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Goldman Sachs: Heads I Win, Tails You Lose


New private-equity fund exploits those who have no choice but to sell.


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

This morning, Bloomberg reported that Goldman Sachs (GS) is raising a $5.5 billion fund to purchase private-equity interests in the secondary market. From experience, the secondary market for private equity isn't a market you'd ever send your kids to shop in. As a trading buddy of mine would say, it's why we have nostrils - to make it easy to rip someone's face off.

And that's what Goldman and others are betting: That there are investors who have no choice but to sell (including college endowments and other long-term investors who followed the "glitz" of private equity and hedge funds, failing to accurately understand the consequences of long term commitments.)

So sell they will - and into Goldman's one-sided market. Yet another real-time example of the ugly flip side of financial staying power.

This morning's Wall Street Journal reveals another 2-sided coin - one exemplified by the current banking system. A front-page article criticizes TARP-recipient banks for raising fees on basic lending and deposit products, while a column in the third section reveals that those same fee increases are likely behind the improving earnings picture for the financial-services industry.

As the history of Fannie Mae (FNM) and Freddie Mac (FRE) reveals, you can't be the slave of 2 masters. And with the government now playing multiples roles within the banks -- regulator, owner, deposit guarantor, debt guarantor, toxic asset guarantor and creditor -- I would offer that the conflicts of interest are abundant.

But while others would suggest that the bottom is in, I would offer that, until the re-balancing of populism and capitalism is clear, all economic recovery bets are off. Calm, while better than crisis, is no guarantee of future performance. And from where I sit, it feels to me like we are just seeing the first shots of the Battle of Confusion Corner - that treacherous intersection of Wall Street, Main Street and Constitution Avenue.

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Position in FAZ, JPM
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