patrick.net

@sp,

Maybe Randy and others can correct me, but there's a difference between true private wealth and your typical private equity firm (Carlyle, Blackstone, Cerebrus, etc.) The latter still use a huge amount of leverage to get deals done. I'm just not sure how much leverage is used to fund VCs and in turn startups. My guess is not much, as why borrow money to throw into a 2-5 year investment?

Peter P,

this is a great chance to swap your paper position into a physical position because the absolute mark-up will be lower. I am planning to go physical 100%.

GLD can be borrowed for shorting, and since it is Wall Street, we know naked shorts happen. Well, if I am holding physical, I don't care what your manipulated paper price is. When all shit hits the fan, we will see if gold or USD toilet paper goes further in buying anything.

Speaking of leverage, did anyone else catch one of yesterday's WSJ articles about BSC? Turns the balance sheets on all these Wall Street firms is incredibly leveraged. The talk in the news is how Lehman is the one on shaky ground b/c of it's degree of leverage, but Lehman is right about 32x leveraged, comparabe to BSC, while the "beacon of hope" on Wall Street, Goldman Sachs is "merely" 26x leveraged.

That's frightening.

skibum,

Carlyle, Blackstone are not VCs, they fall into the category of private equity group which typically play financial gains of doing LBOs, privatizing and later on bringing the same privatized company public. In doing so, they typically resort to cheap financing through issuing bonds or taking on bridge loans (which now become pier loans). They create no value, they are just the mother of all arbitrages of value (or the mother of packaging up). They buy *existing businesses*, turn them around in accounting sense to dress up for a bigger sale to dumber investors.

I have had pleasure to do business with one of those groups in my previous position. I have to say they add no value whatsoever for the world, except for playing the arbitrage to pocket the "arbitraged value" for the partners. The management employed by these private equity groups are usually accounting experts in making the company look good on paper, but in fact, the enterprise value is destroyed in the long term, but they've cashed out so they don't care.

GLD seems to track spot gold prices reasonable well for now. I may go physical, but I need a way to hedge easily.

GC actually has pretty good action at night, have you looked into your hedging options? (I also notice that the Asian session seems to be more optimistic about higher gold price lately. Gold futures can go up $10 just to be beaten down by the gorram New Yorkers.)

I hope the Asian session will be lower because that's when I buy physical.

Can you do that during the short Aussie-only session?

The whole thing about Wall Street can be summarized in the following:

Put a value on future expected (perceived) cash flow and cash out today.

It is ok to do so when one needs to buy or sell a company or a portion of a company. But this mentality has gotten out of whack, so everyone wants to cash out TODAY. No one wants to wait for tomorrow for the value to prove itself. No, we want it TODAY. Not only that, we want to tweak the *perception* of future cash flow so that we get a higher value TODAY.

So Wall Street is really a story-telling machine. To tell a good story, you need to line up the different components, the numbers need to look good (in accounting sense only), the management needs to look sharp, the general business environment needs to look upbeat. But story cannot divert too much from the reality. Eventually realty will shine through.

I can only do that during the Aussie-only session, because that's when the Mint accepts my order and parks my physical PM.

So Wall Street is really a story-telling machine.

All successful businesses are.

Gah. 32x and 26x. If those leverage values are against MBS, CDO, etc then they are insolvent.

If BSC was 30b to the Fed, Goldmnan and Lehman will be something like 100b?

Time to create a Fed burn clock. They are tracking towards insolvency.

Delta airlines just offered severance to 50% of it's employees, 30,000 of 'em.

Fed has another $500B to burn without turning on the press full speed. But we have MER, C, LEH and perhaps Wamu waiting in the pipeline for part of that $500B, I say the press will go on full speed before the end of summer.

Successful businesses have to backup its story-telling skill with real products. Wall Street's product is the story itself, a moneyed version of Hollywood.

I can only do that during the Aussie-only session, because that’s when the Mint accepts my order and parks my physical PM.

The market is thin and quiet after NY closes and before Hong Kong opens. You may be able to find a good deal.

Not investment advice.

Successful businesses have to backup its story-telling skill with real products.

Successful executives on bonuses and stock options don't have that requirement.

Carlyle, Blackstone are not VCs, they fall into the category of private equity group which typically play financial gains of doing LBOs, privatizing and later on bringing the same privatized company public.

oo,
You misread my post. I realize these guys are private equity. I was making the point that these guys provide a lot of the cash sloshing around our economy by "freeing up" that cash through leverage. They add no real value, I agree, but their contribution to all the free-flowing money in our economy will become apparent as they continue to not get the loans needed to complete these deals.

The whole thing about Wall Street can be summarized in the following:

Put a value on future expected (perceived) cash flow and cash out today.

oo,
In many ways, today's story runs parallel to the junk bond crisis of the 80's that brought down Drexel. Funny how a new generation on Wall Street repeated the same recklessness and greed.

History repeats. Whatever transpired in the past *will* transpire in the future, in one manifestation or another.

skibum,

sorry about that. But I don't think they "provide" lots of cash sloshing around. According to what I have seen, they don't even put in 10% down for a deal that they are committed to. They borrow most of that money, either from public market or from banking buddies. They always try to minimize their own cash contribution so that they can spread their equity over to as many deals as possible.

I think they contributed to the misallocation of money in the economy, not the free flow. Funds that could have been lent to more productive uses got diverted to such deals which have shorter turnaround time and higher "guaranteed" payback than, for example, building a research facility. The deal that I experienced was funded mainly by money from BOA, which was only making a fixed return on coupons while the partners at the group get all the upside. Downside? The deal is structured so that the bucks stop at the failed LLC leaving partners untouched and BOA eats all the loss.

Why would a bank take on such a shitty value proposition? Because the BOA executive approving such a deal is buddy buddy with the partner and they are related through some kind of marriage relationship. The kind of rampant corruption on the Wall Street is just completely disgusting.

I honestly think Michael Milken is a saint compared to many senior execs on the Wall Street today.

The kind of rampant corruption on the Wall Street is just completely disgusting.

They are just being human. I am not saying that humanity is not disgusting.

OT but of interest. The oral argument transcript for DC v. Heller is up now at the SCOTUS site. www.supremecourtus.gov/oral_arguments/argument_transcripts.html

The justices have been holding DC's lawyer down and kicking him in the nuts. :)

I don't think they are being human. If I am worth a few hundred mil, or "just" tens of mil, I would want to do something useful for other people, make the world a better place since I don't have to worry about money any more. Most people who are successful on Wall Street consider money the only thing they ever live for.

However, if everybody thinks like these guys for whom money is the only reason for living on, then they won't be 1/10 as rich as they are today, because suddenly there will be billions more competitors.

# OO Says:
The management employed by these private equity groups are usually accounting experts in making the company look good on paper, but in fact, the enterprise value is destroyed in the long term, but they’ve cashed out so they don’t care.

aka "Flippers". Same wine, different label.

OT but of interest. The oral argument transcript for DC v. Heller is up now at the SCOTUS site.

Thanks Dennis!

It is about time. I don't know why all my "liberal" friends seem to think that only state militia should have guns. I thought 'liberal' and 'liberty' share the same root.

An interesting observation on the Fed 75bp cut statement today:

http://www.federalreserve.gov/newsevents/press/monetary/20080318a.htm

Nowhere in the entire press release did they mention the housing market. I'm not trying to read too much into it, but either they finally realized the problem is much bigger than subprime (took them long enough), or housing's not a problem anymore (yeah right), or they just forgot....

I don’t think they are being human. If I am worth a few hundred mil, or “just” tens of mil, I would want to do something useful for other people, make the world a better place since I don’t have to worry about money any more.

You still have faith in humanity, huh?

or housing’s not a problem anymore

Or housing should be not talked about as a problem anymore.

skibum
I believe they didn't mention housing because

1. Congress Dems are getting ready for the mother of all bailouts and they (Fed) don't want to provide them with ammo
2. The Gov. is about to lift restrictions on GSEs and do the bailout via that route so the Fed doesn't want to give enemies of that proposition ammo by making it look like like the GSEs are entering unsafe waters
3. Shutting down BS has - through a complex but inevitable cascade of events - solved the problem (from Feds perspective) by passing it on to "other parties"

Doh!
I forgot the "or" between the numbers...please be kind enough to imagine it there

Housing was in fact mentioned in 1st paragraph, direct quote below.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

I want to see Ben bring the rate wheel into play. Every fifteen minutes he spins it where it lands is the rate, ---- maybe. Let's see how good the guys on the Street really are.

Housing was in fact mentioned in 1st paragraph, direct quote below.

Housing was in fact mentioned in 1st paragraph, direct quote below.

Oops. My Bad.

I disagree with the notion that VCs use extensive leverage. VCs aren't banks, they are the truest form of investor. The firms are normally made up of partners who pool their resources and invest in a portfolio of startups with the potential for a large harvest event. When they have a track record of success qualified investors will put money with them to spread throught their portfolio. I don't think it is accurate to say that they borrow money to invest.

throughout

TOB,

That footage of the SoCal tent city looks like it was shot with movie film rather than video. How old do you think it is?

I see.

sorry, this is a test:
:D :) >:) >:( >D >( >)