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CNN Money – Hedge funds may be struggling and closing up shop in the current market environment, but Goldman Sachs Group Inc. (GS) was able to make more money tending to the funds’ needs this year than last.
The company, which on Tuesday reported its first quarterly loss since it went public a decade ago, was able to post a 19% gain in revenue in its securities services operations for the three months that ended Nov. 28, compared to the same period last year. The business also turned in record net revenues for all of fiscal 2008 at a time when Goldman’s normally high-octane trading and principal investing line was down by 71% for the year.
Goldman’s security services business is dominated by its prime brokerage operations, whose clientele comes primarily from hedge funds. Competitor Morgan Stanley (MS), which runs a similar prime brokerage business that turned in record net revenues last quarter, reports its earnings on Wednesday.
Though hedge funds have been hard-hit by customer redemptions and market losses, Goldman was able to generate more revenue this year because its securities services business mix became more profitable, Chief Financial Officer David Viniar told analysts during a conference call.
Reuters – Goldman Sachs could post its first ever quarterly loss as a public company in December, as market turmoil weighs on revenue for investment banking businesses and forces asset writedowns.
One Wall Street analyst, Glenn Schorr at UBS, predicted a loss for the bank on Friday. The potential for a quarterly loss, combined with the generally weaker environment for financial institutions, has some investors wondering if Goldman Sachs really deserves to trade at a higher valuation than Morgan Stanley, the other major independent investment bank that is now a commercial bank.
Goldman’s shares trade at about 1.1 times their tangible book value, while Morgan Stanley’s shares trade at less than half their tangible book value. A spokesman for Goldman declined to comment.
Goldman Sachs is legendary for its risk management expertise. In early 2007, it saw the storm clouds gathering above the subprime mortgage market and positioned itself to profit from the expected home loan downturn.
New York (HedgeCo.Net) – The Securities and Exchange Commission charged San Francisco-based MedCap Management & Research LLC and its principal Charles Frederick Toney, Jr. with defrauding investors via “portfolio pumping.”
“Fund investors relied on MMR and Toney to abide by their fiduciary duties and put the fund’s interests ahead of their own,” said San Francisco Regional Director of the SEC Marc J. Fagel in a press release yesterday. “Instead, Toney engaged in trading activity which hid his poor performance.”
Engaging in “portfolio pumping” in this case meant that Toney invested heavily at the quarter’s end with a thinly-traded penny stock, which in turn quadrupled the stock price and allowed him to inflate his quarterly results to investors. By doing this, the fund was able to hide what would have been a 40 percent quarterly loss for MedCap.
Instead, the scheme helped the company up its reported value by $29 million thanks to Toney’s four day buying frenzy which pushed the price of the stock from $.85 to $3.72. The fund was then able to charge higher management and performance fees that were based on the inflated numbers.
While MMR did not confirm or deny the allegations, the company has agreed to settle out of court by paying $100,000 in penalties and giving back the amount received in inflated management fees totaling over $70,000. Toney has also agreed not to act as an investment advisor for the next year.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
The Money Times – Last year, I read an article in which David Herro outlined his rationale for owning shares of UBS in his Oakmark International fund. He focused on the value of its wealth management unit, which delivers stable earnings and benefits from the spread of wealth across the globe. Fair enough, but UBS’ most recent quarterly results show the bank’s abysmal performance in other areas is now tarnishing its crown jewel.
After a fourth straight quarterly loss due to subprime writedowns, UBS’ Wealth Management unit suffered net outflows of 19.3 billion Swiss francs ($18.8 billion) — its first net outflows since the fourth quarter of 2000.
In response, the bank is reversing its "one bank" strategy by giving increased autonomy to its three businesses: Investment Banking, Wealth Management, and Asset Management. The initiative could pave the way to a spinoff or sale of the investment banking business.
New York (HedgeCo.Net) – Writedowns from major banks have reached the $500 billion mark, only one year after the subprime fallout forced mortgage-backed securities to plummet in value. And it’s not over. Some economists estimate that number will ascend upwards to $2 trillion by the time all the damage is done.
UBS, the European bank hit hardest by the U.S. fueled mortgage crisis, announced its second quarter losses yesterday to be $6 billion, most of which can be attributed to subprime-backed assets.
This marks the fourth consecutive quarterly loss that the Zurich-based bank has posted. UBS has previously written down over $35 billion since the credit crisis started last summer.
Other major banks are dealing with the same dilemmas. Wachovia has already experienced over $22 billion worth of write downs, while Merrill Lynch and Citigroup each have written down over $50 billion.
The current probe launched by New York Attorney General Andrew Cuomo isn’t helping either. Since major banks are now being forced to buy back bad auction-rate securities, many financial institutions are finding themselves in way over their head. In addition to the subprime-related mess, UBS has to allocate $20 billion to buy back the shoddy securities from disdained clients.
In an attempt to restructure, UBS also announced it will separate some key divisions of the company. The investment bank, which has been experiencing the major losses, will pull away from the bank’s wealth management and asset management divisions.
UBS hopes to give each section “maximum strategic flexibility.” While some speculate UBS is positioning themselves to be sold, chairman Peter Kurer has insisted that the companies are not for sale.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
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New York (HedgeCo.Net) – While Delphi continues its quest to secure the capital needed to exit bankruptcy, GM has announced they will increase their loan to the auto parts maker to $950 million. The extra $300 million will help Delphi maintain some liquidity throughout the process.
Delphi, who sought bankruptcy protection in October 2005, pulled together an exit strategy that included a $6.1 billion influx of capital. Hedge fund Appaloosa Management took the reins and agreed to provide $2.55 billion to help lift them out of Chapter 11.
Former parent company GM also came to the rescue and promised a whooping $2 billion piece of the puzzle. However, Appaloosa proceeded to walk away from the deal during the final days in April, leaving Delphi with no other alternatives.
Delphi took action against the hedge fund in hopes of making it deliver on the promised capital. The hedge fund bailed amidst what they thought was an increasingly risky situation. They also were concerned whether or not Delphi has an overreliance on GM.
Delphi’s next hearing is scheduled for August 26th in the U.S. Bankruptcy Court in New York. GM just reported a $15.5 billion quarterly loss, one of the largest in their history.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds! Be sure to check out our sister sites. For more information, visit www.hedgeconetworks.com
