift to you: "fancy being lavished during the holidays?" [Cajun Boy In The City]

I've got some things to tend to and will be gone for the remainder of the morning, meaning I'm going to miss Goldman Sachs's earnings announcement. You know how this pains me. I'll be back eventually this afternoon, but it won't be the same, so I'm going to put in my two cents now. Personally, I don't even think Carney will need to add anything to this even after the numbers are out, but that's his prerogative.

In spite of atrocious performances from Global Alpha and GEO, which perhaps might be indicators of Goldman's inability to do anything but suck ass when it comes to hedge funds, the firm's latest HF venture is starting out with a record-setting $10 billion, of which it is expected to lose at least 40 percent, taking redemptions and unforseen weather patterns into account, by the end of '08. According to Bloomberg, GSIP, run by Raanan Agus and Kenneth Eberts, is (wisely) treading on the Goldman name and standard of excellence, as if to say, "Hey look, we're not so bad," past performances of existing hedge funds presumably not being taken into account, though you never know (could be good for demonstrating that GS is human and capable of failure. So, so, so much failure.) The best part is that GSIP has actually calculated-- calculated-- that if the current fund, in an imaginary world where time travel existed, had been around since the beginning of '04, it would have returned 18 percent each year through August 2007, beating the S&P 500's 10 percent average. Keep in mind this is all just hearsay and speculation, and that it's entirely possible that the same fund, had it existed since the beginning of '04, could have just as easily returned 79 percent each of those years.

Anyway. I think we all know what time it is:

The Brooklyn bloggers are up in arms after news leaked out on The Brownstoner, a popular blog about Brooklyn real estate, that a Goldman Sachs executive had purchased a brownstone on Joralemon Street in Brooklyn Heights. The Brownstoner went on to report that a broker had said that several Goldman Sachs bankers were looking in the neighborhood and that he knew of two other Goldmanite purchases in the area. We noticed the report this morning when it was picked up by Bloomberg.

Brooklyn Heights has long been popular with those who work in lower Manhattan. Access to several subway lines and the proximity to the Brooklyn Bridge make the commute to Manhattan quick and easy. Former Wall Street Journal editorial page editor long kept a house in Brooklyn Heights. Due to the work of preservationist icon and famed litigator Otis Pearsall,* much of the historic character of the neighborhood known as “America’s first suburb” has been retained. And it’s started to undergo something of a foodie renaissance, with restaurants like Noodle Pudding and Jack the Horse Tavern attracting crowds. CNBC’s Erin Burnett has said that her favorite restaurant in New York is Henry’s End, which sits on Henry Street in the Heights.

But a neighborhood revival is one thing. Three Goldman Sachs bankers moving in is another. The commenters on the blog ranged from those who adopted the pose of old money outraged that brash bankers might undo the genteel nature of their neighborhood to Park Slope socialists worried that yet another people’s republic—seriously, have you people ever been to the Food Co-op there?—might fall to the forces of capitalism next. And, of course, there were more than a few hipster types worried that their borough was losing it’s “special” status.

“Gentrified Brooklyn has gone from this alternative, creative-vibed place into a second-rate bourgeois social/money-climbing environment. Kiss Brooklyn's 'specialness' goodbye. It's worse than what it was alternative too,” one wrote.

All we can say is that it’s a good thing these people don’t know that one third of the permanent DealBreaker staff moved to Brooklyn Heights last March. They’d probably be marching in the streets.

*Full disclosure: Otis Pearsall is related to John Carney.

Next Goldman M&A Target: Brooklyn Heights? [Brownstoner]

You might think you know me but you have no idea. Though it may seem as though I have a heart of stone and soul as black as night, I am a person with feelings who (occasionally) cares when I've hurt others. After my post on Goldman Sachs only having one bathroom, a few 85 Broad employees e-mailed me to express their disappointment in my commentary, and the pain it caused them. (Perhaps later, if you're good, I'll post the messages.) I can offer apologies 'til I'm blue in the face but when it comes down to it, actions speak louder than words. So I offer the offended parties, who were the subject of my ridicule just one hour ago, this olive branch. It is the greatest gift I have to give. The fact that the lips don't match up to the audio track is just an added bonus.

There's a very important story in today's Wall Street Journal. You can tell it's important by how long and boring it is. So long and boring that you might've a. only read the first paragraph b. just skimmed it for key words and phrases or c. said "No! I'm god damn sick and tired of these motherfucking "How Goldman Sachs won when EVERYONE ELSE LOST" articles! I can't do it! I won't do it!" and not read a single word, choosing instead to settle for a nice relaxing spliff, though, realistically, that reaction probably could've only come from one person, and is sort of beside the point, because he no longer allows copies of the Journal within 1,000 feet of him anyway. Normally we don't pass judgment on your chosen paths/reading material (or lackthereof), but these are extenuating circumstances, and we would be remiss not to tell you that those choosing a, b, or c this morning made terrible, horrible mistakes. Because buried way down the page, after the part about Goldman's "penchant for rolling the dice with its own money," the "home run blasted from...the structured-products trading group's Scotty Pippin and MJ AKA Michael Swenson and Josh Birnbaum," ABX, VaR, jumping rope and lifting weights, broken promises to a wife and two children, and an obligatory Nick Leeson shout-out, contains a deep dark secret. A secret that's sure to make the day for many of you who like to see nothing more than Snarf and his friends fail, because it more or less gives confirmation that in 2008, the team that made GS a large pile of money, is going to shit the bed.

We do. That’s because a. We spent the last four hours with our ear pressed up against a juice glass pressed up against the door of said office (acting natural every time someone walked by) and they stuck with us since we were escorted out of the building circa 2:30 and b. we are quite good at sensing human suffering (picking up on some right now, actually). There’s no point in dancing around the fact that the cries are Lloyd Blankfein’s and the inconsolable disappointment behind them has to do with today’s report that the Little Fella is set to receive $70 million in compensation this year, up 30 percent from last year’s $54. But down, by some percentage too painful to calculate, from last month’s $75 million as predicted by the New York Post. Sources close to the matter say that even the thought of seeing Stan O’Neal in the elevator of their Park and 81st apartment building, clutching an unemployment check for dear life failed to make LB feel any better because “he’ll look at me and I’ll know what he’ll be thinking: ’70 mill? Ouch.’ No, I can’t face it. I’ll take the stairs.” During this time of unmitigated sadness, I think you all know the question you need to ask yourselves:

William Mills, chief executive of Citigroup’s markets and banking division in Europe said at a hearing of the Treasury Committee in the U.K. Parliament today that big C’s losses “greatly exceeded…profits in the [subprime] field over the last several years.” Mills, who is known to go where no one else will, added that the firm has suffered “reputational damage” above and beyond an incident last month involving Vikram Pandi showing up to an important meeting wearing a t-shirt proclaiming, “I fuck on the first date,” without irony.

Gerald Corrigan, managing director in the more or less irrelevant role of risk management at Goldman Sachs told the same audience that GS performed better than Citi this year. “On balance, we probably made money.” To his credit, he delivered this line completely monotoned and without an expectation of laughter or gasps from the crowd.

Citi Subprime Losses `Greatly Exceeded' Profits, Mills Says [Bloomberg]

We thought that our wrap-up of the reaction to Ben Stein’s piece might finally put our day-long obsession with his Goldman Conspiracy Theory Essay to rest. But then Stein himself decided to lash out against one of his opponents.

The news comes from our friends at New York magazine’s Daily Intel, who actually got a hold of Stein and asked him about the reaction.

"It is hardly to be expected that I could question an institution as powerful as Goldman Sachs and not get some response," Stein told Daily Intel. "As to Paul Krugman, I don't like to deal with people so full of hate. His recent piece on [Milton] Friedman [in the New York Review of Books] was so thoroughly debunked by Anna Schwartz that I would well imagine he's not happy."

Of course, this is a slimy—if tactically smart—move. No doubt Stein is particularly hurt that another New York Times writer with economic credentials bashed his essay. (Isn’t there some policy that says they aren’t supposed to openly mock each other? We’d always assumed that there must be. How else do you explain the lack of open mockery of Maureen Dowd in the pages of the Times?) But going after Krugman is slimy-smart because a lot of Stein's detractors are also not the biggest fans of the Krug. It even makes us uncomfortable to find ourselves agreeing with him. And reminding everyone that Krugman is a Friedman-basher and, more broadly speaking, an Keynesian enemy of free-markets is rhetorical hardball.

But it’s probably a misstep for Stein to imply that his column was criticized because he questioned “an institution as powerful as Goldman Sachs.” Take a look at that long list of critics from our earlier post. Not a one of them is routinely a defender of Goldman or of institutional power in general. In fact, pretty much every single one of the critics we quotes is far better known for biting at the ankles of our financial titans. This just makes Stein looks sadly defensive.

Ben Stein Thinks Paul Krugman Probably Just Has Low Self-Esteem [Daily Intel]

We’re not the only ones who have called out Ben Stein for yesterday’s column. It’s getting roundly trounced by most commentators. Here’s a quick round-up of some of the comments we’ve come across today.

• Roger Ehrenberg thinks the main sin of Goldman economist Jan Hatzius did was dissenting from Stein’s rosy view of our economic prospects. “Just because his paper doesn't comport with Mr. Stein's view of the world doesn't make it wrong or its methodology flawed - it's just that Mr. Stein doesn't like it,” Ehrenberg writes.

• Athenian Abroad says that Stein doesn’t seem to understand the difference between capital requirements and reserve requirements. “Hatzius's paper describes the impact of the sub-prime crisis on bank lending via the hit to banks' capital. Stein dismisses this, because the Fed can create reserves, and because Stein doesn't know that these are completely different things,” the Athenian writes.

• Naked Capitalism goes back an re-reads that Alan Sloan piece Stein refers to and discovers that the New York Times columnist totally misread it and seems to have confused events of 2006 with those of 2007.

• Stein’s even getting it from his fellow denizens of the New York Times. “Maybe I don’t have what it takes to be a serious columnist. I mean, it would never have occurred to me to suggest that the only way to explain an economic forecast I don’t agree with is to say that it must be part of an evil plot to drive down the market, so that Goldman Sachs can make money off its short position — and to suggest that Goldman should be the subject of a federal investigation,” Paul Krugman says.

• Leftist economist Dean Baker won’t even support the Goldman bashing. “Stein gives no reason whatsoever to doubt that Hatzius wrote a serious analysis of the current state of the U.S. economy,” he writes.

• Dan Altman turns Stein’s conspiracy theory around. “You could also ask whether Stein, a friend of the Bush family and sometime cohort of the president, is just trying to prop up the economy to help his old pal,” he writes.

• Surveying the scene—the Stein piece, the reaction to it (we cribbed a couple of these links from his earlier post)—Portfolio’s Market Mover Felix Salmon finds himself depressed. “It's not illegal – in this country – for Stein to make such allegations. But it is quite shocking, and depressing, that the Gray Lady would willingly allow herself to be used as a vehicle for this kind of yellow journalism – and would place it on the front page of its business section, no less,” he writes.

• Even Fake Ben Bernanke takes a shot: “Stein goes on to say in reference to Goldman ‘It is far worse when the sellers were, in effect, simultaneously shorting the stuff they were selling, or making similar bets.’ Of course, Stein innocently points out that he’s simultaneously a shareholder in the company he’s criticizing. Why not have it both ways?”

• Oh, and because of the wonders of the internet, we have already heard from Henry Blodget, whose crooked stock analysis was cited by Stein in the column. “The real lesson here is that Wall Street analysts can't win: No matter what they say, it is easy to suggest that their conclusions might be motivated by something other than the facts. This is fair (who knows what truths lurk in the hearts of men?), but let's at least note that Wall Street shares this conflicted condition with many other industries,” Blodget writes.

So far, Stein’s only defenders seems to be our pals Charlie Gasparino, who has been appearing on CNBC to balance what has been a brutally critical reaction by most of the networks anchors and guests, and Wall Strip founder Howard Lindzon. Over on his blog, Lindzon writes that “Goldman is the world’s largest bookie that fixes games and legally sells you shit while they are dumping it out the back door.”

While we're on the topic, we might as well mention that Ben Stein also seems to have an inflated view of the role of economists at investment banks, and perhaps in the world. Most traders and brokers we know tend to regard their economists as irrelevant at best and hazardous at worst. They are used to economists taking positions that are unhelpful to their book or to their sales efforts. But they don’t mind that much because they don’t think many people listen to—much less follow the advice of—their economists.

“These guys are talking heads for us. Part of brand promotion on a grand scale. They might as well work for the PR department. They get the firm’s name out there but, internally, no one really trades on what they say,” one equity trader with over twelve years experience tell us.

We’re kind of having a Ben Stein afternoon here at DealBreaker. We can’t seem to put his Sunday column down.

Earlier today we noted how his Sunday column rested on the nonsensical position that there was something unethical about shorting mortgage indexes while selling collateralized mortgage products. But the thing that seems to be getting the most attention around town is Stein’s sleazy smear against one of Goldman Sachs' leading economic analysts, Jan Hatzius. We want to talk about this but we can't even get straight what it is Stein is accusing Hatzuis of doing. (And we suspect Stein can't get it straight either.)

On the one hand, Stein points out that Goldman Sachs apparently sold collateralized mortgage products but—don’t try to follow this too closely or you’ll wind up stupider for having tried to think like Stein—one of it’s chief economists has said that the credit crunch may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a recession.

“Doesn’t this bear some slight resemblance to Merrill selling tech stocks during the bubble while its analyst Henry Blodget was reportedly telling his friends what garbage they were?” Stein asks.

On the other hand, Ben Stein makes the opposite point: that Goldman’s chief economist is attempting to talk up a recession to help Goldman’s short positions.

“Here is my humble hypothesis, even after talking to Goldman: Is it possible that Dr. Hatzius’s paper was a device to help along the goal of success at bearish trades in this sector and in the market generally?” Stein asks. “His firm says his paper, like all of its economists’ work, was not written to support any larger short-trading strategy. But economists, like accountants, are artists. They have a tendency to paint what their patrons, who pay them, want to see.”

Goldman can’t win with Stein. If the sell credit products while shorting them he accuses them of being new-age stock pumpers. If they publish reports predicting dire consequences for the economy, he accuses them of creating fear to bolster their short positions.

Our humble hypothesis is that Stein has no idea what he’s saying. He can’t decide whether Goldman’s sin was selling products it doesn’t believe in or promoting a view of the credit markets it does believe in. His main column is a mess of innuendo and half thought out positions, mixed is misplaced populist bravado. It’s like he packed every nasty thing he could think of—without bother to actually think thought any of them—and then let them pour onto the pages of the New York Times, like so many clowns falling out of a tiny car.

Earlier on DealBreaker: Ben Stein's Crazed Attack On Goldman and Ben Stein's One Good Point.

It’s been quite a while since we spent so much time thinking about Ben Stein. And when we say we’re thinking about Ben Stein we mean, as is so often the case, laughing about Ben Stein. His “Everybody’s Business” column is so consistently—we almost want to say insistently—muddled that we sometimes find it hard to even comment on it. There’s no reply to his arguments because, well, there are so few actual arguments in his arguments.

Yesterday’s column on the perfidy of Goldman Sachs selling collateral mortgage products while shorting the mortgage market is a masterpiece of the style of Stein. His major premise—which is apparently borrowed from a recent piece in Fortune by Allan Sloan*—is that there is something deeply unethical about “peddling” collateralized mortgage obligations while shorting this market through index sales.

The ethics of shorting a market while selling related financial products to those who are long that market reminds Stein of KGB ethics. We’re not going to pretend to understand this analogy. Instead, let’s get straight to the heart of the matter: Stein is criticizing Goldman for hedging its bets.

"Goldman Sachs:...it’s not the Vatican."

Lloyd Blankfein has been named the most powerful CEO on Wall Street. Bet you didn't see that one coming. OR THIS.

25 most powerful people in business [Fortune]
The Office Pessimists May Not Be Lovable, But Are Often Right [WSJ]

I bet you think you know what it’s like to be a Master of the Universe. I bet you think it looks like a great time. What could be bad, you might be asking yourself. No Writedowns. No layoffs. No CEOs with substance abuse problems. No constant wondering, “Which Lloyd are we going to get today, Lloyd Lloyd, or Stoned Lloyd, who can only think about chips and dip?” You're probably even wondering aloud to no one in particular but perhaps some 2-bit recruiter, where and how can I get some of that? Take it from a few Goldman Sachs employees, you do not want. Speaking to Deal Journal on the promise of anonymity and the assurance that their names wouldn’t follow “whiney little bitches” in print, the Goldmanites said that $16.9 billion in bonuses and the opportunity to buy Bear Stearns as a group doesn’t mean shit because they are in a prison of their own making.

…some bankers at Goldman have told us they secretly wouldn’t mind seeing a little air taken out of the stock as the end of the fiscal year draws near.

How could the ultimate symbols of the capitalist system harbor such perverse desires? Look at the way bonuses are doled out at Goldman and other Wall Street firms. An employee is told, for instance, that he is getting $100,000 of stock. That means the higher the stock price at the time, the fewer shares he’ll receive. The fewer the shares, the less the payout will be worth down the road.

Think about that next time you pity yourself for working at Merrill Lynch or Citi or Bear Stearns. Some Goldman employees are apparently so upset about GS being priced at $220.31 this morning that they’ve put their resumes to C. No, just fucking with you, but seriously—that’s how bad it's gotten there.

The Goldman Bonus Paradox [Deal Journal]

Goldman Sachs analyst William Tanona is now saying that Citigroup will have to write off not 8, not 11 but $15 billion over the next two quarters on its collateralized debt obligations. Our question is, why stop at 15, which seems almost believable. You could probably go up to thirty, thirty five, before anybody would say, “Wait just a second.” It’s almost as though Bill didn’t get our memo on how he could better do his job. Anyway. Tanona’s note also included a downgrade of C to “sell” from “neutral,” and this pearl of wisdom: “The lack of leadership at this point in Citigroup's storied history could not have come at a worse time."

Unfortunately, at this juncture, it doesn't seem as though anyone's jumping for the job. As it happens, we've got someone in mind for the position, but don't want to name him just yet, as the bid will probably be taken more seriously in a couple months, when it's become clear beyond a shadow of a 50 billion dollar writedown that no one else will do it. The two hints we'll offer is that the candidate's going to be looking for work circa January 2010, and was the last vestige of class in that fleabag hotel known as 85 Broad. If you're able to hazard a guess, are you with me? Are you behind me? It could happen.

Citigroup Gets 'Sell' Rating, May Face $15 Billion Hit [CNBC]

It allegedly won’t be announcing any multi-billion writedowns this quarter but Goldman Sachs’s Global Alpha is probably going to lose about $6 billion in assets this year and that’s got to count for something. The 60 percent decline (from an ’07 start of $10 billion) is the result of a confluence of factors including some trades that were meant to come off as ironic (investors asking for their $2billion and counting back apparently didn’t get the joke) and the weather. The good news is that no matter how much money the fund loses, pride in the face of mounting failure--GA lost 9 percent last year--will prevent it from being shuttered. ``Goldman as a firm would like not to have the reputation of shutting things down,'' Geoffrey Bobroff, an independent investment consultant told Bloomberg. ``Smaller isn't necessarily bad.'' Anyone have the letter Mark Carhart and Raymond Iwanowski sent to investors using this "Global Alpha voluntarily lost money because we decided it was getting too big too manage" logic? Send it here.

Goldman's Global Alpha May End 2007 With Assets Down $6 Billion [Bloomberg]

Goldman Sachs is really starting to frost my cookies and I don’t think it would be off base to say I’m not alone in this sentiment. Not content with merely getting through each quarter without taking multi-billion dollar writedowns and running the government, and keeping Lloyd Blankfein’s Oxy addiction out of the Journal, the bank (employees John Mallory and Gerry Cardinale, not representing the firm per se but nonetheless making everyone’s hands dirty) felt the need to broker a deal between mortal enemies Alex Rodriguez and Yankees management that would pay the disenfranchised third baseman at least $300 million if he breaks Barry Bond’s career home run record of 762 (and counting). No one is saying that the two parties shouldn’t have been reunited so that they might experience another pitiful season together, and Mr. Rod can wear stripes while he continues to never win a World Series ring, but why did Goldman Sachs (via employees who weren’t technically doing working at the time, but whose actions nevertheless reflected poorly on the firm) have to do it? We get it, you’re Goldman Sachs, you’re amazing, you’re wonderful, you can do no wrong and can’t help yourself but go out in the world and do right. Guy banks want to be you, girl banks (and gay banks) want to fuck you. You have nothing else to prove, and you’re only alienating people with this shit. Why don’t use do something really noteworthy, like hire a chief executive who has hair? Does Stan O'Neal fur? We hear he's available.

Also, I think you should look at this.

Yankees May Pay Rodriguez for Home Run Record [NYT]

Goldman Sachs is sticking to the story that it cooked up (by which I do not mean to imply that they’re lying) about not having any subprime-related writedowns on the horizon. The consistency of the statements coming out of 85 Broad almost makes it seem as though those guys are telling the truth about being better than everyone else by leaps and bounds (which is, admittedly, not necessarily a feat to write home about). You could say we’re easily swayed by the power of suggestion (or just not that great at valuing Level 3 assets*), but we’re starting to believe what we’re being told, over and over and over. You could also say we just don’t ever want to see that face (at left) again (because it reminds us too much of childhood). Seriously, though look how mad he is at you punks, who won’t stop asking him to fess up to a crime Goldman maybe never committed.

Regardless of the lies or not lies, no one has touched the biggest issue, which is the fact that Llloyd claims GS is maintaining its short position on subprime just one day after Stephen Schwarzman said Blackstone is “going long” on those mortgages. This is just like that time Jesus and Judas found themselves pitted against one another, except with much higher stakes. We’re not just talking about thirty pieces of silver anymore.

Goldman: No More Write-Downs [AP via Forbes]
Goldman Doesn't Plan Significant Mortgage Writedown [Bloomberg]

*which is just us being humble, you know we could nail this stuff with our eyes tied behind our back.

Goldman Sachs is set to pay Lloyd Blankfein $75 million in stock and cash this December, $20 million more than he took home last year. How groundbreaking. Seriously, a Goldman employee being paid a ton of money, while Bear Stearns tries to cover up the fact that last week it bounced 15,516 checks at the same time, is utterly revolutionary. Personally, even though he claims not to need our pity, we feel sorry for Blankfein. How boring must it be to come into the office every day, push some papers, twiddle some thumbs and know with the highest degree of certainty that you’re going to get a huge bonus, without fail? Wouldn’t it be more fun, or at least more exhilarating, to be constantly wondering, a) Forget about bonus—will today be the day I get fired? B) If I do get fired, how handsomely will I be rewarded for fucking up so badly? A lot or a little? C) Would it be bad if I laced this big bag of pot with some embalming fluid and smoked the whole thing over lunch? Or bad in a good way? That guy's masking his ennui and we know it.

Goldman CEO In Line For $75 Million Bonus [NYP]

Dark clouds are hanging over Boca Raton this week, where Wall Street’s leading trade group is staging its annual conference. The crowds seem smaller, and the mood is decidedly gloomy, according to Aaron Elstein of Crain’s. The only source of joy at the three-day conference is that at least it is taking place very far from the office.
In past years, the SIFMA conference has been a place for Wall Streeters to meet and greet, brag about big deals, compete for top spots as masters of the universe. This year’s conference has a totally different mood—nervous anticipation. And the question on everyone’s mind is which firm will take the next big earnings hit.

“Much speculation centers on Goldman Sachs, which is one of the few firms that hasn’t come out lately with a revised multi-billion-dollar write-down estimate,” Elstein writes. “Helping to feed those rumors, Edward Forst, the past year’s SIFMA chairman, abruptly canceled his appearance at the conference. The official reason was health reasons but Mr. Forst day job is as global co-head of Goldman’s investment management division, a post that may be keeping him plenty busy just now.”

Dark cloud hangs over Wall St. conference [Crain's New York]

Oh noes! South African breeding operations like Leigh Fletcher’s, which provide hundreds of lions each year for hunters like you and me to stalk and kill in an enclosed area for sport, are being shafted by both animal rights groups and the government, the god damn government. This matters because, in turn, you and I—people who love to slay giant cats that don’t have a fighting chance—are being shafted. Starting Feb. 1, a new law will require that lions roam free for TWO YEARS before they are hunted, so they can "adapt to the wild before they are killed, allowing for a fair chase," a new rule that kowtows to pressure from animal lovers who, so far as we can see, have a problem with canned hunting. Prices are going to skyrocket and some analysts are predicting that in a few short months, it may cost more than $35,000 for one measly catch. This means that I’ll only get to shoot one lion per year, and based on 2006’s bonus numbers, Goldman Sachs employees, on average, will be able to afford to kill less than eighteen. Unless of course they decide to pool their money and buy Bear Stearns, in which case that number falls to zero. Or skyrockets to 15,516, depending on how flexible you are about what kind of animal you want to hunt in a small enclosure with no chance of escape.

Hunting Lions Bred in Captivity May Soon Cost More Than $35,000 [Bloomberg]

As a bank of normal intellectual capacity, Goldman Sachs is sort of unfairly taking home the title of most profitable securities firm in the U.S., as result of having snuck into the Special Olympics of making money and smoking the competition. But whatevs, they did, and now they’ve set aside $16.9 billion to pay salaries, benefits and bonuses in the first nine months of 2007. Bloomberg points out that since Bear Stearns’s market cap is $14.7 billion, Goldman employees could buy Bear, and still have money left over for snacks. Yes, those catty Bloomberg bitches went there. But mudslinging aside, what would the Masters of the Universe do with the bank at 383 Madison, presuming they’re not too squeamish to enter a building so filthy that new employees are given information regarding how to treat everything from scabies to staph on their first days of work? Some ideas that have been floating around the GS bullpen include: (1) make Global Alpha Bear’s problem (at last a way to shuffle off that two-year embarrassment, and it’s not like BSC doesn’t have hedge fund expertise), (2) flood the building and create Wall Street’s largest corporate fish tank (added bonus: no need to pay severance to drown Bear employees), (3) make it one gigantic grow house (Cayne’s office already has a number of built-in heat lamps, so it wouldn’t be that difficult).

Goldman Pay Tops Bear Stearns's Slumping Market Value [Bloomberg]

They may routinely lose on the not blowing up hedge funds/passing drug tests/having a good reputation in general fronts but last night, Bear Stearns finally got to taste victory, when its stock price surpassed those of all its competitors on the Street, including Goldman’s. I mess, but that’d be pretty rich, wouldn’t it? The real story is that at the first annual Extell Wall Street Boxing Charity Championship, a benefit that raised money for a variety of causes ranging from prostate cancer to child abuse, Bear Stearns’s Josh “The Matrix” Weintraub, knocked out Goldman’s Shane “Second Coming” Kinahan in the first round. It’s almost paralyzingly shocking to find out that Godman doesn’t employ the best athletes on the Street but what can you do? Here's a video of Kinahan pumping up to lose. Thanks for stopping by.

Boxing: Wall Street style [Fortune]

When Goldman turned in it's third-quarter earnings and revealed the the credit-crunch was its friend, several eyebrows were raised by market watchers. How could Goldman have made the kind of money it claimed to have made by shorting subprime mortgages, more than person we spoke with asked.

Apparently, the same question is being asked over at the Securities and Exchange Commission. Writing in today's New York Post, John Crudele reports that the SEC is "curious" about whether Goldman's traders were tipped off by the firm's investment bankers, giving them an edge on the market. Interestingly, there seems to be some debate within the SEC about whether or not such tipping would constitute insider trading. We assume the crux of the matter is the technical legal question of whether the notoriously conflict-ridden Goldman could ever commit insider trading. If your clients already know you are on both sides of every trade, can you really be convicted of misappropriating from them?

We'd like to know a question Crudele doesn't ask: what kind of non-public information could have led Goldman to take on those winning positions?

SEC Eyes Goldman Sachs' Good Fortune [New York Post]

It’s late October, and that means it’s promotion time at Goldman Sachs. Every year, shortly before Halloween, the firm names new managing directors, and every other year it names the elite partnership managing directors.

Today Goldman set a new record, naming 299 spanking new managing directors. (Last year 263 were tapped.) Officially, the firm is “inviting” these employees to become MDs on December 1st, although we’ve never head of anyone declining the invitation.

Reflecting the fact that Goldman increasingly runs the entire world, and not just America, fifty-seven percent of the new managing directors work outside the U.S. Bloomberg reports that 30% of the class of 2007 Europe, the Middle East and Africa, 10% in Japan and 17% in the rest of Asia including China and India.

And it’s not just the number of managing directors that’s going up this year. The amount Goldman set aside for bonuses is going up too. “Chairman and CEO Lloyd Blankfein and Goldman set aside $16.9 billion to pay salaries, benefits and bonuses in the first nine months of the year, surpassing the record for all of last year,” Bloomberg notes.

The increased numbers—both in compensation and number of new MDs—reflects the fact that Goldman has broken away from the pack this year. As we noted yesterday, Goldman—which reported profits during the credit crunch as many banks took gigantic losses—is just about the only firm on Wall Street with a positive stock performance for the year.

Congratulations, lads and lasses. You are buying tonight, of course.

Goldman Sachs Announces New Managing Directors [Goldman Sachs press release]

Goldman Names 299 New Managing Directors, Most Ever [Bloomberg]

As we noted in Opening Bell this morning, another big buyout has gone the way of all mortal things. Today’s entry into the deal graveyard is the $8 billion Kohlberg Kravis Roberts and Goldman Sachs buyout of Harman International. According to most news stories on the deal, Goldman and KKR are forking over $400 million in exchange for convertible notes, Harman’s using the money for a stock buy-back, and everyone’s amicable, honky-dory, smiles and handshakes about the new deal.

But when we squint at the fine text, we’re not sure that Harman should be smiling so widely. According to the acquisition agreement, the company was due to collect a $225 million break-up fee if KKR and Goldman walked. So what’s seems to be happening is that they are selling $400 million of notes to the balking buyers for $175 million. Let’s call that a 57% discount. So Harman will now owe $400 million of principal to KKR and Goldman in exchange for just $175 million beyond what they were arguably already due according to the agreement.

But Goldman and KKR are getting more than just the notes. They are getting an option to buy the stock. Typically, a convertible note is linked to a share price that places the option currently out of the money. But if we follow through on the idea that Goldman and KKR are buying the notes at a discount, we can see that these are actually currently in the money. The $104 a share translates into 3.8 million shares for $400 million of notes. Those shares are now trading at $85, which means that the buyers have entitled themselves to $326 million of shares for just $175 million dollars.

To put it even differently, after the discount, the deal prices the shares at $59. We’re not sure that’s exactly the “vote of confidence” in Harmon that its executives are touting. Harman may now have an additional $175 million for a buyback but this seems a steep price to pay for that money.

Of course, if you figure that break-up fees are not sunk costs for dead deals because the buyers aren’t ever going to pay them anyway—a growing trend from private equity buyers, to be sure—then we guess it does sound like great deal for Harman. It’s probably just our short-sighted stinginess that makes us think in terms of additional, incremental dollars in the deal rather than the complete $400 million package.

KKR and GS Capital Partners to Invest in Harman International [Press release via Market Watch]

The news on Friday that a court had issued an order allowing Cheyne Finance, the London based SIV, shiv it’s creditors by ceasing payment on its commercial paper is, somehow, good news. At least, it’s good news for Goldman’s prime brokerage business, according to the Telegraph.

How’s that work? If it’s too early in the day for you to read about the sordid tales of Wall Street conflicts of interest, you may want to skip this item. Here’s how it starts: last month Goldman set up a private equity arm to invest in hedge funds, a move that is widely seen as a way of giving a boost to its already fabulously successful prime brokerage business. If the hedge fund investments earn great returns, they’ll make money. And if they don’t, the fund managers may be grateful enough for the new fund injections that they’ll give Goldman their prime brokerage business. And if that doesn’t work—if the fund managers don’t make Goldman the broker for their funds—well, Goldman can always threaten to send in a couple of redemption notices. They’ll get the message pretty quick.

It’s a standard Goldman move, the kind of thing that makes you slap your forehead in wonder that you hadn’t thought of such an obvious strategy yourself. If only you had a more devious mind.

Now hedge funds that had invested in Cheyne’s commercial paper are panicking at the SIV’s insolvency. And who is riding to their rescue? Well, that very same Goldman Sachs, of course.

Deloitte, which is administering Cheyne, has been holding talks with banks interested in rescuing the fund with new money. According to the Times, Deloitte is expected to narrow these rescue talks down to a single bidder within days. Goldman is widely thought to be the lead bidder, although the Royal Bank of Scotland is also said to be a contender. There’s also talk of a strong third bidder but we have no idea who that might be and the Telegraph isn’t naming them either.

This brings about the mind-boggling possibility that Goldman has invested in hedge funds that have invested in commercial paper issued by an entity which may soon be owned by Goldman Sachs. And you thought that KKR borrowing money from Citigroup to buy Citigroup loans to KKR was spinning things right round like a record baby, right round.

Goldman takes lead in race for Cheyne [Telegraph]

Update, 9:47 AM: It looks like even Goldman couldn’t get around to spinning things that fast. The latest word is that RBS is now in exclusive talks to buy the assets of Cheyne. “If the deal goes ahead, it will mark the first known sale of an SIV's entire book of assets, and would be an encouraging sign for other troubled SIVs that are trying to refinance or restructure their portfolios,” Market Watch notes.

RBS in exclusive talks on Cheyne SIV assets: sources [MarketWatch]

As if we didn’t live in a sick, fucked up enough city, where you can’t smoke in a bar, eat Trans fats or be rude to tourists, now people are saying that it’s no longer acceptable to mess with accounting so that actual losses plus paper gains equal a 79 percent increase in net income. Yes, the rules police has a problem with the fact that Goldman Sachs, because it is resourceful, was able to make (make money) money in the third quarter, when everyone else wrote down billions in losses, through trading profits that were unrealized and came from financial instruments whose value was determined by…Goldman. (“Goldman reaped huge gains within the level 3 pot in the third quarter. For example, it made a net gain of $2.94 billion from level 3 derivatives, financial instruments whose value is based on the value of underlying securities. And get this: $2.62 billion of that gain was unrealized.”)

A. What happened to Wall Street being a place that rewarded financial engineering and B. Incidentally, while walking home last evening I happened to pass Lloyd Blankfein outside his building, talking to a bunch of what I’m going to ballpark at ten years-old boys about what sounded like scooters. He was wearing a fleece vest, maybe an Old Navy Performance one, I don’t know. Let me ask you this—does that sound like the garb of a man who lie just to make a buck?

Questions arise about Goldman's blowout quarter [Fortune]

A bunch of people have all told us, “Word is Goldman has laid off about 250* in ABS, CDO, cash from jr-md level,” or something to that effect, this morning. Think it’s true? KNOW it’s true? Guess it’s true? They’re all pretty much the same to us. Don’t hesitate to call.

*And, according to one, "it's not going to be reported anywhere," because the first rule of being fired from Goldman Sachs is, you don't talk about being fired from Goldman Sachs (or Blankfein's bald spot, which is a sensitive topic).

Real estate blog Curbed recently sat down with an investor in the field to discuss whether or not Andre Balazs’ High Line-squatting Standard Hotel is symptomatic of a developmentification of Manhattan that’s turning the island into a place where only utterly lame (but sufficiently rich) people will live. A simple ‘yes’ would’ve sufficed, but the expert, perhaps going through some sort of personal problem or maybe having had the unfortunate pleasure of drinking at Joshua Tree last night, took it one step further.

Fuck it, I say. Manhattan is one big joke. I think they should let highrises go up anywhere at this point. What's the point of communities on the island anymore?

Everyone's so priced out, does it matter anymore?

If you want a neighborhood/community, move to Brooklyn.

Let Manhattan be just one big bullshit skyscraper. Tower of Motherfuckin' Babel. But for douchebags.

And the Lord spoke and said, "Let us make sure these douchebags do not understand each other, less they build a Tower of Douchieness. Let one douchebag not understand the other." And thus the languages of Goldman, Lehman, and Morgan were formed and the Lord saw it and it was good.

First of all, this tower already exists, and its name is Windsor Court (and on the UES, Dormandy). Second of all, and we’re just passing this along, analysts from Merrill Lynch and Bear Stearns would like to know, “Hey, why weren’t we included on that list?”

Investor Rant: 'Manhattan is One Big Joke' [Curbed]

And it seems to be, roughly:

- Don’t monumentally fuck up--> get a nice bonus.

- Screw things up beyond all of our wildest hopes and dreams--> don’t get a nice bonus.

Reuters reports that Bear Stearns’s nine-month compensation fell 6 percent to $3.10 billion ($199,730/employee). Payout for all of last year was $4.34 billion. Anyone who can correctly identify the event that may have imparted losses on BSC’s trading, financing and hedge fund businesses is in for a treat.

On the other side of James Cayne’s golf game: Morgan Stanley, which set aside $13.4 billion for the first 9 months, up 25 percent and set to match or exceed last year’s $14.4 billion ($280,000/employee) and Lehman Brothers, which set aside $7.33 billion for the first 9, up 14 percent and about $255,000 per employee.

Goldman, because John Carney predicted it would, is also set to increase bonuses ($565,000 per employee), though this would be the case even if Lloyd Blankfein’s top secret hair restoration project went over budget. GS said it reserved $16.9 billion in the first nine months, up 21 percent from last year’s period and already exceeding the $16.5 billion set aside for all of 2006.

Goldman 3rd quarter shows bonuses poised to rise [Reuters]

One of the stunning things that Goldman Sachs said yesterday was that they had offset losses arising from this summer's credit crunch by shorting mortgages. With hindsight that seems like such an obvious bet that you want to kick yourself for not thinking of it first. But one thing we've been trying to understand is what exactly Goldman means when it says it was "short mortgages" in the third quarter. What asset classes was it shorting?

We can think of a few obvious ways to short mortgages by going short assets that are correlated with the mortgage market. Short the common stock of mortgage companies. Short ABX. Buy protection on correlated bonds. But these are just guesses. We want to know more. How do you think Goldman minted the kind of money they say they did by "shorting mortgages?"

You already know the spiel about Global Alpha, but to recap:

- In an August to Remember, assets dropped an impressive 22.7 percent.

- The fund is currently valued at $6 billion, down a bit from last year’s valuation of $10 billion.

- In the first two weeks of September, GA fell 2.8 percent, bringing the year-to-date decline to 34.9 percent.

- The reason Global lost (and continues to lose?) so much money is because too many quant funds—in an effort to be as great as Goldman—emulated its strategy of losing enormous amounts of money, and crowded the playing field.

- Global Alpha will not be receiving a get out of jail free card, like Global Equity Opportunities did after it lost more than 30 percent in August. Possible reasons for GA getting the short end of the favoritism stick include the fact GEO, after being injected with $2 billion, fell 1.9 percent MTD, and ruined it for everyone; Goldman doesn’t love Global Alpha as much; and, most plausibly, the bank of Maurice Greenberg is just plain sick and tired of this shit—bail yourselves the fuck out of this one.

- Now that it’s seen what rock bottom looks like, Global Alpha “promises,” “vows,” and “swears” it will do better. “Better” doesn’t necessarily mean “good,” just “not as catastrophically bad.” (Goldman does not make promises it can’t keep.)

- The aforementioned improvement in performance will be accomplished in one of two ways: either Global Alpha will change its strategies so as to make money instead of lose it, or, and this sounds a lot less labor intensive, just “benefit from troubles that have driven other quant funds out of business.” (James Simons’s comment? “Suck it through my pocket protector, Goldman.")

- They’re not sorry. (And why should they be? According to Global Alpha, their disastrous approach "remains attractive." (Beauty really is in the eye of the beholder). The real question is, why have *you* apologized to *them*?)

Full letter from Mark Carhart and Ray Iwanowski, after the jump.

Is it even possible for an analyst to correctly estimate the earnings of a secretive investment bank like Goldman Sachs? If so, someone should tell the analysts how to do it.

Goldman blew them away again this morning. It not only beat expectations. It reported Wall Street's only profit gain, as Bloomberg reported this morning. A good piece of that profit gain was thanks to the sale of Horizon Wind Energy LLC, a Houston based alternative energy company that Goldman bought five years ago for $150 million and recently sold to a Portuguese power company for $2.1 billion.

Ironically, the man behind that purchase was Mark McGoldrick, who headed Goldman's special opportunities group. Earlier this year, McGoldrick left Goldman after becoming convinced that the firm wouldn't adequately compensate him or his group for the outsized gains they were earning.

This morning's earnings report is a nice little birthday present for Goldman topdog Lloyd Blankfein. As he blows out his candles on his ice-cream cake this afternoon, Blankfein should at least make a wish for McGoldrick, the man who helped make this birthday exta-special. Oh, and maybe wish a little something for whoever it was who shorted mortgages at Goldman and turned this summer's subprime-led credit crisis into a profit opportunity.

Goldman Profit Rises 79 Percent as Gain Boosts Trading Revenue [Bloomberg]
Goldman Sachs 8-K [SEC]

Frankly, we’re disappointed. We’re disappointed in you. Our readers.

All morning long we tried to get our mitts on the letter to investors sent by the managers of Goldman Sachs Group's Global Alpha hedge fund. And so far we’ve got nothing.

By now everyone’s heard the gist of it. Goldman isn’t closing the fund or pumping it up with any of its own money, Goldman Equity Opportunities-style. They’re just going to try harder. Think more. Move faster. Maybe borrow a little less money. Walk it off.

One promise that’s apparently made is that they plan to profit from the woes of other quant funds. How exactly? That’s for them to know, and the rest of us to find out. Because they’re smarter than we are. You can tell because they lose more money.

Actually, it looks like the new secret strategy might just be to keep using the old strategies and hope the other quants go out of business. At least that’s how we read the following two sentences from the Wall Street Journal.

The letter conceded that there was more money invested through quant strategies across the market than the managers realized. But it said Global Alpha would benefit from troubles that have driven other quant funds out of business or to change their strategies.

Oh, and have we mentioned we’d like to see the letter for ourselves? Email it to tips@dealbreaker.com. Win back our respect. Please.

Goldman Vows to Do Better [Wall Street Journal]

As if things weren’t rough enough in the proprietary trading wings of Goldman Sachs, we hear now that the brainiacs who man the “special situations” unit are breaking out of their gilded cage. Or maybe being forced out.

Earlier this month, the Wall Street Journal reported that the founder the group, Mark McGoldrick, had left Goldman and was planning on starting his own operation. The story behind the story of his departure is under dispute—Goldman reportedly hinted that McGoldrick had cracked up but many feel that McGoldrick left because Goldman wouldn’t part with enough coin to keep him and his group happy.

Now many of the best and brightest of the special situations group are out looking for new jobs, according to a source familiar with the situation. They’ve polished up their resumes, contacted recruiters and started poking around Wall Street for even more special situations. It’s unclear at this point whether they’ve left Goldman on their own accord or been forced out.

Goldman reports third-quarter earnings on Thursday.

Goldman Sachs and other underwriters are attempting to syndicate $775 million of covenant-lite term loans, Reuter’s Mike Flaherty reported last night. The loans were made to fund the buyout of Laureate Education at a spread of 325 basis points over Libor, and were fully funded by the underwriters at the close of the deal. Now they are testing the strength of the secondary market for the so-called Cov-Lite loans, which have gone out of favor with many investors.

Cov-Lite loans were a product of the recently deceased extravagant credit market. Unlike traditional bank loans, they are stripped of nearly all of the covenant restrictions that lenders typically rely upon to keep track of the financial condition of borrowers.

“Restriction-free loans used to be the rage, and debt investors couldn’t get enough of them during the LBO frenzy. But debt investors got spooked by the subprime mortgage mess, and Cov-lite, as it became known, went the way of the dinosaur (at least for now), right there with its pal Pik-Toggle,” Flaherty writes.

Unlike the financing for the big buyout deals that are still waiting to close, such as KKR’s acquisition of First Data, the Laureate deal has already been funded, leaving the lenders with no way of pressuring the borrowers into accepting more stringent terms. The loans will likely be sold below par, leaving the original lending syndicate with losses. The depth of the discount, however, may be a sign of the market’s appetite—or lack of appetite—for the loans in the pipeline deals that lenders have committed to make but have not yet funded.

In short, many are looking at the Laureate syndication to demonstrate just how screwed the banks may be on the buyouts scheduled to close later this year.

Goldman to be educated on Cov-Lite appetite [Reuters]

It’s always sad when veteran employees with spouses/children/golf club memberships to pay for* are shown the door for no good reason (other than the market being in the toilet), but what of the neophytes, who haven’t even been around long enough to have their spirits and wills to live crushed? We’re told that eighty salespeople from Goldman’s Class of 2007, hired just two months ago, were notified yesterday that the firm is “reevaluating” their (collective) role.

The disposables were then given the option of being transferred into operations now or biding their time for the next three months waiting for an as-yet-undecided fate, which could very well include being “let go.” If this is the kind of crap deal being offered to the Mini-Masters of the Universe, what do you think is being proffered to the youth of, say, Bear Stearns?

*By which we do not at all mean to imply James Cayne should be laid off. You came to that conclusion on your own, don't put that on us.

The Pritzkers, who are like the Hiltons you still recognize with clothes on, sold a $1 billion stake in their Hyatt hotel chain to Goldman and Madrone Capital Partners started by Wal-Mart chairman Rob Walton.

Speculation about the fate of Hyatt has been on the rise with the chain’s ongoing restructuring plan, internal family drama, and Blackstone’s $26 billion Hilton buyout. The Hyatt restructuring has involved 53 internal mergers, expansion into China and preparations to release detailed financials.

The Pritzker domestic squabbles culminated in a $1 billion lawsuit a couple years ago in which Liesel Pritzker accused her father Robert of tapping into the trust fund. Liesel eventually won $450 million (or lost $550 million, or made normal people want to cry).

Liesel has taken the stage name “Matthews” (or mom's maiden name) for a number of screen roles (and real life), including Sara Crewe in the mid-90s classic, “A Little Princess,” which is one of Lloyd Blankfein’s favorite films, and played a vital role in getting Goldman to pull the trigger on the purchase. Scenes like this are not uncommon at 85 Broad Street:

Miss Minchin (played by a confused junior analyst): Don't tell me you still fancy yourself a princess? Child, look around you! Or better yet, look in the mirror.
Lloyd Blankfein: I am a princess. All bank CEOs are. Even if they live in tiny old attics. Even if they dress in rags, even if they aren't pretty, or smart, or young. They're still princesses. All of us. Didn't your last boss ever tell you that? Didn't he?

Actually, the entire premise of “A Little Princess” is that a batty girl (Sara Crewe) in an oppressive boarding school responds to every situation by claiming that she is a princess. A typical scene:

Random Teacher: Your dress is on fire.
Sara Crewe: I am a princess.
Random Teacher: I’m fucking serious, your dress is on fire.
Sara Crewe: All girls are princesses, even if they are burning, or freezing, or suffering from a horribly infectious rash.
Random Teacher: Stop, drop and roll bitch, our insurance doesn’t cover this.
Sara Crewe: All girls are princesses, whether they are stopping, dropping or rolling…

This has also been the Goldman response to its hedge fund’s ignominious performance (Investor: Your hedge fund is blowing up, Goldman: We’re princesses, we’re Goldman, we’re Wall Street Royalty alright! We’re PRINCESSES!”)

Pritzkers sell $1bn stake in Global Hyatt [Financial Times]

I’ve always maintained that it pays to have a sugar daddy in the man Eliot Spitzer made the poster boy for his Wall Street witch-hunt in pursuit of Albany residency, and, if you can swing it, a Jew from Detroit, too. Case in point: Goldman’s previously floundering Global Equity Opportunities shot up 12 percent last week after the 85 Broads got a $1 billion pick-me-up from former AIG chairman Maurice “Hank” Greenberg and billionaire Eli Broad, in addition to $2 billion, from itself (by which we mean GSC, the bank. Let it go). In what some might regard as a nice recovery, assets more than doubled to $7.5 billion, after the fund lost approximately 30 percent earlier this month, due to some messiness in the mortgage sector.

Another quant fund that quantifiably improved its performance was RenTec, which made up almost the entire lot of its 8.7 percent decline from the beginning of August. An apparently clairvoyant James Simons had written to investors on August 10, “Usually such behavior—[market turmoil]—causes first pain and then opportunity… [with a return to normal conditions], we anticipate an attractive opportunity.” The turnaround made both investors who would choose to make money over losing it happy, and those of us keeping tabs on how many times the word “opportunity” is used in a letter by a hedge fund manager MTD, and having it actually mean something other than “bull shit.”

Goldman’s Global Alpha, down 27 percent for the year through August 13, is not doing as well. Clients’ requests for withdrawals totaling $1.6 billion have left the fund with a mere $6.8 billion in assets.

Goldman Global Equity Hedge Fund Rises 12% After Cash Infusion [Bloomberg]

Deal Journal: How would you assess Goldman Sachs?

Wilhelm: Goldman has probably lost some of its cachet in terms of advisory services. It’s lost people over time to hedge funds. Effectively, what Goldman has been doing is working with people who have left the firm to provide services to them. Look at the profitability of its prime brokerage. That’s all service to hedge funds. You could look at it as Goldman outsourcing the human capital of trading. It’s really providing distribution and execution services for these guys.

Deal Journal: But come on, Goldman is still Goldman, right?

Wilheim: It looks more like a Citibank.

We know morale is down and everyone is FREAKED OUT about the prospect of their bonuses being reduced by 5% and more than a few of you are considering cutting your losses and ending it now, but name calling like this is really unbecoming of grown men (as are the tears, in public places).

Traders vs. Bankers: Breaking Up Wall Street Banks [Deal Journal]

383 Madison is the house that “[un]sexy” trading and handling money for clients and looking really good when things looked really bad for Wall Street’s real players built. So why isn’t Bear Stearns busy getting permission from the city of New York to add a deck off its master bedroom, remodeling the kitchen and preparing to make neighbors jealous with a forthcoming in-ground pool? According to some catty bitches over at Fortune, because Bear got jealous of the Street’s heavy hitters*—Goldman Sachs in particular—and strayed too far from its decidedly “back office” roots. Oh yes, they went there.

When it should’ve been sticking to its tried and true “mundane business of trading, especially complicated debt securities,” a model that made Bear successful in good times, and very successful in bad times, the self-described “Spartan” of Wall Street was getting into the riskier game of hedge funds. This was a bad idea for three reasons.

The first is that no one at Bear Stearns has the slightest idea what these highly exclusive, unregulated private investment pools actually are. (To be fair, though, few do.)

The second is that when BS decided to get into the more volatile pastime, a departure from the firm’s historically conservative nature, it didn’t just say “oh, we’ll try something a little more dicey but do it the Bear Stearns way,” it said “fuck being conservative, if we’re going to play Russian Roulette why not do it blindfolded while dropping acid?” This would explain why the fund pretty much ignored/missed danger signs in the subprime mortgage market, and put together a management team that gave the impression (based on reality) that it couldn’t care less. (To play devil’s advocate for a moment, writing reviews of “Evan Almighty” really is important than keeping a watchful eye on billions of dollars.)

The third is that when James Cayne’s delusions of grandeur got the better of him, and he decided to go to head to head with Lloyd Blankfein out of petty jealousy, he didn’t realize that the Nebbishy Master of The Universe didn’t get to where he is today by taking four hour lunch breaks to play bridge tournaments and entire weeks off to cheat at golf.

Two failed hedge funds, a fired heir apparent, and a precipitously falling stock price later, BSC has seen better days. But according to Bear, its foray into big boy land will not hurt the firm’s bottom line. To the contrary, Bear Stearns is in exactly the type of environment in which it thrives, on “nimble[ness] and creativity.” It will be profitable and bonuses will not suffer. Because it just slashed 240+ jobs.

How Bear Stearns lost its way [Fortune]

*Let’s make a pact to never use that phrase or phrases like it (“big hitter” is no better) again. Deal? Deal.

Four months ago we launched The Big Idea, our occasional feature speculating about the future of finance, with a guess that Goldman might Sachs consider spinning off it’s proprietary trading group. There had been word on the street that the big pay packages received by many of the top names in private equity and at hedge funds had some within Goldman proprietary trading group feeling underappreciated. “We're hearing from investment bankers who have talked to people inside the firm that Goldman could face pressure to spin-off its trading and hedge fund business in order to realize the value of the business before its guys start to defect or strike out on their own,” we wrote.

At the time, the Big Idea made something of a splash across the financial media and was heavily discussed in the financial community. But Goldman, then trading at it’s fifty-two week high, didn’t seem very keen on the idea. But just because Goldman wasn’t willing to talk spin-off didn’t mean that some of the top guys inside of Goldman weren’t plotting their own private spin-off.

This weekend’s Wall Street Journal details the rise and departure of Mark McGoldrick, the 48-year-old founder and former head of the “Special Situations” group at Goldman. Last year, McGoldrick got a $70 million bonus, one of the highest bonuses paid by the firm and more than Goldman CEO Lloyd Blankfein's $53 million, but considered himself and his team “under-compensated.”

More After the Jump

The real tragedy today isn’t that the Federal Reserve is suddenly cool with inflation, that hedge funds are being forced to churn out “Sorry about that” letters on an hourly basis, or that there’s a 39 percent chance that Countrywide Financial will be forced to hold a fire sale. It’s not even that John Devaney will soon be helicopter-less. You want to know what the real crisis that’s unfolding before our very eyes is? What’s the cause of this pandemic of fear? What you should be losing sleep over? What billionaire Eli Broad *is* losing sleep over? It’s this:

Although the recent job cuts in two Bear Stearns mortgage units have sliced through obscure places called Irvine and Scottsdale, rumors have started to circulate on Wall Street that the axe may soon fall closer to home. Some, including Jim Cramer, have predicted that there will be serious bloodletting in areas tied to credit markets and hedge funds.

“I think that many of these firms have as many as 30 percent more people than they need right now in these departments, and all of them will be cashiered by the end of the year. The lists are being drawn up; the HR people notified,” Cramer wrote recently in New York magazine.

Many on Wall Street scoff at the idea that they have anything to worry about but recent history of market downturns suggest otherwise. When the markets suffered in the years following the bursting of the tech bubble, investment banks and brokerages laid off as much as 25% of their work force. In just one day in the winter of 2003—it was February 7th, to be precise—Goldman Sachs announced that it would cut roughly 20% of its 220 options traders.

Last time around the cuts began with the brokers, since it was a downturn in the equities market that began the bloodletting. This time it may start with those parts of the investment banks directly tied to mortgages, leveraged buyouts and hedge funds and spread from there. As the mortgage market contracts, structured finance could also get hit, with both product and sales people losing jobs as the pool of underlying assets dries up. Derivatives traders may also find the axe swinging in their direction.

But enough of this vague speculation. It’s time for specific speculation. Where are the job cuts coming next? A recent item on DealBook doesn’t exactly name Lehman brothers as the most likely candidate. Except that it sort of does. “Bear Stearns is the nation’s 12th-largest home lender, according to Inside Mortgage Finance. The company, the fifth- biggest U.S. securities firm, ranks second after New York-based Lehman Brothers Holdings Inc. among U.S. sellers of mortgage bonds,” DealBook explains.

There’s also been talk of more cuts coming from Citigroup. Despite claims that they are still dancing in the LBO market, the music seems to have stopped. And a few seats are probably going to get pulled away, leaving some left standing. Like musical chairs but with your job.

Anyone care to irresponsibly speculate about who else might pick up the job cutting axe?

As Bear Cuts Jobs, Some Wonder Who’s Next [DealBook]
Bloody and Bloodier [New York Magazine]

Bloomberg reports today that the fees for the new non-bailout, non-rescue investors in Goldman Sachs’ GEO fund are being slashed or waived entirely.

“New participants won't pay the 2 percent management charge and Goldman will cut its performance fee in half,” Christine Harper and Katherine Burton report. A spokesman for Goldman has confirmed.

This somewhat undercuts the case that Goldman was making yesterday that the injection of new money wasn’t a rescue for the fund but simply allowing investors to take advantage of market opportunities. Unless by new opportunities they meant "investing in our hedge fund at a tremendous discount."

Goldman Fund Cuts Fees to Woo Investors After Loss [Bloomberg]

“Smoking your own product.”

That's how one hedge fund manager referred to the announcement that Goldman Sachs had invested $2 billion on its own money into it’s Global Equity Opportunities fund.

“You can look at it as a testament to the quality of the product,” he said. “Or you can just say that maybe they’ve become addicts or can’t find other buyers for the stuff.”

During a conference call following the announcement that GEO was taking $3 billion of new money—$2 billion from Goldman and another $1 billion from friends—Goldman denied that this amounted to a “rescue” of the fund. It was an “opportunity.”

But lots of people are calling it a rescue regardless. And some are wondering why GEO needed to be rescued more than other Goldman operated quant funds that are also said to have been in trouble.

But if you read between the lines in the transcript to Monday’s conference call, you can see one reason that GEO needed a bailout: it had gone way beyond its leverage parameters. According to Goldman Sachs CFO David Viniar, Goldman had to investors to expect that GEO would be a little bit more than 3.5 times leverage. But before the injection of new cash, GEO was around six times levered.

In an analysis piece on Reuters today, Jonathan Keehner pins GEO’s troubles squarely on the leverage donkey. “The strategy of using debt like a steroid to boost returns on investments came back to haunt” hedge funds like GEO, Keehner writes.

The way Goldman disclosed this level of its leverage seems to suggest that it realizes the fund had levered up way too far. “Note how Viniar tried to downplay the leverage in the Not-Being-Rescued fund, and actually understated it by half before [Credit Suisse’s Susan] Katzke forced him to cough up the truer picture of just how much trouble the ‘quants’ had gotten into, when the gamma of their beta lost its alpha,” Jeff Matthews writes on his blog today.

How a Goldman hedge fund shrank a third in a week [Reuters]
When the Gamma of the Beta Begins to Lose its Alpha [Jeff Matthews Is Not Making This Up]

James Cayne would probably love it if he could place a hand on Lloyd Blankfein's incredibly soft, smooth cheek (or head) and say, "You and me, we're not so different," but, according to Bloomberg, that's never going to happen. Because Goldman Sachs and Bear Stearns *are* different, despite the fact that both investment banks have guided their internal hedge funds through a sea of major-dare we say embarrassing-losses over the last few weeks. For starters, stocks and bonds-in GS's corner, stock is trading at 2.2 times book value, and the risk premium on bonds is 35 percent lower than for Bear, whose shares are now radioactive and whose A+ rated debt is viewed, and this is just clinical terminology, as a pile of junk.

Another topical difference between the two concerns their approaches to failures. Now, you're probably saying yourself, "Bear Stearns has A LOT more experience managing things that are the opposite of successful. So it should stand to reason that they're better at it than Goldman, who, up until recently was perfect." And you'd be wrong. Because when Bear Stearns fails, it sees its failure as an opportunity-to fail yet again. First, BS attempted to stave off a collapse in June by locking up money and unloading securities in order to meet lenders' requests for more collateral. This strategy, not unlike the hedging strategies employed in the first place Bear Stearns's High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leverage, failed. When Goldman lost several hundred truckloads of money, it turned to fellow money-changers Hank Greenberg and Eli Broad to take advantage of its "not a rescue." While it's certainly not winning any awards for excellence in hedge funditry, Goldman has managed to keep its funds afloat, while the Bear Stearns funds, for all intents and purposes, exist only on paper in bankruptcy court.

Let's keep going with the diffs: you've got geography-Bear's in midtown, Goldman's way down on Broad Street. And confidence--people have some in Lloyd Blankfein/Goldman (in lieu of "confidence," terms "respect for", "fear of", and the like work, too). The answer to the question, "Where can you find the bank's CEO at approximately 3 pm on a Tuesday?" (A. Blankfein-his office; Cayne-the golf course, except on the last Tuesday of every month, when it's "at a bridge table, not doing a very good job of earning the title 'championship bridge player'.") Laxity versus stringency regarding health codes. Company-mandated hairstyles. Etc.

Blankfein-Cayne Spread Widens to '01 High in Flight to Quality [Bloomberg]

“The combination of precise formulas with highly imprecise assumptions can be used to establish, or rather to justify, practically any value one wishes . . .Calculus . . . [gives] speculation the deceptive guise of investment.”
--Benjamin Graham, 1949

Goldman Sachs is holding a conference call to recent hedge fund performance. Today the firm announced that Goldman Sachs itself and some of its friends are investing an additional $3 billion in Global Equity Opportunities, an equities quant fund. They aren't going to call it a bailout. Instead they'll probably say something like the investment allowing them to "manage the delevering process." It's just getting under way. Feel free to listen by dialing 1-888-281-7154 (U.S. domestic) or 1-706-679-5627 (international).

Count how many times they use the word "opportunity" to describe market conditions. It's the hedge fund watch word of the day.

After the jump, the full statement from Goldman Sachs.

Update & Highlights: Goldman confirms losses at Global Alpha of 27%, half of which happened just last week. GEO down 30%, nearly all of the losses coming last week.

Further Update: Replay Information: Missed the call? They are going to replay it on the Goldman web site. Watch here for a link when it gets posted. You can also listen in by dialing 1-800-642-1687 (U.S. domestic) or 1-706-645-9291 (international). The passcode number is 13217143. Replay should be available around 11:30.

Remember the days when Goldman Sachs executives could say “volatility is our friend?” Well, it looks like the friendship has broken up.

Goldman’s North American Equity Opportunities has been liquidating its positions in the face of heavy losses, according to a report just published by the Wall Street Journal. It is not clear how significant the liquidation is. There are widespread rumors that the fund may be selling off everything and shutting down. But Goldman has “privately thrown cold water on a published report that North American Equity Opportunities hedge fund is liquidating,” according to the Journal.

The Journal notes that the fund, which at had assets of $767 million earlier this year, was down over 15% year through July 27. Loses in July alone are said to have been around eleven percent. Given the market’s volatile behavior in August, it’s likely that losses have continued to mount and may have become much, much worse.

The same report from the Journal says that another quant fund, Tykhe Capital, has suffered losses of about 20% in August alone.

Oh yeah, and Goldman says that Global Alpha isn’t shutting down either. It’s liquidated certain positions to pare back its risk profile but it’s not done yet.

Second Goldman Hedge Fund Moves to Sell Some Positions [Wall Street Journal]
Goldman:"business as usual" at shrinking Alpha fund [Reuters]

Goldman’s angry pen pal who wrote, “Hundreds will die. We are inside. You can’t stop us,” to the bank and 40 media outlets two months ago is still at large. An apparent follow-up letter to Newsday and the Daily News postmarked July 11 in Brooklyn is claiming to be written by the same author, only dictated by her parents.

The follow-up letter is signed “Three frightened kids and six frightened parents” and details the misguided prank of two teenage boys and one girl. The new letter exposes the first letter as a glorified arts and crafts project by three college-bound “A” students:

The kids came up with the “plot” because one of their parents had a financial beef with Goldman Sachs and had loudly complained about it at home. The three kids thought it would be “funny” and “creative” to do the mailing, never imagining it would coincide with real events in the U.K. They got the newspaper names and addresses from a directory at the library.

We think it's more the "similarities" with someone who wants to blow up Goldman Sachs that has people worried here. The FBI admits there are similarities with the handwriting in both the letters, but the new letter suggests that the kids used a library, which is dubious. The FBI isn’t ready to close the case just yet.

Settling childhood scores isn’t what it used to be. Couldn’t the kids have just tp’d or egged 85 Broad?

Letter to Newsday claims Goldman threat a hoax [amNewYork]

Rumors is rumors, as we say. Nothing more. But nothing less. And sometimes rumors move markets. This morning Bloomberg reported that shares of several European companies that have invested in Goldman Sachs were under pressure from rumors that Goldman’s Global Alpha hedge fund was nearing a meltdown. And now Goldman Sachs is doing its best to quash the rumors and denying that it is liquidating the fund.

So what's going on? Beats us. Other people might want to make you rich. We just want to make you better informed. And sometimes that means keeping you up on what people are whispering about even when we can't vouch for the substance of the rumors.

On thing is clear: there certainly is a lot of fear out there. Wall Street has been awash in rumors large hedge fund failures in recent weeks. Many have proved unfounded. A few months ago this sort of thing might have been laughed off. But after the collapse of two prominent Bear Stearns funds and the failure of Sowood, these sort of things are increasingly credible.

Goldman Denies Global Alpha Liquidation Rumors [FinAlternatives]

Rumors are swirling-- swirling-- that Goldman Sachs's flagship hedge fund, Global Alpha, is being liquidated. The news has apparently put pressure on shares in EADS (-2%), which is a constituent of the fund, as well as Germany's Continental (-2.2%) and Italy's Fiat (-3%), which are investments of the fund. Global Alpha recorded a 7.7% loss in the last week of July, bringing its performance for the year to -12.1% before fees.

Goldman’s Global Alpha, the bank’s flagship hedge fund, posted a 7.7% loss in the last week of July, bringing its performance for the year to -12.1% before fees. Though 2005 brought in gains of almost 40%, the fund is now up to an 18-month streak of not-so-good returns, having reported a 6% loss last year.

Goldman Sachs Asset Management’s profits have been in hurt in the last two quarters because Global Alpha’s performance, or non-performance, has failed to earn fees. Still, CFO David Viniar noted optimistically that there had been no substantial redemptions from the fund (that’s something!) and that things could be worse: they could be Bear Stearns (or Man AHL, which fell 6.7% the same week. Or Sowood. Or John Devaney. Or a bunch of floor traders. Adrien Grenier. Etc).

Goldman Sachs flagship fund falls 8% [FT]

What do you get when you take Mexico's largest construction company, Goldman Sachs, and more pesos than either knows what to do with? You get a $4.1 billion bid to run a couple of Mexican toll roads. Empresas ICA and Goldman Sachs Infrastructure Group I (a $6.5 billion fund Goldman has a 12% stake in) outbid richer than Bill Gates mogul Carlos Slim's company, Portugal's biggest highway operator and Moldavia's largest bear-baiting business. The bid is for a 30-year contract to run 340 miles of calles. The Empresas/Goldman bid was the highest of six offers and the winning bid will be announced in a couple of weeks, although the Mexican government wants to assure us that everyone is a winner thanks to the President's new infrastructure plan, from Bloomberg:

Communications and Transportation Minister Luis Tellez yesterday said the government's goal is to raise 287 billion pesos (about five American dollars) to build and upgrade highways by 2012, with funds coming from the government and private companies. "Que tal gringos? Aqui es el cuatro uno uno. [Mexican President] Calderon's infrastructure plan is muy aggressive,'' Gonzalez said. "This is excellent news for todos los construction companies. Mi serpiente grande de la noche es en fuego con su amore.''

ICA, Goldman Sachs Bid $4.1 Billion for Mexican Road [Bloomberg]

The soon-to-be opened 15 Central Park West—what, you haven’t heard of it, hobo? Basically: the Kosher 740 Park—just added Sandy Weill and Daniel Och (-Ziff) to its list of inhabitants. Other Shul-enthusiasts on the condominium complex’s roster include Lloyd Blankfein and Daniel Seth Loeb, who bought a penthouse in the building for $45 million in 2005.

Interested in the property? Too bad—all the units have sold. However, developers Arthur and William Zeckendorf predict that there may be up to ten flipped apartments up for grabs when the building opens in the fall. So if you think you can stand living alongside the nouveau-riche, and are willing to risk having one of Loeb’s pet gerbils burrow a hole into your apartment, here’s the low-down:

-The building is coated in 2,832 panels of limestone from the same Empire Quarry in Indiana that makes up the skin of the Empire State Building.

-Working fireplaces (fireplace fetishizer Weill would sooner live in a studio on Rivington than a penthouse without an accessible means of burning things, you know this)

-Screening room

-Game room

-60-seat lobby dinging room (with private chef)

-Health club

-A waiting room for chauffeurs

-29 maid’s suites on low floors so you Louisa can work around the clock but not contaminate your personal space

-30 wine rooms surrounding “an octagonal tasting area”

-31 autofellatio rooms, all finished in English oak, with a lovely marble trim

-Pizza party Fridays

15 CPW [NYO]

From the DealBreaker Tips Line:

To: tips_dealbreaker

Sent: Thursday, July 12, 2007 1:56 PM

I'm out at the E3 conference in Santa Monica, and arrive a few minutes late to the big press conference given by Take Two, showing off the new Grand Theft Auto 4.

Unfortunately, being late, the door girls refuse to let anyone inside. Until, that is, a Goldman Sachs employee shows up. He also is refused admittance. The crowd of journalists is pleased that everyone is being treated fairly.

GS employee then starts showing his name badge (with employer clearly identified) and throws a bit of a fit. After all the "Don't you know WHO I work for?" crap, the door people relent and let him inside. The assembled crowd is no longer so pleased.

We’re not saying it’s the height of all arrogance to assume that one’s rank as the “world’s most profitable investment bank” would be enough to displace the fact that a would-be Asian CEO-appointee can barely read or write in Chinese, we’re just saying. Goldman Sachs was told that it could not name Richard Ong chief executive officer of its Beijing joint venture on account of Ong’s “knowledge of Chinese [being] too weak.”

Apparently Ong, currently co-head of investment banking in Asia, didn’t write satisfactorily enough to take a mandatory test for senior managers, which China began requiring in 2004 (managers hired before then have until 2009 to pass before losing their positions). Zha Xiangyang, deputy CEO of Goldman Sachs Gao Hua Securities, was promoted instead.

Since December, the China Securities Regulatory Commission as increased enforcement of the language requirement. On November 30, the group said it would “punish” securities firms appointing managers who haven’t passed the exam, but did not detail what the penalty would be. Given the reaction to a little contaminated food, Goldman was probably wise to not push this one.

Ong declined to comment (to the Chinese edition of Bloomberg).

Goldman's Ong Misses China CEO Job on Language Hitch [Bloomberg]

Validating the self-worth of a vastly undervalued bank, Apollo has lined up Goldman Sachs (and JP Morgan) as a key advisor on its forthcoming I.P.O. Goldman lost big time in the underwriting (drinking) game when it was only asked to play a minor role in the Blackstone offering and it was announced that Citigroup and Morgan Stanley will lead the KKR I.P.O. The snubs caused many people on the street to bitch and moan about the outright malarkey and wonder what in god’s name Goldman had done to suffer such indignities.

Goldman is also rumored to be a lead underwriting for AQR, expecting to file for an I.P.O. in the next few weeks.

Earlier: Inopportune Time To Be A Master Of The Universe

JPMorgan and Goldman get roles in Apollo IPO [FT]

The FBI is currently investigating “disgruntled ex-Goldman Sachs employees and customers” who may have something to do with the letters targeting GS employees being mailed to newspapers across the country, starting last Friday and climbing to 31 since yesterday.

Sent to The Village Voice (Lloyd Loves Savage Love) as well as newspapers in Brooklyn, Queens, Long Island and, mysteriously, Fort Wayne, Indiana, the notes are all hand-written in red ink on lined paper and read: "Goldman Sachs. Hundreds will die. We are inside. You cannot stop us." They are signed, "A.Q.U.S.A." Tom Boyle, spokesman for the U.S. Postal Service said that Goldman has given investigators a list of “people who have a gripe with the company.” Too many…can’t do it…brain exploding…anything that’s good in the world…milkshakes and love are a good jumping off point.

Feds Eye Goldman Gripers [New York Post]

When the indoor putting green became a necessary accoutrement to the chief executive office, everyone assumed that the “golf or work?” conundrum had been answered with a resounding “both.” But, as the Times reported recently, there is no tenable substitute for well-manicured sand traps and tree-lined fairways, even when your hedge funds are collapsing.

Yesterday, the Bespoke Investment Group blog posted the recent scores and handicaps of five CEOs: Stanley O’Neal of Merrill Lynch, Richard Fuld of Lehman Brothers, James Cayne of Bear Stearns, John Mack of Morgan Stanley and Lloyd Blankfein of Goldman Sachs. The Dealbreaker question of the day: is there any correlation between a CEO’s golf game and that other hobby, making money? Here are the results:

CEOs Ranked by Handicap
1. Stanley O'Neal (9.9)
2. Richard Fuld (10.3)
3. James Cayne (15.9)
4. John Mack (17.0)
5. Lloyd Blankfein (32.1)

CEOs Ranked by Percent Change in Stock Price This Golf Season
1. Lloyd Blankfein (+6.9%)
2. Richard Fuld (+3.14%)
3. Stanley O'Neal (-1.3%)
4. James Cayne (-3.49%)
5. John Mack (-9.86%)

Lloyd Blankfein, by far the worst golfer of the bunch who, on a really good day shoots under 110, pushed Goldman stock up nearly 7% since April. This could mean several things: while other executives hit the links, Blankfein is holed up in the office; his short game is only strong in the financial sector; or he is confused about how golf is scored. You decide.

Alert the National Guard: Goldman has now been left out as a major underwriting playa in two—count ‘em, two—IPOs. First there was the Blackstone slap in the face, and now KKR is jumping on the “Don’t touch me there, Goldman” bandwagon. The same banks who lead the B-stone deal, Citigroup and Morgan Stanley, will be underwriting KKR’s as well.

What’s with 1-2 punch? When it happened the first time, many believed that GS and JP were working on another P.E. IPO, there was a non-compete and so on and so forth. Others wondered if Goldman’s own “aggressive pursuit of private-equity deals alienated Steve Schwarzman,” failing to take into consideration that a 5’6” tall man probably has pretty thick skin. But Blackstone’s in the past—what’s the deal with the second snub?

As Reuters points out, JPMorgan doesn’t have a private equity arm capable of competing with KKR, but Henry Kravis may “have beef with the bank,” re: First Data Corp.

Reuters reported in April that Henry Kravis and crew were fuming at the way JPMorgan handled its proposed takeover of First Data Corp. Long story short, JPMorgan owns a majority stake in a First Data joint venture. KKR tried to reassure JPMorgan that the JV was not under threat, but JPMorgan pushed back, offering to buy out First Data’s 49 percent stake in the venture or dissolve the partnership altogether, sources told Reuters. That didn’t sit well with Kravis, sources say.

So that’s JP Morgan, okay, but the lack of Goldman is still coming as a shock to those who believe Goldman Sachs rules the world and all of its inhabitants (really, though, Goldman does have the ability to make it rain). So what’s up there? Some theories:

• Goldman’s private equity arm competes directly with KKR for deals.
• As noted by the ‘Bookies, in March, Lloyd Blankfein said, “It’s impossible for us to be in every piece of business,” which is kind of like hearing your deity admit to being human and will thusly be chalked up to Blankfein being drunk, and struck from the record.
• Goldman has different looting and plundering strategies from those of KKR
• Goldman needs a nap
• There can only be one bald supermogul per IPO
• Goldman is advising Apollo, Citadel
• Goldman is the midst of a herpes outbreak
• Kravis just doesn’t think Goldman’s all that good at the private equity business
• Goldman has told KKR in the past that it would underwrite its IPO—when small mouth bass rule the world

Goldman, JPMorgan out in the cold for second private equity IPO [Reuters]
Underwriting Henry: Who’s In and Who’s Out [DealBook]
Goldman’s Hedge Fund Alumni Network [Deal Journal]

Letters sent to nine newspapers today saying “Goldman Sachs. Hundreds will die. We are inside. You cannot stop us,” are being investigated by the FBI. The Bureau does not yet know who sent the notes, which were signed “A.Q.U.S.A.,” and handwritten in red ink on loose leaf paper. While the bank has a range of security measures to deal with all threats and is “monitoring the situation closely,” Goldman spokesman Lucas Van Praag said that the threat lacks credibility.

Goldman Sachs targeted with death threats [CNN Money]

Agribusinesses hungry for ethanol subsidy dollars seem to have planted so much corn that now we’ve got a glut of the stuff people were still calling “yellow gold” only a few weeks ago. Nonetheless, lobbying for more government subsidized ethanol continues. What’s behind the enthusiasm for ethanol?

Tim Carney’s recent column in the Washington Examiner looks at who’s pushing for higher CAFE standards, one of the key programs driving up demand for corn.

While raising the CAFE requirements would be a stick in the eye of the Big Three (whose political action committees [PACs] in 2006 gave about $1.3 million to federal candidates), it would clearly be a gift to the ethanol industry, whose strong connections to lawmakers are legendary. Ethanol, an alcohol fuel made from grain, usually corn, benefits from special tax breaks, protective tariffs, and federal and state handouts, as well as government mandates.

In the 2006 election cycle, the PAC for Archer Daniels Midland (ADM), the nation’s top ethanol maker, gave $120,000 to federal candidates while fellow agribusiness giant Cargill, No. 2 in ethanol, gave $223,000 to House and Senate candidates.

Also pulling for ethanol — and thus benefiting from stricter CAFE standards — is Goldman Sachs, the Wall Street investment firm that has invested $30 million in a Canadian ethanol maker.

Silicon Valley billionaire Vinod Khosla, who recently penned a New York Times op-ed along with former Senate Majority Leader Tom Daschle, D-S.D., calling for even more ethanol mandates, is also heavily invested in ethanol.

(Tim Carney is the brother of DealBreaker's editor.)

Big Ethanol wins big on CAFE [Washington Examiner]

Marc Spilker has been named COO of the investment management division of Goldman Sachs (he will not be replacing Eric Schwartz, who recently announced he would be stepping down as co-head of asset management, as rumored earlier this week). Spilker will retain his role overseeing alternative-investments.

Separated at birth? Lloyd Blankfein, Goldman Sachs CEO; Pancho Villa, Leader of the Mexican Revolution; Snarf, Thundercats (Ho!)

With construction of its new JPMorganChase tower at WTC Site 5, Jamie Dimon can resume his rightful place at the top of the Greek Orthodox Church. Never one to be called anything but a strict constructionist, the belly of the DimonDome plans to rest over St. Nicholas Greek Orthodox Church and 165 feet over Liberty Park.

The building concept (pictured left), from Kohn Pederson Fox and The Real Estate, is being criticized as not only a good picnic spoiler but a bit of an eyesore, and may be pared back, according to architect Gene Kohn. The cantilever is a "beer belly" according to the New York Post and a "tower of darkness" according to Curbed.

Despite public opinion (the JPMorgan way!), the cantilever will exist at all costs, and contain JPMorgan's trading floors. JPMorgan plans on doling out a few million to the Greeks to keep them quietly in the shadow of the 42 story tower and amidst the whooshing lament of the vortex of lost souls.

One upping JPMorgan is the new Goldman Sachs World Headquarters (pictured right) at 43 stories down the street at West Street between Vesey and Murray (Battery Park Site 26). The tower, which has several more lateral bumps than a measly lone cantilever, is already 8 stories high under construction and expected to open in 2009. If the JPMorgan tower is the "tower of darkness" then Goldman HQ is the tower of light, or at least greenery, as the building is being prided as a marvel in green-tech and earning all sorts of eco-friendly certifications.

WTC Chase Tower Will Block Church's Heavens [Curbed via DealBook]
Goldman Sachs New World Headquarters (West and Vesey Streets) [Lower Manhattan.info]

Were you worried there wasn’t going to be an update to the pettiest story of all time? Worry no longer. Here’s a quick recap for those of you who haven’t been keeping score, which seems ridiculous to us since this story is about shrubs, but whatever, that’s your journey. Anyway, Goldman Sachs MD Marc Spilker wanted to widen his path to the beach at his house in the Hamptons. Unfortunately, his neighbor, Kynikos founder Jim Chanos had a problem with this, since his row of hedges would have to be taken out in order for Spilker’s family to be able to “maximize their beach enjoyment.” Spilker cited a deed that said he could have 15 feet, Chanos produced one that said otherwise. Then this week they went to court to negotiate; Spilker claimed to only want a few feet (i.e. 6-7), Chanos gave it to him and asked for it to be put in writing.

The (soon-to-be-promoted?) Goldman Sachs employee apparently then had a change of heart, re: abiding by the terms of the agreement, and yesterday afternoon decided he’d rip down the remaining hedges on Chanos’s property. Oh, and new neighbor Stevie Cohen, who shares the path to the beach, has thrown his support to Spilker.

Smart people would rather work at Google than Goldman Sachs, Bloomberg reports today. One reason is that “Goldman's current package is not enough to compete with West Coast IT companies.” But then again, if you work at Goldman, you get to play with Excel all day. It's so hard to decide, we know. Having difficulty picking one G over the other? We’ve broken it down for you, after the jump.

Goldman Meets Match in Googleplex When Recruiting Graduates [Bloomberg]

JPMorgan has reversed the curse, and pulled into the top spot of the European I-Banking League Tables for the first half of 2007. JPMorgan was boosted by its strong performance in ECM, which commanded the second highest combined market share in ECM, trailing Deutsche Bank. The League Tables measure the combined market share of M&A, ECM and DCM. Citi was the only bank to finish in the top four in all three categories, and is 2nd in the League Table to JPMorgan.

Goldman, the Yankees of the financial world, remain much like the Yankees this year, sitting in a distant fifth place behind JPMorgan, Citi, UBS and Deutsche Bank (or 11 games out of first place). Goldman is quick to mention its top spot in European M&A, and high team OBP. Goldman has advised on $401bn worth of European transactions so far this year.

Spurred by megadeals like UniCredit/Capitalia, Enel & Acciona/Endesa, KKR/Alliance Boots, Reuters/Thomson and the ABN Amro bidding war between Barclays and RBS, deal volume in Europe has reached $1.3 trillion, and is expected to exceed last year's record of $1.5 trillion.

JP Morgan leads in investment banking [Financial News via Dow Jones]

Goldman Sachs’s co-head of asset management, Eric Schwartz, has announced that he will step down from his day job this summer, after 23 years with the bank. Under Schwartz’s tutelage, the asset-management unit grew to a record $758 billion, more than double the amount it handled when he became co-head (with Peter Kraus) in 2003. Rumored to be promoted to the soon-to-be vacant position? The man with no respect for the sanctity of another man’s hedge, Marc Spilker, who currently oversees Goldman’s alternative-investments unit.

In other news, James Metcalfe is leaving his post as head of power mergers and acquisitions at Lehman Brothers to become global head of power banking at UBS. Lehman posted an ad on Craigslist looking for someone with “a good head for numbers and lack of care for shrubbery” just this morning.

Goldman's Schwartz, Co-Head of Fund Management, to Step Down [Bloomberg]

Trying to monetize on the reality that there are a dwindling number of bankers traveling overseas via boat and/or Hover board, Goldman Sachs is strongly considering investing in a business class-only airline. Though no deal has been reached yet, the bank’s private equity arm has been in talks with airline executives about setting up a carrier that would exclude socioeconomically challenged patrons, and its buyout division has reportedly had several “informal” discussions with Luton’s Silverjet, toying with the idea, but not yet making any penetration.

According to Silverjet (whose aircrafts are redesigned 100 flat bed Boeing 767-200s), only 65 passengers are required on a flight to break even, as the average ticket costs a reasonable £1,000, with a transatlantic return flight costing £65,000 to operate. Should the deal go through, The Guardian notes that it would be a standard P.E. investment, and not a Goldman air taxi service, because business-class still does not require adequate insulation from the rest of the world. No word yet on whether Bear Stearns employees would be permitted to buy tickets.

Bankers warm to business class-only airlines - as flyers and investors [The Guardian]

The hauntingly empty lobby of Bear Stearns

Yesterday’s showdown over the fate of two big Bear Stearns hedge funds “marks an important test of the financial markets’ resiliency,” according to this morning’s Wall Street Journal. So the natural question is: how did the financial markets score? What does the report card look like on the day after several investment banks flinched from pushing these two funds over the edge?

If “Plays Well With Others” was one of the subjects being tested, several of the investment banks who were exposed to the losses at the hedge funds scored very well. JP Morgan Chase, Goldman Sachs and Bank of America all reached negotiated deals with Bear Stearns to limit their risk. Although the details are sketchy, it seems that these deals involve Bear Stearns buying back collateral assets the banks had seized, forestalling a need to auction them off.

Merrill Lynch didn’t score quite as highly in this category, and late yesterday afternoon proceeded with an auction of Bear Stearns assets it had seized. We’re told the auction met with mixed results. Some of the higher-quality assets with less exposure to the subprime market met fetched what the Journal calls “reasonably high prices.” Other assets—variously described as “sludge,” “junk in investment-grade clothing” and “immoveable objects” by traders we talked to—faired less well. The Naked Capitalism blog describes them as fetching “atrocious prices.” Deutsche Bank also seems to have opted to auction off its collateral rather than cut a deal with Bear Stearns.

But at a more fundamental level, the test may have revealed a foreboding weakness in the credit derivatives market. JP Morgan, Goldman and Bank of America are said to have pulled back from auctioning off the collateral because earlier feelers put out to potential buyers revealed that the assets they had seized would have “fetched so little in the market,” according the Journal. The idea is that if they had brought down the the Bear funds, the investment banks would have hurt themselves as well. As Alphaville puts it, "So the picture becomes clearer: eat, be eaten, eat each other, but stop before you accidentally eat yourself."

But something even more ominous also may have convinced the banks to reach a settlement a real market test for these assets—the CDOs rarely traded and are priced according to complex mathematical models—might have demonstrated that they were worth far less than they were valued at on the books of hedge funds and investment banks. This could cause a ripple effect, forcing re-valuations at many hedge funds that hold similar assets, and at the banks that lend to them.

“As its two credit focused hedge funds with about $20bn of highly leveraged assets are put on ventilators, there is real pressure in the market for the creditors not to sell the collateral for fear of undermining the value of the CDOs and other debt packages. As we all know, they are near impossible to price accurately, due to the nature of the underlying distressed assets, and if these CDO’s are valued downwards, then all hedge funds who own similar subprime assets will have to do the same and hey presto we have a falling market, more defaults and the house of cards comes tumbling down,” Finbar Taggit writes today.

In short, by flinching from auctioning off the CDOs, JP Morgan and the other banks that reached deals with Bear Stearns may have prevented what some feared would become the much heralded “systemic event” in which the collapse of one hedge fund brings down all the others. But the cost of doing so appears to be keeping the actual market values of many of these assets more or less financially illegible. And keeping markets and regulators illiterate when it comes to reading the risks of these products.

One trader we spoke to described the outcome as a “cartoon moment.”

“As long as Wiley Coyote doesn’t realize he’s run off the cliff, he won’t fall,” he said. “These guys don’t want to look down because they are afraid there may be no there there.”

Bear's Woes Test Markets' Mettle [Wall Street Journal]
Bear Stearns Staves Off Collapse of 2 Hedge Funds [New York Times]
Subprime sector hit by $1bn assets sale [Financial Times]
Bear feast - be sure not to eat yourself [FT Alphaville]

The JPMorgan Corporate Challenge kicks off tonight in Central Park at 7:00pm with the first of two 3.5 mile races. The event, which started in New York in 1977, is now held in 12 cities on five continents with over 200,000 participants from 7,000 organizations.

The banks make up a large portion of the 15,000 race registrants. Here are the registration numbers for the top five:

Morgan Stanley – 1,605
JPMorgan – 1,450
Lehman – 800
Goldman – 550
Citi – its own version of the 1980 Olympics, boycotts on principle

Goldman limited its roster to 550 after almost 800 employees tried to register, according to the bank’s fitness center manager. Does anyone know why Goldman had to limit its registrants (and please tell me they had tryouts or cuts to determine who made the final 550)?

Last year, of the major banks, CSFB has the most outstanding individual performer - ’03 Harvard alum and track captain, John Traugott, who is an associate in the equity capital markets group. Traugott had the 2nd fastest time overall in the men’s division over the two races with a 17:48.

Karl Dusen of AIG posted the fastest overall time in the second race with 17:05 and Joseph Mcveigh of Morgan Stanley posted the 3rd best time with 18:18.

If anyone has any fun corporate challenge stories, or is planning to pull a Jeff Gillooly on John Traugott, please comment or drop a line to 'tips at dealbreaker dot com.'

Wall Street Rivals Run for Charity, Bragging Rights and Beer [Bloomberg]

Inflows at Goldman Sachs Asset Management's alternative investment funds fell to zero in the second quarter after raking in some $32 billion last year. David Viniar, GS CFO gave it to analysts straight: "There is not really much colour to add; it was flat over the quarter."

When asked about Global Alpha, Goldman's fantastically performing hedge fund, Viniar noted that there have not been substantial redemptions, because "people who are investing in the fund understand that it is a high risk, very volatile fund."

And also, the guy in charge of GSAM has his hands full with bigger problems, namely a hedge in the Hamptons blocking his way to the beach, so why don't you just back the fuck off?

Goldman Sachs alternatives inflows sink to zero [Financial News]

What is wrong with the financial media? Goldman posts flat earnings and no apologies? We're the first to admit that one quarter of flat earnings isn't apocalyptic, especially for an outperformer like Goldman, but figuring Goldman's media pedestal we expected some turd polish. The problem with Goldman, clearly, is that it's set the bar too high for too long. Eventually, you can't keep beating your own records, or something, and Goldman is still in the best position out of any other bank, and look at how crappy some of these other earnings were (cough...Bear), and Goldman did come down with a nasty flu last quarter. After much distraction, here's the Financial Times' take:

But if you keep raising the bar, you eventually come in below it. And the hit to revenues from a slump in subprime mortgages is a reminder that, however good your traders, revenues come under pressure in tough markets.

Here's the Financial Times reaching out to Goldman, saying repeatedly, "It's not your fault, it's not your fault," then, after a long embrace, singing a heartfelt a cappella version of "You're the Best" from the Karate Kid II soundtrack.

Goldman Sachs (A bank so important it needs no headline modifiers) [Financial Times]

Goldman Sachs beat Q2 analyst estimates and last year's net earnings by 3%, posting net earnings of $2.33bn or $4.93 a share, up from $2.29bn or $4.78 a share last year. The consensus analyst estimate for the quarter was $4.76. Net revenue (taking out interest expense) fell 0.6% to $10.18bn but beat analyst estimates of $10.16bn.

Goldman has yet to beat last year's record quarter earnings of $6.67 a share and net revenue of $12.73bn.

Goldman's fixed income, currency and commodities revenue dropped 24% from last year due to the subprime fallout. Goldman's investment banking and asset management/securities divisions each experienced a 13% increase in revenue from last year, booking $1.72bn and $1.81bn respectively.

Like Lehman, Goldman is booking almost half its revenue overseas, although its two major foreign investments in Commercial Bank of China and Sumitomo Mitsui Financial Group dragged down results by $189mm.

Goldman Quarterly Earnings Beat Estimates [Reuters via New York Times]
Earnings at Bear, Goldman Suffer Due to Subprime Mess [Wall Street Journal]

While the rest of us were reading about Economic Net Income and Steve Schwarzman’s big IPO payday, Lauren Silva at BreakingViews was paying attention to something far more important: which banks scored underwriter rolls in the deal. And she noticed that a big name that had been noticeably left out of the deal had found its way on to the left hand side of the front cover. That’s right, Goldman is now an underwriter for the Blackstone Group IPO.

A bit of background after the jump. And, of course, the answer to the question of how Goldman got the role.

Trouble in the Hamptons: Kynikos manager Jim Chanos was forced--forced I tell you-- to call the cops on his neighbor a complete egocentric, namely: Goldman MD Marc Spilker- yesterday when a few of JC's shrubs trades were senselessly torn down front run in an effort on Spilker's part to create a wider beach path greater returns for Goldman's flagging Global Alpha.

"My outrage over this arbitrary and unilateral course of action is probably only exceeded by Mr/Mrs Spilker's sense of entitlement that the four-foot wide path to the beach Global Alpha's own annualized P&L gain of 5.62% (specified in the local easement papers Global Alpha PPM) 'was just not wide high enough for us' as he said when first broaching the subject of arbitrarily widening a path front running a set of trades," Chanos hissed in email-form to a few friends and Goldman execs. Sealing the note with a kiss, he added: "I hope this is not a harbinger of how other Goldman senior executives may act when the markets become 'just not lucrative enough for us!'"

Hamptons Hedges Hullabaloo [Portfolio]

Hoping to capitalize on Russia's "huge potential," Goldman Sachs announced (for the second time) that it will add 25 bankers to its Moscow office, bringing their total to about 100 by the end of the year. Why didn't Goldman move in for the kill (particularly in the commodities sector) sooner? Oh, some legal stuff. A question as to whether or not corruption would "mesh" per se with the GS aethestic. Things like that.

"There are a lot of things to do' in terms of getting rid of corruption in some parts of the economy and creating legal certainty," Alexander Dibelius, who oversees Goldman's business in central and eastern Europe told Bloomberg. But that doens't mean "we should limit our presence here, it just tells us that we have to be conscious about what business we can do and what business we can't do...And I could definitely see over the near term our Russian business overall going to an interesting triple-digit million- dollar figure in terms of revenues,'' Dibelius noted.

Right now Goldman is fighting with Deutsche Bank AG and Barclays Plc in a "tremendous war for talents." GS managing directors dealing with corporate mergers and stock/bond sales in Russia are earning $7 million plus a year, versus the 2-3 million that guys (and girls) doing the same work in New York are making. Compensation rose 25% for bankers last year in Russia, on account of a 5-year oil boom, a record number of IPOs, and Russia’s place as the fastest growing major European economy.

In other news, the Dr. Omar bin Sulaiman, Governor of the Dubai International Financial Centre (DIFC), inaugurated the new office of Goldman Sachs at the DIFC, opened on account of Dubai's great public schools.

Earlier: Commie Schadenfreude

Goldman Expands Moscow Office to Tap `Huge Potential' [Bloomberg]
Goldman Sachs opens office in DIFC [Gulf News]

Italians have been complaining lately that Goldman Sachs “runs their country,” a not necessarily untrue statement, considering that Prime Minister Romano Prodi, central bank president Mario Draghi and deputy treasury chief Massimo Tononi are all ex-Goldmanites. And they’re not just irked about the presence of the Golds for Golds sake (though: could you blame them?).

What they’re bothering to piss and moan over to the New York Sun is that their government is being dragged into a little game of Legal or Illegal?. At question is the Siemens-Italtel merger dating back to the mid-90’s that Goldman Sachs may be involved in (Prodi was on the GS payroll from 1990-1993 and again in 1997). We’re the first ones to say that fraud’s not cool and would probably even take some sort of pleasure in writing a few posts about the Untarnishable Goldman standard being flecked with a bit of marinara sauce, but we’re realists whose cookies are frosted by people who don’t get how the world works, i.e. that Goldman Sachs runs it. US Treasury—Goldman Sachs. The Third World—Goldman Sachs. New Jersey—Goldman Sachs.

Italians Grumble That Goldman Sachs Is, in Effect, Running Their Country [NYS via CWS]

Was the an anonymous donor who recently gave $100 million to the University of Chicago Goldman Sachs President and Co-Chief Operating Officer Jon Winkelried? We’re filing this under the category of “wild speculation” but with a blue sticker that indicates its at least plausible.

Why Winkelried? The donor is described as a graduate of the University of Chicago who feels “his life had been transformed by the nature of the education that he had.” Winkelried got both his undergraduate and business degrees from Chicago, and now serves as a trustee of the University. An alumni publication once wrote about a $5 million gift from Winkelried. In the article he talks about the time he got a C in an introductory physics class. The mediocre grade sent him packing to the library where he re-dedicated himself to his studies.

“That day changed my entire life. I figured out that doing well at the University of Chicago wasn’t just a matter of listening in class and then regurgitating what I had heard. A Chicago education was about absorbing information and looking at the world in a different way,” Winkelried said.

[More anonymous charity hermeneutical speculation after the jump]

Goldman reigns supreme, most recently at a Gramercy Park Hotel Private Roof Club charity quiz to benefit Darna, an organization that provides aid to women and children in Tangier. The event featured a bunch of sponsored teams that went from room to room answering questions in the requisite trivial pursuit categories (Science & Nature, The World, History, Sports, Pop Culture, Arts & Entertainment, Wild Cards). The Goldman team had the highest score, and won a trip to Morocco to stay in the family villa of model Jacquetta Wheeler, the host of the event. The Goldman team took the event pretty seriously, and had the fanciest outfits, according to the Daily Intelligencer:

"We're investment-bank nerds, so we spent pretty much a month planning our outfits," said a member of the Goldman Sachs team. "We had wardrobe consultations on conference calls."

We suspect the event was rigged, evidenced by these sample questions from the quiz after the jump (you can download the full question list here).

Are You Smarter Than a Goldman Banker? [Daily Intelligencer, New York Magazine]

Former Goldman Sachs Asia investment experts Xiong Xiong and Vincent Ee will be launching Libra Greater China Fund, a long/short strategy, next week. Asian Investor reports that the Greater China strategy will focus on the mainland and will also invest in companies listed in Taiwan and Hong Kong. Libra will target 30-40 long positions and 10-15 shorts, with average exposure at 90-130% long and 50-70% short.

Goldman Sachs portfolio managers start hedge fund [Asian Investor]

Breaking Views reports that, despite robust markets, boom in mergers/buyouts and astronomical investment-banking earnings in the first quarter, Goldman Sachs has begun a hiring “pause.” What does this mean for everyone else? Well, given Goldman’s position in the pecking order of things, and the tendency of humans to be sheep, that others will likely follow. BV believes this may even “herald the first industry-wide freeze since the tech meltdown.”

Breaking Views thinks the “pause” stems from Goldman’s realization that by 2008, the firm will drop to $21.10 a share and down to $19.30 the following year. And asking employees to take a cut in bonuses would be out of the question ($100 million to $80 million, are you out of your minds? Why don’t we just ask our top brokers to subsist on food stamps). Some think this is a prudent and necessary step. We think it’s BS, given that we were considering putting in an application down at 85 after the long weekend. Anyone heard anything? You know where to find us. (Crying into a gossamer pillow over no longer having a ticket out of this dump, that's where).

Freezer Burn [Breaking Views]

Alpha Magazine’s hedge fund rankings are in and the banks have faired quite well. JP Morgan and Goldman took 1 and 2 (despite the latter’s 6% loss last year), with $33 billion and $32.5 billion in total capital as of December 31. In third and fourth were Bridgewater Associates and DE Shaw, who both had over $30 billion. Citigroup moved up a respectable 32 places to 13th, from its previous spot at 45. Morgan Stanley clocked in at embarrassing 53, considering all the hedge funds it bought last year.

Everyone’s favorite quant fund, Renaissance Technologies was ranked in 6th place, with $26 billion in assets. Somewhere, David Leonhardt has worked himself into an apoplectic shock and plotting to send pipe bombs to Alpha headquarters.

As a side note, we’d like to thank Financial News for referring to Amaranth as a "notable absence" from the list.

Banks top hedge fund rankings [Financial News]

Hank Paulson is getting antsy. He’s been in DC for almost a year now and the old boy doesn’t have much to show for it. When Paulson left Goldman Sachs, he planned on using his Hammer-like deal-making skills to get stuff (Social Security, Doha global trade talks, China) done. But, according the Wall Street Journal, the same qualities that made Paulson an efficient higher up at Goldman, and allowed him to outs Jon Corzine from the company (while JSC was away with his family for Christmas in Colorado)—impatience, forcefulness, an insistence on interrupting people and monopolizing conversations—just make him a dick at the Treasury, and a frustrated one at that.

If you read DealBreaker—hell, if read CollarMe.com—you know that Goldman Sachs gave out $16 billion in bonuses last year. Blankfein got $54 million (in total comp: weak), traders got $100 million, secretaries $200,000. In general, they also passed out pretty large salaries, too. BFD, welcome to America, let’s all move on with our lives. One guy who isn’t is John Whitehead, former co-head of Goldman Sachs, one billion years ago. During an interview with Bloomberg News, Whitehead, who left his post at 85 Broad in 1984, said that he is “appalled at the salaries,” and called Blankfein’s 2006 paycheck “an outrage.”

Whitehead, 85, noted that in his day, partners on Wall Street never made more than $120,000 (related: when my great-grandfather was 8, frankfurters only cost a nickel). The octogenarian also warned (hoped) that today’s “high fliers are going to fall flat…and their excessive pay should be cut back sharply, even if it means losing some of them.” Besides Blankfein, Whitehead sees competition by hedge funds as the source of the epidemic. He (likely) snarled, “[It] is very tempting to a Goldman Sachs partner who's in that part of the business, to go off on his own, as many have, and they've all done very well, much better than they would have done even at Goldman Sachs…let them see what happens when the hedge-fund bubble, as I see it, ends.” Great, the guy who worked on Wall Street before some of us were even a fetus has chimed in to make sense of it (the outrages) all. Related: in 2006, Goldman executives—by percentage, took a pay cut. Their compensation represented 43% of revenue, versus 47% in 2005, and was the lowest it’s been since the bank went public in 1999.

Former Goldman Chief Rips Wall St. Mega-Payouts [NYP]

In an effort to uphold the rule that the Masters of the Universe can pretty much get away with anything simply because they’re the Masters of the Universe (see, also: Jobs, backdating), a federal judge has ruled that Goldman cannot be included in a lawsuit by Fannie Mae shareholders. The suit alleged that Goldman had allowed the company to “relocate” $107 million in earnings without informing shareholders.

Judge Richard J. Leon said that there was no evidence that Goldman had prepared any of the financial statements that mislead Fannie Mae, or knew about them in advance. The suit complained that that Goldman Sachs had furthered Fannie’s scam through two Real Estate Mortgage Investment Conduit transactions “for the sole economic and improper purpose of shifting $107 million of Fannie Mae's earnings into future periods.”

Interestingly enough, it was the precedent set by the Goldman rule that allowed Kobe Bryant to get off.

Judge Frees Goldman from Fannie Suit [CFO.com]

Despite yesterday’s news that holders of a slight majority of the voting power of Dow Jones & Co would vote to reject the bid from Rupert Murdoch, no-one seems convinced that the final chapter in this story has been written. And it hasn’t. The board of directors of Dow Jones met with its investment banking advisors to discuss the News Corp bid and assess the possibility for that a rival bidder would emerge, the Financial Times.

Goldman Sachs, which is advising Dow Jones, was expected to give the full board an update on the News Corp bid.

Goldman bankers were also expected to focus on an assessment of whether other media groups or private equity investors would come forward with a rival bid.

People close to Mr Murdoch said he had not heard back from the Bancrofts on Wednesday about his requests for a meeting in the next two to three weeks.

The talk of rival bids has so far been just speculative. One provocative guess seems to be the publisher of the Financial Times, Pearson. This would be a kind of market jujitsu, with Pearson defying calls that it shed its trophy media asset—the FT— and acquiring another. Various other media companies and private groups have been named as possibilities. Both by Deal Journal and Business Week have produced their own lists of possible suitors.

But one highly experienced mergers and acquisitions specialist we spoke with believes that rival bids are unlikely. News Corp’s initial bid included a huge premium, and valued the company at such an extraordinary earnings multiple, that it seems almost designed to scare away competition. What’s more, it’s not clear that any other media company stands to reap the synergistic benefits that available to News Corp—which is planning on launching a cable business news channel.

“Murdoch doesn’t make a bid like this unless he thinks he’s going to win,” a source familiar with News Corp’s mergers and acquisitions practice told DealBreaker. “He’s not kidding around with this. I’m not sure there are a lot of other folks eager to step into the ring with Rupert and try to grab this thing out of his hands, either.”

Dow Jones board meets bankers [Financial Times]

There’s a new sheriff in BP town but will there be one at Goldman Sachs, too? The boys at Rupert Murdoch’s Deal Journal note that Lord Browne (John Browne, Baron Browne of Madingley) has been a director at Goldman since 1999 and wonder if recent revelations might threaten that position. The London Times reports that Browne will lose his night job (and the $500,000/year that comes with), though their sources were unnamed and Goldman representatives declined to comment. The Lord will retain his role on the advisory board (as chairman) of Apax Partners Worldwide, the U.K. p.e. firm, but, as Deal Journal points out, us provincial Americans, and the extremely image conscious Goldman Sachs in particular, may not be willing to overlook Browne’s use of company funds (and perjury).

While we can vouch that Goldman—more so than other banks we’ve encountered—is a bit fanatical about its reputation, and has instilled a certain fear in its employees (whenever we IM our friends at 85 Broad for insider information or for a recap on their nights at Tejune, they hardly ever write back), perhaps they’ll overlook what happened across the pond in light of Browne's business acumen (and because he wasn’t using their money, hence, not their problem). It’s not like Lloyd Blankefein doesn’t have any skeletons of his own (Magic Mountain is all we can say and we've already said too much).

Lord Browne and an Unlucky Number at Goldman [Deal Journal]
Browne-Goldman II: Apax Stands Firm [Deal Journal]
Apax Keeps Browne as Chairman After He Lied to Court [Bloomberg]
Lie over gay partner ends BP chief’s career [London Times]

Jim Cramer doesn’t want you to hate the game, or the playa. And in his column in the latest issue of New York, the “game” refers to making money; the “playas,” I-bankers (and I-bank CEOs, and, more generally, I-banks). Sure, you might be saying, why shouldn’t I hate the $54 million/year Lloyd Blankfeins and the Goldman Saches of the world? Not only are they terribly unhygienic, but they make more in an hour than I do in a month (or is that just us at DB? Don’t answer that) and I’m a jealous, small and petty person (to say nothing of my unresolved issues from childhood, which probably feed into the pettiness in a vicious, never-ending circle).

You’re saying that, right? Well Big J has the answer. If you invest said “playas,” you’ll get to be part of their “game” and your resentment will disappear because when you’re rich, you can buy the antidote to resentment. Another reason you shouldn’t hate these “playas” is because Cramer used to work for Goldman Sachs and never fails to mention this (or his relationship with Spitzer, which, let’s be honest, you really can’t blame him for, because Goldman Sachs is an incredible institution and Spitzer is essentially God’s special gift to the world and politics at large). Here are some other arguments for why you should cross Lloyd, Dick and Stanley off of your To Kill lists (hint: they all have to do with their outifts making you money, and Chuck Prince having less financial acumen than Cramer’s garbage disposal):

1. These guys are basically stay-at-home moms: underpaid and, more importantly, unappreciated.

Stop envying Goldman Sachs’ Lloyd Blankfein already. Don’t begrudge Bear Stearns’ Jimmy Cayne and Lehman’s Dick Fuld their millions. Let Merrill’s Stan O’Neal and Morgan Stanley’s John Mack get paid more than Croesus. You heard it here first: They deserve it. In fact, they deserve more than they earn now. Those five men are underpaid because they are about to make you very rich if you buy their stocks.

2. They will make you Kings of Great Neck, Dukes of Roslyn with Asset Management alone. And, not to brag or anything, but if you must know, Cramer predicted Asset Management would be a major money-maker YEARS AGO, before assets were even invented. Of course, no one at 85 Broad listened to him, just like they didn’t about gravity or 9/11.

The results of yesterday’s “Which bank has the dirtiest working conditions” poll are in. Some of the results may surprise you, some may not. If you actually read what we wrote about Bear Stearns’s in-house cafeteria and its 42 health-code points violations, for instance, you won’t (or shouldn’t) be surprised to learn that it landed in the top three (and if you read the part about contaminated food and inadequate levels of personal cleanliness and are still stunned, don’t invite us over to your home any time soon). If you didn’t know, though, that the 85 Broad is basically one step away from a gas station restroom on the Garden State Parkway (going South), you might be a bit caught off guard to learn that the Kingdom also landed at the top of the list of shame (all that glitters is not gold, indeed). Let’s examine the cold hard (dirty, disgusting, scatological) facts now.

Last week several people batted around theories about what it meant when Henry Kravis let Goldman Sachs play the role of the dog that didn’t bark in his remarks about private equity competition from investment banks.

Dana Cimilluca of Deal Journal figured that Kravis was conveying an animus against Goldman.

At a conference in New York yesterday, the buyout king was asked how he felt about competition from Goldman Sachs Group, Morgan Stanley and other investment banks (those two were specifically mentioned in the question). His answer, according to Bloomberg: Morgan Stanley and Merrill Lynch have “done this extremely well.” No mention of Goldman in the response, according to Bloomberg. Ouch!

It’s long been rumored that Goldman Sachs hasn’t been on the greatest terms with Kohlberg Kravis Roberts, and Wall Street’s most profitable bank has been invading KKR’s turf by raising ever larger buyout funds of its own.

We spoke to a person familiar with the thinking inside of KKR this weekend who to us that “the fued rumor is overplayed.” His read was simpler: Kravis just doesn’t think Goldman’s all that good at the private equity business.

“PIA is almost an after-thought. Their top guys aren’t into it. You don’t go to Goldman to do private equity. You wind up there,” he said.

He did say that all this could change with Goldman's new buyout fund. "But it hasn't changed yet," he said.

KKR’s Kravis Disses Goldman [Deal Journal]

Last night we made a brief appearance on one of our favorite CNBC shows, On The Money, and spent a bit of time talking about the Big Idea of spinning off Goldman's trading and hedge fund business.

In the first part of the segment host Melissa Francis asked CNBC's Charlie Gasparino about possible big bank deals in light of the stellar performance of JP Morgan Chase. You know how these things work. A company reports numbers like the one's the JP Morgan Chase did this week and the investment bankers come out of the woodwork with pitchbooks at the ready. There will be pressure to do deals, to start making acquisitions. The question is whether chief executive Jamie Dimon will give in to the seduction of the dealmakers or whether he'll continue to abstain.

Gasparino's convinced that Dimon won't start building JP Morgan Chase into an empire of acquisitions. The most talked about deal on the street, an acquisition of Bear Stearns, would be too expensive, Gasparino says. We agreed, mostly because we think will be hard for the bank to find a bank or financial services company that is beating JP Morgan Chase in an area that the bank is interested in growing. (Although we're ready to hear from you if you've got likely targets. Leave a comment or send an email to tips@dealbreaker.com.)

At the end of the segment we turned to the Big Idea. Since we first published the Big Idea, we've talked to investment bankers who think that spinning off the hedge fund and trading business might be a good way for Goldman Sachs to realize the value of the business it built up. Goldman doesn't seem to get full credit on Wall Street for its hedge fund and trading operations, in part because Goldman's disclosures about these groups is somewhat opaque. A serious danger faced by Goldman is that its top traders might look elsewhere for a big payday.

And that's where the Vikram Pandit factor comes in. When he was at Morgan Stanley, Vikram made decent coin but nothing that would make headlines or build multi-generational empires of wealth. He left to found his own hedge fund, and one year later sold it to Citigroup for a rumored $600 million. That has to have a lot of people, not just at Goldman Sachs, scratching their heads and doing some quick math about the risks and rewards of striking out on their own. We're hearing from investment bankers who have talked to people insider the firm that Goldman could face pressure to spin-off its trading and hedge fund business in order to realize the value of the business before its guys start to defect or strike out on their own.

Perhaps the strongest case against this idea rests on four factors. First, breaking-up and spinning-off runs contrary to the current orthodoxy on Wall Street, where the banks have been acquiring hedge funds and building private equity businesses. There's the value of the Goldman Sachs name, which communicates an undiminished elite status. There's the knowledge within Goldman that the larger firms needs its trading business, and it will be loathe to let it go under any circumstances. And, perhaps most importantly, there's Goldman's share price, which is now trading at its 52-week high. Everyone with equity has been getting a raise for the past several weeks. That's no doubt dampening the urge to split.

Banking on Big [CNBC]

[In the very first of our Big Idea columns we proposed something that we knew would be controversial—breaking up Goldman Sachs—but we hoped would spark discussion. And that’s what it’s done. First on the Financial Time’s Alphaville blog, then in Thorold Barker’s Lex column in the Financial Times, and over to the personal blog of Portfolio finance blogger Felix Salmon, where it was picked up by the Evening Standard tabloid. Each writer, of course, has picked up a new aspect of the Big Idea: Barker argued for transparency rather than breakup and Salmon for a leveraged buyout. But the discussion continues today in the latest edition of the Big Idea.]

Analyst Richard Bove is “toying in a recent research note with the notion of a Goldman breakup,” says Mark DeCambre on thestreet.com. DeCambre and Bove, an analyst at Punk Ziegel, both pick up with the notion that got this discussion going: Goldman seems to trade at a discount compared to the multiples the market seems willing to tolerate in smaller investment banks, hedge funds and private equity firms.

DeCambre writes:

Yet for all of Goldman's dominance, the stock is hardly loved by Wall Street. Richard Bove, analyst at Punk Ziegel, notes that Goldman trades at a steep discount to many lesser rivals -- in part because diversified financial giants, like Goldman and Citi, don't tend to get premium multiples.

Bove points out that Goldman trades at 10.4 times its projected fiscal 2007 earnings. Meanwhile, high-profile boutiques such as Lazard and Greenhill sell at multiples twice that of Goldman.

We haven’t read the Bove note yet but it seems that both Bove and DeCambre treat this as more of an intellectual lark than a serious exercise in predicting a break-up.

“Mark DeCambre admits up front that Goldman Sachs ‘isn’t considering a breakup right now.’But that hasn’t stopped Mr. DeCambre, who writes for TheStreet.com, from joining the others who have recently speculated about what such a hypothetical and unlikely breakup might mean for the hugely profitable securities giant,” DealBook notes on its item following the discussion today.

Last week, however, DealBreaker had lunch with a former Goldman Sachs investment banker who reminded us that there was a time when no-one believed that the Goldman partnership would go public. Some doubted that it was even possible to take the bank public, given the disclosure requirements and concerns about having conflicts between duties to clients and to shareholders. All that vanished, however, when Goldman did finally go public.

Could Goldman actually breakup?

“Stranger things have happened,” he said.

Splitting the Goldman Sachs Difference [theStreet.com]
Playing the Goldman Breakup Game [DealBook]

The point of our new Big Idea feature is to get the conversation started. Our very first item is fortunately proving the concept. The question of what to do to unlock hidden value at Goldman Sachs—we suggested spinning off the hedge fund business—is getting talked about.

This morning we discussed Thorold Barker’s proposal for a Goldman Sachs Glasnost. (Risk factor: look how well openness worked out for the Soviets!) The second proposal of the day comes from future Portfolio financial blogger Felix Salmon, who thinks that the DealBreaker and Financial Times ideas aren’t radical enough.

Felix writes:

Blackstone, or KKR, or Silver Lake, or someone along those lines, should just buy Goldman already. People have been talking about the first $100 billion private-equity deal for some time now – and this could be it. Goldman is a great PE target: an undervalued company with highly-paid managers who historically have hated the idea of a public listing, with all the disclosure requirements associated with it.

Our bankers raised a couple of objections, however, that you’ll probably want to keep in mind.

“Where would they get the financing?” one banker asked. He pointed out that Goldman, at least, probably couldn’t finance the acquisition of itself. What’s more, other investment banks might be hesitant to leap into the financing of an acquisition aimed at making one of their fiercest competitors even fiercer.

“There’s no way Goldmans PMD’s want to work for Steve Schwarzman,” another said. And that might actually be the stake through the heart of the idea. Goldman’s partnership is probably not eager to put themselves under the control of a private equity firm. “After all,” you can imagine them thinking, “this is Goldman Sachs!”

Could Goldman Sachs be a private-equity target? [Felix Salmon]

Earlier on DealBreaker:
Unlocking Value At Goldman Sachs: Spin-Off or Transparency? [4.11.07]
Will Goldman Become the Next Public Hedge Fund? [4.4.07]

Last week we launched our Big Idea feature by proposing that Goldman Sachs spin-off its hedge fund business. Our hope was that it would start a discussion in the financial community about what direction the firm should take to increase its market value. It took a couple of days, but it looks like the discussion is underway. Today we look at two of the reactions to our Big Idea.

The first comes our way from Thorold Barker in the Financial Times. Barker starts out where we did—the observation that Goldman Sachs may be undervalued given the prices Wall Street is paying for other financial assets. “Goldman Sachs has long faced accusations of being a massive hedge fund with private equity business dressed up as an investment bank. If so, it is not being valued like one,” Barker writes.

Barker is skeptical that Goldman Sachs would take the spin-off path. Although a spin-off would allow Goldman to realize the market value of its hedge funds, Barker believes that Goldman would “not relish” giving up its lucrative hedge fund business and might not want to lose some of the strategic advantages that come with having squads of sophisticated hedge fund traders working in-house.

In our reporting since we proposed the spin-off we’ve come across another objection. People familiar with some of the top managers at Goldman do not believe the firm would have the audacity to depart so abruptly from the dominant model on Wall Street. As other banks build themselves into more complex, larger financial institutions, in part by buying up hedge funds, Goldman would be setting itself far apart from the crowd if it moved in the opposite direction. Our sources don’t think the senior management at Goldman is willing to risk the wrath of shareholders and public opinion by betting against the orthodoxy of growth.

Barker has another idea: Goldman needs to open up its hood and start showing us how its engines run, he writes.

The easiest option would be for Goldman to take the boom in alternative asset management as a sign that it is time for more transparency.

If it believes it is being short-changed on valuation it could give more detail on exactly how it generates profits in its different businesses. In that way, investors could get more comfortable with the mechanics of the group (even if that meant seeing the gut-wrenching volatility in some areas). This would also give investors a clearer view of what the sum of Goldman’s parts is really worth.

One difficulty with this idea is that it risks giving away the keys to the kingdom. Many hedge funds attempt to keep their inner-workings from the public eye for fear that exposure might invite copycats or counter-strategies from rivals. A new openness at Goldman might allow investors to better understand how Goldman makes money, but it would also allow competitors to gain this understand. The current thinking at Goldman, we’re told, is that this risk is not worth taking.

On Wall Street: The transparent alternative for Goldman [Financial Times]

An initial public offering has been ruled out by Kohlbeg Kravis & Roberts, sources tell DealBreaker. “KKR is next” was one of the most persistent rumors that arose in the wake of news that Blackstone would offer $4 billion of limited partnership equity to the public was. There were published reports claiming that bankers at Goldman Sachs were already at work on putting together an IPO for KKR—and those might have been correct. Perhaps there were bankers pitching an IPO to KKR. Perhaps the venerable private equity titan had even encouraged the bankers. But now we’re told that the IPO is off. Indefinitely. Permanently. For now.

Word from CNBC’s Charlie Gasparino that Goldman and JP Morgan were working on an IPO for Apollo Management, and subsequent stories in the Wall Street Journal and New York Post, quickly helped Apollo replace KKR in Wall Street afterhours chatter and on the pages of the newspapers. Part of what had been feeding the KKR rumors was the feeling that Goldman—which was notably absent from the list of advisers to Blackstone for its IPO—must be working on something for a Blackstone competitors. How else had one of the premier banks been shut out of one of the most talked about deals? It seemed the door was held open for nearly everyone else on Wall Street.

Apollo fit just as well as KKR for this theory, and reports and rumors of its impending IPO private placement have quickly replaced those pointing to KKR. Even denials by people “close to Apollo”—as DealBook reported—and by people who maybe know some other people who are familiar with things that sometimes happen at Apollo—as the Wall Street Journal reported—haven’t quenched the thirst for this story. This morning's WSJ report only served to confirm that it was Apollo and not KKR whose deal was keeping Goldman occupied during the rush of other banks into the arms of Blackstone's IPO.

But we came not to discuss the history and origins of the KKR rumor but to lay it to rest. Our sources—lets call them, “people familiar with KKR’s plans”—tell us the KKR has decided to stay out of the IPO game for the time being. The reasons we’ve heard are purely speculative: it didn’t like the comparatives with Blackstone, it didn’t like the attention Blackstone and its tax treatment were getting, it didn’t think the timing was right, it didn’t think the price would be good enough to justify the headaches of added public scrutiny, the KKR-ers aren’t pushing for freely transferable equity stakes like the ‘Stoners are. Take your pick or invent your own.

It’s the story that won’t stand still even long enough for a blog to report on it. Last night the Wall Street Journal’s Kate Kelly and Susan Pulliam reported that Apollo has retained Goldman Sachs and JP Morgan to explore a private placement of ten percent of it’s equity, possibly for as much as $1.5 billion.

Some highlights from the WSJ:
• If 10% of Apollo goes for $1.5 billion, Apollo founder stands to make a cool $750 million because he owns half the equity of the firm. [DealBreaker’s note: Damn it feels good to be Leon Black.]
• The private placement would allow Apollo to cash in some of the value of its equity while the market for private equity is still hot while avoiding hitting the public markets with private equity offering too close to the Blackstone IPO. [DealBreaker’s note: So Apollo avoids the risk of a public market slow-down before the IPO and pushes that onto the private purchasers? Great work if you can get it.]
• A private placement wouldn’t require immediate registration with the Securities and Exchange Commission and would postpone the need to make SEC compliant financial disclosures. [DealBreaker’s note: This means the deal could get done very, very quickly. Registration and compliant disclosure take time. Roadshows and financials for institutional investors—much easier to put together.]
• Despite all these details, it’s still not 100% that this thing will even happen.

[Editor's note: Graphic is "Birth of Apollo." Hopefully more pleasing to the eye than that Blackstone IPO thing we've been throwing around lately.]

Apollo Explores Sale of 10% Stake In a Private Deal [Wall Street Journal]
Equity Firm Is Seen Ready to Sell a Stake to Investors [New York Times]

[Editor’s Note: We’re launching some new regular features and “The Big Idea” is the first of them. That nifty logo you see to the left will tip you off that we’re about to engage in speculation, guess-work and commentary about the Big Idea of the day, the week or the month. This isn’t the realm of breaking news or even linking to news broken elsewhere. The inaugural Big Idea begins by asking what seems an obvious question in light of all the talk of hedge funds and private equity firms going public: What about Goldman Sachs?]

"Will a hedge fund become the next Goldman Sachs," asks Jenny Anderson in today’s super special DealBook Section of the New York Times. There are all sorts of problems with this idea, not the least of which is that while the hedge fund in question—Citadel—is growing in all sorts of new and strange ways it hardly seems to be growing into anything like a full-fledged investment bank. “Citadel has elements of an investment bank disguised as a hedge fund, minus the investment bankers,” Jenny admits. So, yeah. No. Not an investment bank. Not Goldman Sachs.

We can't help but wonder, "Could this work the other way around?" With all the talk of hedge funds and private equity going public, one story that’s been overlooked is the possibility that Goldman Sachs might spin off its hedge fund business. Goldman broke new ground when it abandoned its traditional partnership structure and let the public buy pieces of its equity at the turn of the century. But that was then, and this is now. And surely Goldman Sachs has not reached its Hegelian end-state. The end of history of the history of Goldman is a ways off yet, and the next step might be a spin-off of its profitable trading business.

That will come as a shock to some who have come to regard Goldman Sachs as a hedge fund disguised as an investment bank—but is it really so far-fetched? But the proprietary trading business—basically, Goldman trading for Goldman—has been a strong profit and growth engine for the bank, so strong that some wonder whether this piece might be far more valuable as its own entity.

Surely there are some people inside Goldman Sachs proprietary trading business wondering just how much their little corners of the investment bank might be worth if it wasn’t dragged down by the fee-gobblers in investment banking and credit groups. A free-standing GS Prop Trade would surely face some risk from facing the markets without security of Goldman’s other businesses behind it. But these guys are risk machines, and have been ratcheting up their risk tolerance for some time.

Would the rest of Goldman let the traders go? Perhaps. A spin-off might also help the other businesses at Goldman. It could refocus those parts of the firm that remain behind on their core business, and eliminate the always present suspicion that while a clients dealt with one side of Goldman the other side might very well be trading against the client’s interests.

What’s more, it would empower the investment bankers over the part of Goldman they get to keep. With the departure of Hank Paulson and the rise of Lloyd Blankfein and his trader buddies, some other parts of Goldman have been chafing. There were, of course, those old reports of the partners fighting like ferrets. Could divvying up Goldman bring peace to Broad Street?

We haven’t heard anything more than cocktail party chatter along these lines—and we’re not sure you should place all that much confidence in the opinions of the sort of people who attend the sort of cocktail parties we frequent. The recent performance of Global Alpha—down 2 percent for the year when hedge funds have had an average gain of 1.9 percent—probably isn’t exactly lighting a fire beneath the fannies of would be Prop Trading Secessionists. But, you know, it’s in the air.

And we can’t help but smile at the ironic image of Prop Trading stealing away into the night with its own spin-off at the very time when Goldman’s investment bank is out pitching so many other hedge funds and private equity firms on their own IPOs.

One storyline that is clearly emerging from the various private equity and hedge fund IPO rumors and reports is that the investment banks are gunning hard for this business. And they’re not waiting around for hedge funds to decide to go public—they’re pitching, even pushing, the idea of launching a public offering on the firms.

“All over Wall Street, bankers are pushing private-equity shops to move quickly, reminding them that market conditions could deteriorate and diminish investor appetite for any offering,” Wall Street Journal reporters Katie Kelly and Robin Sidel write in today's paper. “In this case, however, it isn't clear whether bankers are more concerned about a capital-markets slowdown or getting a high-profile deal to the finish line before rival firms attempt to do the same.”

A sign of how ultra-competitive the investment banks have become for this business is the public attention paid to the fact that Goldman Sachs was not included as an underwriter for the public offering of Blackstone partnership equity. There was a lot of speculation about why one of the premier banks on Wall Street (yes, yes, Broad Street, we know, “Wall Street” is a metaphor or a synecdoche here) was left out of a deal that seemed to include every other bank on the Street. Was it because Goldman “called bullshit” on the Blackstone IPO, as some said? Or was it personal animosity between the higher-ups at Blackstone and some prominent Goldman personages? Or—and we’re sorry there are so many “ors” here but that’s just the way the world is—was it that Blackstone was hesitant to let Goldman—which competes with Blackstone in many of its businesses—do much digging into its books in preparation for the offering.

If the reports of an Apollo IPO—a story broken by CNBC’s Charlie Gasparino yesterday and carried several millimeters forward in today’s Wall Street Journal and New York Post—are correct, then it seems we have the answer: Goldman couldn’t take the Blackstone business because it was already working on the offering of its competitor. Now Goldman is famous for finding creative ways to cleverly untie seemingly Gordian knots of conflicts—but underwriting two competing private equity IPOs might have been too going too far.

That’s the story as we’ve heard it. But the boys at Deal Journal have an alternate reading of the Apollo story. They write that the Apollo IPO isn’t so much of what kept Goldman out of the Blackstone underwriting syndicate—it’s a consolation prize for the banks, a bit of business they apparently pushed to get after being shut out by Blackstone. Of course, Deal Journal has been a big proponent of the Blackstone In Competition With Goldman theory, and this take would allow them to leave that notion in place. The Apollo Conflict theory, in fact, undermines the whole idea that Goldman was shut-out.

Of course, we’re probably just counting our eggs while they are still in the bush. Or however the saying goes. <