Friday, August 2, 2013

On Goldman Pond

On Goldman Pond
by Jesse Kornbluth,

He was supposed to have an internship at an online startup last summer, but when their money didn't come through and Stanford couldn't find anything else for him, he went out to the beach. He didn't have a plan, but on his second day at his parents' house his mother sent him to Loaves & Fishes for curried chicken salad and a baguette. Waiting to be served, he saw they were selling lobster salad for $100 a pound, and that's when the light bulb went off.

He called a friend, and they bought a batch of lobsters and made their own lobster salad. The next day, they parked his mother's Range Rover on Sagg Main, put up a big sign — LOBSTER SALAD. $125 A POUND. WHY PAY LESS? — and he and his friend split $2,500 with plenty of time that afternoon to suck down some Marys and flirt with the au pairs at the Beach Club. Two days later, they scored some media, got a permit, and became the eighth wonder of the world.

This summer, the summer before his junior year, he has an internship at Goldman Sachs. A gazillion kids applied, but not many of those 20-year-olds had business cards from Goldman bankers who thought $125-a-pound lobster was the apex of cool. As they say, it's not who you know, it's how you know them.

It wasn't exactly a secret, but until The New York Times slapped it on the front page, it wasn't generally known that Goldman Sachs, the powerhouse Wall Street bank, was also in the aluminum business. Not in the manufacture of aluminum. The ownership of it. And then moving it from one warehouse to another, thus increasing storage costs and enabling Goldman to raise the price.

He started as a floater on the aluminum project, checking the shipments from one factory to another. Then he was assigned to a banker known as Sweat Shop Norman, who got the nickname because his job was to find such screwed-up companies that the workers would never dare to unionize. And then Steve Cohen's hedge fund got indicted.

In the spring term of his senior year at Choate, he had taken a spirituality class just for giggles, and learned something amazing: The universe exists in a perfect balance between good and evil. In economics, that would translate to: The market is efficient. At Goldman, they'd put it like this: There's a buyer for every seller.

So when the hedge fund was indicted, Goldman identified a new category of potential sellers: hedge fund executives who owned houses in the Hamptons, especially on the fabled Sagaponack and East Hampton ponds.

This is primo Hamptons real estate, maybe the most primo now that Hurricane Sandy has shown us that houses overlooking the ocean may not be the wisest to own, long term investment-wise. But some of the ponds are protected from storm surge. Those prices are crazy: A banker sold his house on Sagg Pond — 33 acres, ocean view — for $65 million last year. And that wasn't an outlier. A 7,500 square foot "cottage" on five acres overlooking Georgica Pond went on the market for $70 million and sold for 75. (When he saw that, his first thought was "Of course: why pay less?") Even a real cottage — 3,000 square feet — sold for $10 million in a week.

Goldman's theory was that the hedge fund indictment was a wakeup call. The banks had pumped billions into these funds. Word on the Street was those banks might, at any moment, decide the exposure wasn't worth it. Or, more correctly, their clients might wonder how those Madoffian gains had been achieved and decide they really might do better owning no-load mutual funds.

What if hedge fund honchos, buoyed by the incredible lightness of leverage, had to produce large amounts of cash? Where would they get it? Selling Manhattan real estate was too public. Deciding that Rhinebeck was the new Wainscott was almost credible.

He joined the real estate team — five interns and a manager — in late July. They met in a war room with a giant map of the Hamptons. Working from social web sites, boards of museums, sponsors of horse shows and a stack of those thick Hamptons magazines that celebrate the rich at play, they made their lists. And then they made their calls.
They weren't subtle. They called the wives.

"We see your husband bought your house for $10 million in '09," he might begin. "That was a bargain. But you have an $8 million mortgage. And another in the city. And two kids at St. George's — that's such a great school, I used to play soccer against them; I'll never forget how cold it gets on those bluffs in November. Forgive my bluntness, but if a domino effect creates a flight from hedge funds, your husband might be looking at a liquidity crisis.

"Goldman would like you to avoid that. If we can come to terms quickly, we'll pay you $15 million for your house. Let me do the math for you: Your $2 million investment turns into a $13 million profit. Overnight. Yes, there's a catch: Our offer expires in a week."

Many of the women gasped. No one hung up. And in two weeks Goldman owned 20 houses. They cost a fortune, but in the grand scheme? A rounding error.

He got a bonus for selling the most: eight houses on a single pond. Not because he was the greatest salesman. If they got to talking, he told the women he was the guy who sold lobster salad for $125 a pound last summer. They liked that. And in exchange for encouraging their husbands to sell, the clever wives made him agree to supply them with lobster salad for the rest of the summer.

An efficient market. A buyer for every seller. A universe, in perfect balance.