Goldman Brokerage
Goldman Sachs Prime Brokerage
Many are now wondering what surprises Morgan Stanley and Goldman Sachs might have in store after several other large banks and insurance firms have fallen. Here's a short story related to this topic:Resource #1: (11.6.08) Great piece here by the FT about how Goldman Sachs is booting some of their hedge fund clients off of their platform. This opens the doors again for independent or mini prime brokerage shops to pick up the pieces left behind by larger operations such as Goldman. In the last 9 months there has been more prime brokerage account closing, creating and multi-priming than there was over the previous 3 years. Here is the story excerpt:
Goldman Sachs is cutting back the number of its hedge fund clients in an indication of tougher market conditions and of the changes sweeping through what was once the premier investment bank.
"Their ability to leverage themselves has been affected by their new reiteration," says George Kellner, founder of hedge fund Kellner, DiLeo. "They are reviewing many of their relationships."
That review is especially intensive for hedge funds pursuing strategies that involve trading securities that aren't very liquid, such as convertible bonds, or that rely on the massive use of borrowed money, such as the computer-driven strategies that seek to profit from small price discrepancies.
During the bull market, such strategies appeared liquid and borrowing was cheap. But in recent months, prime brokers raised the cost of funding and many hedge funds were forced to sell convertible and junk-rated bonds that dealers can't readily lend. Such securities have become "dead-end collateral" in Wall Street parlance. Read more...
Resource #2: The spiraling downward of financial confidence has sprouted up in various areas. Bloomberg reports that hedge funds making up “less than 10%” of Morgan Stanley’s prime brokerage balance are withdrawing their assets from the firm, or plan to do so. The article cites “a person with direct knowledge of the matter.” The article notes that Deutsche Bank AG (DB), Citigroup (C), Credit Suisse Group AG (CS) and JPMorgan Chase (JPM) “are picking up Morgan Stanley’s clients.” The threat to hedge funds’ assets is real, the article suggests: Lehman has frozen “billions” in hedge fund money inside its prime brokerage unit since it filed bankruptcy on Monday.
Pension funds try and strangle short sales
But some are fighting the good fight, apparently. Dow Jones Newswires is reporting that the California Public Employees Retirement System (CALPERS) is “no longer lending out shares” of Goldman Sachs (GS) and Morgan Stanley (MS), hoping to “limit short-selling” of the stocks. The wire quotes Clark McKinley, a CALPERS spokesperson, as saying “We don’t want to inadvertently contribute to the instability of these companies or the market.” DJ notes that Cali’s teachers pension system yesterday stopped lending shares of both stocks, and sent a letter to 60 of its fellow pension funds urging them not to lend. Read more...
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