It’s not every day that a company invites the “public” to listen to a call that is usually geared toward analysts and investors.
But Goldman’s first quarter conference call this morning is no ordinary event. It comes only a few days after the venerable Wall Street firm was hit with fraud allegations by the Securities & Exchange Commission over its role in marketing a CDO in 2007.
Goldman, which has seen its stock plummet since the allegations were announced last Friday, is expected to address the issue this morning. The firm may have little choice, the focus of many of the questions is sure to be on the fall out from the SEC lawsuit, even as it reports that profits jumped 91% since a year ago.
One unknown is whether CEO Lloyd Blankfein will make an appearance this morning. He rarely, if ever, speaks publicly on these calls, leaving that task up to the company’s savvy, not-easily-rattled CFO, David Viniar.
Deal Journal is living blogging the call, which is expected to start at 8 a.m.
8:04 am | by Michael Corkery
The good news then the bad.Â CFO Viniar is running through Goldman's results first and then will have the general counsel walk through the SEC complaint.
8:06 am | by Michael Corkery
Doesn't sound as if Blankfein is going to make an appearance
8:06 am | by MIchael Corkery
Investment Banking: Equity underwriting and M&A advisory fees are down from the fourth quarter. Only debt underwriting rose.Â And I-banking backlog is flat.
8:07 am | by MIchael Corkery
Trading business: All revenues are up from a year ago despite lower volatility.
8:08 am | by Michael Corkery
Risk, as measured by Value at Risk, is down 11% from fourth quarter.
8:10 am | by MIchael Corkery
Compensation accural rate is the lowest ever, which reflects current strength of Goldman revenue and the political environment.
8:11 am | by Michael Corkery
It took a full ten minutes into the call, but he finally mentioned Goldman's goal to serve its clients' interest first.
8:12 am | by Michael Corkery
Greg Palm, general counsel is up: We are "disappointed" that SEC would bring the case in face of the info. we presented.
8:13 am | by MIchael Corkery
Palm: The process began in August 2008 when SEC asked for information, and we have been very cooperative.
8:15 am | by MIchael Corkery
For the third time in about 3 three minutes, Palm mentions how "professional" and sophisticated and experienced IKB and ACA were at CDO deals , suggesting they knew what they were doing.
8:16 am | by Michael Corkery
Palm: In selecting the portfolio of collateral, ACA reviewed all of the assets in the pool.Â It had final say and used its own modeling to decide the collateral. It rejected more than half of the collateral suggested by Paulson.
8:17 am | by Michael Corkery
Palm: There is no evidence that ACA thought Paulson was taking an equity position in the deal.
8:18 am | by Michael Corkery
Palm: Goldman lost $100 million on the deal. (That estimate seems to be growing. Yesterday Goldman said it lost 90 million on the transaction)
8:19 am | by Michael Corkery
Now to questions....Glenn Schorr of UBS asks if Paulson wasn't misrepresented as being long on the deal, how were they introduced into the deal.
8:20 am | by Michael Corkery
Palm: I am sure we would have put them in contact with each other. There is no evidence introduced to us what it would involve....if the question isÂ "What was ACA thinking" I don't know.
8:23 am | by Michael Corkery
Schorr: Are there any wells notice outstanding?
8:24 am | by MIchael Corkery
Palm: We disclose anything that is material. We do not disclose every Wells notice (from the SEC) that we get. That would not make sense .
Schorr: Obviously, at the K, you didn't think this was material. (Schorr made some waves yesterday when he pushed Citigroup about whether it had any outstanding Wells notices. Citigroup stayed tight lipped.
8:28 am | by MIchael Corkery
One thing lost in all of the SEC news. Goldman has repurchased shares becoming one of the first big banks to do so in the wake of the financial crisis. Most firms have been hoarding capital.
8:29 am | by Michael Corkery
Palm: Why did we raise estimate of losses. We thought $100 million is a round number and it would sound better (chuckle, chuckle)
8:32 am | by Michael Corkery
Credit Suisse asks any client business has been impacted by the SEC complaint
8:35 am | by Michael Corkery
Palm: Timeline for dealing with the SEC lawsuit is unknown.
8:36 am | by Michael Corkery
Viniar: Our clients will support us as long as we provide the best service. As long as we continue to perform for our clients they will be happy for us.
8:39 am | by Michael Corkery
Roger Freeman of Barclays: How many CDO transactions has the SEC reviewed. Goldman did about 70 in 2006 and 2007?
8:39 am | by MIchael Corkery
Palm: There is one case that has been brought, that's all I can say.
8:44 am | by Michael Corkery
Mike Mayo of CLSA: In very simple terms,Â Paulson was short the portfolio and selecting the portfolio, and Goldman didn't disclose that to ACA. Why would SEC be wrong?
8:44 am | by MIchael Corkery
Palm: Paulson selected some material, but ACA had final say on the collateral.
8:46 am | by Michael Corkery
Palm: Remember that whatever you invested in during this time period,Â "you got crushed."Â It didn't matter what you selected in terms of mortgages.
8:46 am | by Michael Corkery
Mayo: How common was it for a third party like Paulson to select the collateral for the CDO.
8:47 am | by Michael Corkery
Palm: This CDO was constructed and marketed in similar ways as transaction at the time.
8:51 am | by Michael Corkery
NOTE: That was the most interesting exchange so far. Palm essentially seems to be arguing that all mortgages were weak at the time so it didn't matter what collateral had been selected for the CDO, and whether it was selected by someone who was long or short on the housing market. The SEC argues that this is a judgement call that should have been left up to ACA decide. But it wasn't able to do so because Goldman didn't disclose Paulson's short bet on the CDO.
8:53 am | by Michael Corkery
Palm: No conversation with the Department of Justice on the Abacus CDO. (It remains a civil matter)
9:00 am | by Michael Corkery
Now to the quarter results: Viniar is asked what areas of its fixed income and commodities trading business are strongest. He says the strength was across the board. (Note: No one, neither analysts nor Viniar, seems to mention much of the firm's capital markets strength is due to extremely low interest rates thanks to government monetary policy)
9:04 am | by Michael Corkery
Palm: You can't do a synthetic trade unless both sides (both long and short) are amenable to what you are talking about.
9:05 am | by Michael Corkery
Trone: Why did Goldman take a position in the deal (super senior tranch)?
9:06 am | by Michael Corkery
Palm: We had skin in the game (which is something that regulators want more of) and we would not have put skin in the game if we thought there was something wrong with the deal.
9:10 am | by Michael Corkery
Back to the quarter, equity flows to asset management business is weak in the quarter, why?
9:10 am | by Michael Corkery
Viniar: That is happening across the industry as more investors put money into fixed income funds.
9:19 am | by Michael Corkery
That's a wrap. Palm and Viniar stayed on two essential messages: 1) That ACA and IKB (the long investors in the CDO) knew what they were doing because they'd done simliar deals in the past. 2) ACA knew Paulson was involved in selecting the collateral for the CDO.
The one thing Goldman didn't seem to answer as clearly was why ACA didn't know Paulson was shorting the CDO. Palm argued that Goldman made all appropriate disclosures and pointed out that in the end it didn't matter which mortgages went into the CDO because most loans, regardless of who chose them, eventually went bad.Â Still, some analysts questioned why ACA wasn't told about this by Goldman, who was brokering the deal.