Goldman Sells Equity To Buy Junk

Goldman Sachs, pillar of ethical honesty in the lead up to the last market top and crisis, appears to be so bullish on leveraged loan and high-yield debt that it prefers to create an entirely separate holding company (that requires less transparency), raise external equity capital, lever up, and use a management team with “no experience managing a business development company (BDC).” As the WSJ reports, Goldman plans to offer shares in a new unit, Goldman Sachs Liberty Harbor Capital LLC “as soon as is practicable,” in a BDC that means it is exempt from the so-called Volcker Rule.

The entity also enables Goldman to report less transparently since it qualifies as an emerging growth company under the JOBS Act. The hope is to leverage the special purpose vehicle.

We can’t help but think back to the firm’s ability to create bespoke securitizations for its clients that implicitly enabled it to be short into the CDO collapse. In this case, we wonder if funding this vehicle with outside capital, remote from the bank itself, and perhaps transferring the bank’s exposure to HY and leveraged loans (which are trading at dramatically rich levels currently and have been called ‘frothy’ by more than one Fed president) is an implicit option on credit (if credit rallies, profits go up to parent entity; if credit tanks, entity implodes and eats ‘remotely’ the new equity capital without affecting the bank itself)? Or maybe we are being too negative?


Via WSJ,

Goldman Sachs Group Inc. has launched a new specialty finance company to invest in high-risk debt primarily of U.S. mid-size companies with no credit ratings.


… plans to offer shares in the new unit, Goldman Sachs Liberty Harbor Capital LLC, “as soon as practicable after the effective date of this registration statement.”


… the group has “elected to be regulated as a business development company under the Investment Company Act of 1940.”


Goldman said it expects the new unit will not fall be covered under the so-called Volcker Rule, which was is part of the Dodd-Frank financial regulatory overhaul.



The unit does qualify as an emerging growth company under the Jumpstart Our Business Startups Act of 2012, known as the JOBS Act, which could allow it to “take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies,” said Goldman in the filing.



Goldman said its investment advisor Goldman Sachs Asset Management L.P. and its management, which will earn incentive fees based on their performance, “have no prior experience managing a BDC.”

Guest Post: Bizarre Updates From 'The New Normal' School Of Economics

Submitted by Pater Tenebrarum of Acting-Man blog,

Bernanke: Spreading Money Printing Bliss Globally, Whether or not Anyone Asked for it

Last week saw a full court press in defense of the current money printing exercise. It started with Bernanke telling us the Fed is making the whole world happy … even if the world hasn’t asked for it:

“The Federal Reserve’s bond-buying program is not a “beggar-thy-neighbor” policy designed to spark a devaluation of the dollar to spark the U.S. exports at the expense of other countries, said Fed Chairman Ben Bernanke on Monday. Rather, the Fed’s policy is an “enrich-thy-neighbor” action because strong growth in the U.S. would spillover to trading partners, Bernanke said in a speech to a conference at the London School of Economics. Some emerging market economies have complained about the Fed’s quantitative easing program, and some have called it the start of a “currency war.” But Bernanke said a return to solid growth in the U.S., Europe and Japan would ultimately benefit smaller countries.”

(emphasis added)

One should not let this man loose in front of innocent students. It is certainly true that the dollars Bernanke prints are spilling over into the world at large – where they distort price signals everywhere. In most foreign nations mercantilist thinking predominates, and some even have currency pegs or quasi currency pegs. In any case, they all feel they must inflate right along with the Fed, so as to avoid that their currencies appreciate too much against the dollar. As an example, Brazil’s minister of finance has been complaining for years about ‘QE’, and the central bank of Brazil has begun to run a very risky and far too loose policy, which has in the meantime led to a noticeable increase in money prices. The one thing money printing can definitely not achieve is ‘solid growth’, even though it may temporarily appear so on paper on a purely quantitative basis. Misdirecting scarce resources into bubble activities may well look like ‘growth’ to Bernanke, but in reality it can only weaken the economy structurally.



Ben Bernanke: spreading happiness far and wide.

(Photo via


Rosengren’s Cost-Benefit Analysis of Money Printing

Next up to bat was Eric Rosengren of the Boston Fed, who similar to most of his colleagues is of the ‘John Law School of Economics’ (i.e., what the economy needs to ‘get better’ is ‘more of the circulating medium’). Rosengren is a proponent of Anglo-Saxon central banking socialism at its finest and always likes to decorate his speeches with reams of statistics to buttress his case, but unfortunately one cannot prove or disprove points of economic theory by means of statistical data.

Here is an excerpt from his assessment of what the money printing exercise achieves that is fairly typical for Rosengren’s explications:

“The Fed’s purchases of long-term securities are intended to lower longer-term interest rates, like rates on home mortgages and auto loans, in order to promote faster economic growth. These purchases also encourage households and businesses to shift somewhat from riskless low-yielding short-term government securities to investments that bear a sensible degree of risk and have a stronger economic effect, like corporate bonds and stocks.


Federal Reserve Bank of Boston staff use two different models to estimate the impact of asset purchases on the economy. One explicitly articulates household and business behaviors and the other is a purely statistical model.  Reassuringly, both models give similar results. Our best estimate implies roughly a one-quarter-point decrease in the unemployment rate for a $500 billion asset-purchase program.”

(emphasis added)

In so many words, nothing can go wrong because our ‘models’ say so. One may well feel compelled to ask Mr. Rosengren what the economic models of his staff were saying about the economy in 2006 and 2007, but as far as we are aware nobody present at the delivery of his speech actually asked that. That would no doubt be considered impolite.

However, we know what the Fed heads were talking about in their meetings at the time, and that they were laughing a lot in 2006 (the details of the 2007  meetings are due to be released this year – there is an inexplicable five year delay associated with these releases). In other words, their ‘models’ evidently told them that everything was just going swimmingly. By contrast, anyone with even an ounce of common sense could see that the economy was cruising toward a disaster. Now the same people who didn’t see this coming are laying the foundations for the next disaster by doing the same things all over again, only at an even grander scale. Meanwhile they are defending their actions with the same means that they undoubtedly used to justify their previous catastrophic policy decisions. And the whole world is seemingly pretending that all of this is completely normal!


Bubble trouble

The tinder for renewed bubble activities: assorted interest rates (from Rosengren’s presentation) – click for better resolution.



Eric Rosengren – guided by models that tell him nothing can possibly go wrong.

(Photo via


Former “Hawk” Wheeled out in Trial Balloon

A few years ago Minneapolis Fed chief Narayana Kocherlakota was among the handful of dissenters on the FOMC board, refusing to go along with the ultra-easy monetary policy proposed by Bernanke and others. At the time he provided a qualitative assessment of the labor market which we actually greeted with a few approving words in these pages.

Here is what he said back in 2010:

“The job openings rate has risen by about 20 percent between July 2009 and June 2010. Under this scenario, we would expect unemployment to fall because people find it easier to get jobs. However, the unemployment rate actually went up slightly over this period. What does this change in the relationship between job openings and unemployment connote? In a word, mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs.


There are many possible sources of mismatch — geography, skills, demography — and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.”

(emphasis added)

Got it in one. As an example, companies in the US are looking for experienced welders and cannot find enough of them. For reasons unknown, Kocherlakota has completely abandoned this largely qualitative approach to analyzing the labor market. Now he is attempting to out-dove the doves.

As we have pointed out here many times, we do not believe for one second that there is anything to the frequent ‘exit’ talk.  Here is Kocherlakota’s latest, where he notifies us that he now believes that $85 billion in additional money printing per month while keeping the overnight interest rate at a big fat zero is still not enough – and more importantly, he wants to see the threshold at which the policy is ended lowered even further.

“As I described earlier, the FOMC has a second mandate: to promote maximum employment. In March, most of the 19 FOMC participants believed that the unemployment rate will converge to a level between 5.2 percent and 6 percent within five to six years. But, under the current formulation of monetary policy, I see the rate of convergence to this long-run rate as likely to be slow. In particular, I expect that the unemployment rate will still be close to 7 percent by the end of 2014. The FOMC could facilitate a faster return of the unemployment rate to its lower long-run level by adopting a more accommodative monetary policy that puts more upward pressure on employment. Thus, I would say that my outlook for unemployment and my outlook for inflation both point to a need for more accommodation than is currently being provided by the FOMC.


Based on my outlook for the next two years, I’ve concluded that the FOMC would better fulfill both of its congressional mandates by adding more monetary policy accommodation. How could it do so? I think that there are several possible approaches available to the Committee. For example, the FOMC could reduce the public’s level of policy uncertainty by clarifying the nature of the economic conditions that would lead the Committee to reduce or stop its current asset purchases. Alternatively, the Committee could communicate to the public that, once the removal of monetary accommodation eventually commences, the rate of withdrawal will be slower than is currently anticipated.


Both of these kinds of changes in communication could potentially provide needed monetary accommodation. However, they would require the FOMC to make relatively complex changes to the language of its current communications. My own preferred approach is considerably simpler. In its current forward guidance, the FOMC has stated that it expects the fed funds rate to remain extraordinarily low at least until the unemployment rate falls below 6.5 percent. The FOMC could provide additional needed stimulus by lowering the threshold unemployment rate from 6.5 percent to 5.5 percent—that is, by changing one number in the existing statement.”

(emphasis added)

In other words, not only has the skills mismatch magically disappeared from his deliberations, and the Fed is suddenly able to ‘create employment’ by printing money, but he also offers the first public trial balloon in favor of extending the money printing exercise way past its current official sell-by date. You couldn’t make this up.



Narayana Kocherlakota: from now on, 2 + 2 shall be 5.

(Photo via


Pseudo-Scientific Justifications

To round things out so to speak, the NY Fed’s economics staff is now putting out something that is resembling long discredited Philips Curve nonsense to justify higher inflation (note that some seven Nobel Prizes in Economics have been awarded for papers debunking the nonsense Samuelson et al. had cooked up in the context of the Philips curve. This happened not long after Henry Hazlitt showed in an analysis of the 1947 to 1976 period that the probability that the alleged connection between inflation and employment existed was no higher than simply flipping a coin). Admittedly Nobel Prizes in Economics don’t prove much and are often even a contrary indicator (see Krugman), but in this particular case they seem to have been on the mark.

It should be noted that while there can be short-run effects on employment if prices rise faster than wages, such seeming gains are perforce ephemeral, as they A) assume that workers will forever be accepting lower and lower real incomes without demur and B) lead invariably to a misallocation of capital that ultimately weakens the economy’s ability to generate real wealth. In other words, to recommend higher inflation in order to lower unemployment ranks among the worst economic policy ideas ever. That the Fed’s board members are all such big fans of it is quite ominous. Now their staff is evidently providing the pseudo-scientific ammunition to justify it. Note here that when these people speak of ‘inflation’ they are not referring to the massive growth in the money supply, they are referring to one of its eventual effects, namely rising prices on a broad front.

“In times like these, a rise in inflation expectations could do the economy some good, argues research published by the Federal Reserve Bank of New York.


The paper argues that when traditional forms of monetary policy, such as cutting short-term interest rates, can go no further, central bankers can goose economic activity higher if they can convince the public the future pace of inflation is likely to rise.”

In short, the Fed should actively seek to lower the demand for money, a task it is undoubtedly capable of fulfilling. Unfortunately such ‘goosing of economic activity’ by means of inflation is precisely what John Law’s playbook recommended and was later tried again by the revolutionary assembly of France and many others. In all cases it appeared to ‘work’ for a while, and every time when the juice was switched off, the depression immediately returned. This then caused the monetary authorities to opt for dispensing the next ‘coup de whiskey’. Often this went on until the ultimate catastrophic demise of the entire underlying monetary system. That is in fact the only choice there is: one either allows the economic adjustment (a.k.a. bust) to occur early and fast, or one postpones it by printing money and thereby ensures an even bigger catastrophe down the road. That is the only long-run outcome that can be expected from this type of policy.



As we have frequently pointed out, modern-day economic policy is evidently in the hands of utter quacks. It matters little to them that their prescriptions have failed time and again for hundreds of years – they do the same thing over and over again, as though they were escapees from an insane asylum.

For Cyprus, The Pain Is Only Just Starting

If the suffering, yet docile, Cypriot serfs thought deposit confiscation would be the end of their problems under the European feudal system, they are about to be shocked. Because as part of their banking sector bailout, the country is set to get a “loan” from the Troika, a loan which comes with a Memorandum of Understanding, aka a “blueprint for austerity”, with dictates terms for government revenue increases and spending cuts (of the variety that nearly caused America’s leader to blow a gasket when he was describing the untold devastation that would result if the rate of acceleration in US budget spending dared to be slowed down even by a tiny bit). Today, a draft of the revised Cypriot MOU being prepared by the head of the IMF mission to the island nation, Delia Velculescu, leaked and can be found in its 24 page entirety here. However, for the benefit of our Cypriot readers, here is the important part: the listing of the anticipated austerity tsunami coming, not to mention healthcare system, “pension reform” changes and other proposals the ECB and the IMF are imposing on Cyprus as part of their generosity to keep the recently insolvent country as a well-behaving serf in the Eurozone.

Key highlights:

  • Freeze public sector pensions
  • Increase the statutory retirement age by 2 years for the various categories of employees
  • Reduce preferential treatment of specific groups of employees, like members of the army and police force, in the occupational pension plans, in particular concerning the contribution to the lump-sum benefits;
  • Reduce certain benefits and privileges for state officials and senior government officials, in particular by
    suspending the right to travel first/business class by state officials,
    senior government officials and employees with the exception of
    transatlantic travel.
  • Increase excise duties on energy, i.e., on oil products, by increasing tax rate on motor fuels (petrol and gasoil) by EUR 0.07
  • Increase the standard VAT rate from 17% to 18%.
  • Introduce a tax of 20% on gains distributed to winners of betting by the National Lottery for winnings of EUR 5,000 or more
  • Increase fees for public services by at least 17% of the current values
  • Increase excise duties on tobacco products, in particular on fine-cut smoking tobacco, from EUR 60/kg to EUR 150/kg. Increase excise duties on cigarettes by EUR 0.20/per packet of 20 cigarettes.
  • Introduce a permanent contribution of 3% on pensionable earnings to Widows and Orphans Fund by state officials who are entitled to a pension and gratuity. Introduce a contribution of 6.8% on pensionable earnings by officials, who are entitled to a pension and gratuity but are not covered by the government’s pension scheme or any other similar plan;
  • Actuarially reducing pension entitlements from the General Social Insurance Scheme by 0.5% per month for retirements earlier than the statutory retirement age at the latest from January 2013, in line with the planned increase in the minimum age for entitlement to an unreduced pension to reach 65 (by 6 months per year), between 2013 and 2016;
  • Ensure a reduction of seasonal hourly paid employees by 992 from 1806 in 2012 to 814.
  • Implement a four-year plan as prepared by the Public Administration and Personnel Department aimed at the abolition of at least 1880 permanent posts over the period 2013-2016.
  • Ensure additional revenues from property taxation of at least 70 million by updating the 1980 prices through application of the CPI index for the period 1980 to 2012
  • Increase the statutory corporate income tax rate to 12.5%; Increase the tax rate on interest and dividend income to 30%.
  • Increase the bank levy on deposits raised by banks and credit institutions in Cyprus from 0.11% to 0.15% with 25/60 of the revenue earmarked for a special account for a Financial Stability Fund
  • Undertake a reform of the tax system for motor vehicles, based on environmentally-friendly principles, with a view to raising additional revenues, through the annual road tax, the registration fee and excise duties, including motor fuel duties.
  • Ensure a reduction in total outlays for social transfers by at least EUR 113 million through: (a) the abolition of a number of redundant and overlapping schemes such as the mothers allowance, other family allowances and educational allowances; and (b) the abolition of supplementary allowances under public assistance, the abolition of the special grant and the streamlining of the Easter allowance for pensioners.
  • Ensure a reduction of at least EUR 29 million in the total outlays of allowances for employees in the public and broader public sector by i) taxing pensionable allowances provided to senior government officials and employees (secretarial services, representation, and hospitality allowances) in the public and broader public sector  ii) reducing the allowances provided to broader public sector employees and reducing all other allowances of broader public sector employees, government officials and hourly paid employees by 15%; and iii) reducing the daily overseas subsistence allowance for business trips by 15%. Ensure a further reduction the subsistence allowance of the current allowance when lunch/dinner is offered by 50% (20% – 45% of overseas subsistence allowance instead of 40% – 90% currently paid).

And last but not least:

  • Increase excise duties on beer by 25% from EUR 4.78 per hl to EUR 6.00 per hl per degree of pure alcohol of final product. Increase excise duties on ethyl alcohol from EUR 598.01 to EUR 956.82 per hl of pure alcohol.

So the stronger the booze, and the faster it gets one drunk, the more expensive is will be.

In brief: for the Cypriot serfs the pain is just starting.

Troika Draft MOU source

Global Economic Slowdown Accelerates Again

It would appear that between the historical revisions of over-optimistic initial prints in macro data in the last few months and the reality of the weakness in Europe; the global economy is in Slowdown. Goldman’s Swirlogram has now seen its Global Leading Indicator in the ‘slowdown’ phase for two months as momentum fades rapidly and seven of the ten major factors in the index declining with Global (Aggregate) PMI, and Global New Orders-less-Inventories worsening. Quite comically, the three factors providing some positivity are the Baltic Dry Index (which we are told is irrelevant when it drops), Japanese Inventory/Sales (which improved but remains at depression-era levels), and US initial jobless claims (which have become a farce statistically from what we can tell). Of course, none of this macro reality matters for now – until it does that is.


The red arrows show the relative size of adjustments from the initial estimates…



and the last 3 days have seen the biggest drop in US macro data in 9 months…



Charts: Bloomberg and Goldman Sachs

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