Today we saw a typical Buffet move as he surprised everyone by taking a $5B investment into BAC. Everyone is talking about it and praising how good this is for the company, I guess it kind of is, but there are others, like me, who are more worried now than before Buffet made the investment. I do not own BAC and I am not short BAC or any financial firm right now so I have no self serving purpose for this.
What concerned me is the fact that the figure was $5B just like the Goldman deal. This seems to be a figure Buffet is comfortable risking in times of duress. Buffet has billions on hand, but only $5B that could yield him 6% something isn’t right. Now, I considered the pre-Buffet chatter about BAC to be the typical rumor mill stuff, illiuid, cut off from the markets, huge liabilities that haven’t been realized and the like, but nothing real or substantially true. However, I admit the massive selling of pieces of their business did strike me as if they were concerned about things, but it did not strike me as they were going out of business it was merely troubling. However, now with Buffet adding in his now typical $5B ‘petty risk cash’ into the firm does make me concerned about BAC.
Clearly the firm needed the cash as it was presented to and accepted in, what, 12 hours. You do not take $5B paying out 6% when we are in a zero interest rate environment and can issue paper cheaper without raising any suspicions. Frankly, taking a middle of the night cash infusion from Buffet is strikingly similar to 2008 for my taste. BAC got hosed on this deal, as many others have already said, and they are paying way too much for this cash. A case can be made that BAC paid the premium for the Buffet ‘seal of approval’ but that seal did not work for Goldman in 2008.
If one followed Buffet in 2008 on the Goldman deal they lost out pretty bad. After the cash infusion was made Goldman dropped to $48/share, about $70/share below Buffets investment, and the average investor would have probably sold at a loss given the events of 2008. If they were smart they would have doubled up, but come on, it was 2008! Regardless, Buffet was too early and could have done much better if he waited, but more to the point what kind of due diligence did he do back then? I am thinking more than he did with BAC, but no one knows for sure. What I do know is the government had to follow up on Buffet’s investment to the tune of $700B as they had to save the whole system. The government bailed out Buffet in the Goldman deal, basically.
What is different this time is the fact that countries are going broke now, not just banks, and there is risk everywhere. With BAC not only do you have sovereign risk, but you have derivatives risk and a whole bunch of mortgage issues from put backs to just bad loans altogether. I believe this time is very different because it is sovereign risk and we have had this issue before… in the 1930’s. In the Depression Europe had defaults and many countries devalued their currency which hurt the U.S. as we, at that time, were a net exporter of goods. The European issue deepened our Depression and the same thing will happen this time around, unfortunately. Not only may BAC hold European debt on its books, but they might have CDS exposure as well, not that we would know about that, thanks Frankendodd. In any event BAC is one hot mess and the sad thing is that BAC will not drop from $110 to $48 because it is at $7 already, you do the math to see what a similar drop would look like for BAC.
I do not think BAC is finished, it might be, but I doubt it. I do believe it will be stuck in the single digits for a very long time. For crying out loud, they bought Countrywide, just a reminder.
We all know the answer to that question, but he really has taken the cake today. As Goldman defends itself against this lawsuit Cramer had a piece on CNBC titled “Cramer: Goldman Invested Own Money in CDO.” In this article he cites an unnamed source, which is the first red flag, that stated Goldman did not short this CDO. Well, who cares as that is not the allegation. The allegation is that Goldman allowed Paulson to pick out lousy mortgages to short, in order to create the synthetic CDO, and did not disclose to investors that this CDO was created by a guy who wanted to short the market. The charges claim that the marketing of this CDO was said to have been picked by an “independent” third party which is patently false, unless Paulson & Co. wanted to lose money. As an aside, this is right about the time Goldman started to short the sub-prime market according to my sources, you know, publically available information.
The question is about whether Goldman did this, I think they did, and what other banks might have done the same thing, they all copy each other and the synthetic CDO market was a very esoteric vehicle to invest in. The CDO market was also controlled by a few main banks, Goldman, Morgan, BoA, Deutsche Bank, Citi and a few others. These banks kept the prices of the CDS swaps low, meaning the buyers, i.e. Paulson, was not making any money, as the market was collapsing which shows that the banks were deluding themselves about the reality of the market. Most CDO’s only needed a 5% default rate to blow up, banks did not move the prices of the CDS’s in the buyers favor until well after that 5% default rate, read The Big Short to verify. In other words, these guys controlled the market, created a product they knew was crap (the short sellers picked what they wanted to short!) and then sold these synthetic products to unwitting clients, they had to invest in some of them because by 2007 all the suckers were less likely to buy synthetic products.
My point is simple, no one claimed Goldman shorted this specific CDO, but misled investors to buy it by distorting the facts about it. Are they guilty? More than likely, but I am sure the case will be settled with admission of guilt. Does this mean AIG and other investors might have a claim? Yup, so go buy some GS Cramer, I am sure he will tell you that later tonight. Did other banks do the same thing? More than likely. It is hard to believe GS was the only bank that did this when they were a relatively small player in that business, compared to Citi, Merrill Lynch and others. Does Cramer grasp those facts or thoughts? I don’t think so.
After all, this is the guy who thinks the market going up every day for a month and a half is a good thing. Then again, Cramer, whose selective memory will omit this in a week or tonight, did this on his show last night:
I guess Cramer never made money shorting stocks… yeah right. I respect Cramer the hedge fund manager, but this other guy, what he turned into, is disingenuous.
It only took 2 years for the SEC to get off their butt and do something, but these charges are not telling the whole story. The complaint alleges that Paulson & Co. constructed a synthetic CDO through Goldman, Paulson picked the worst mortgages to bet against. Goldman, in turn, sold them to investors, they need someone long to buy what Paulson was short, they apparently pitched them as good investment products that were handpicked by a independent third party. They lied to investors, shocking. Paulson did nothing wrong that I can see, but since he is a big bad hedge fund we will see what will happen.
What is interesting is that this should not be the only charge against the firm. After reading several books it was clear that Goldman was long sub-prime until June, or so, of 2007 when the market started to crash. They in turn went short the market, buying CDS’s on the synthetic CDO’s they helped create. They are hiding their culpability by claiming, “we were only marking a market and had nothing to do with creating this mess.” That is pure bull. It was clear that the firm worked with the first person who created the CDS on sub-prime, Mike Burry in California. While they only brokered the deal between AIG and the hedge fund, Scion, Goldman did know that this guy picked the worst sub-prime to bet against. They let him handpick the worst of the lot to short. They knew the synthetic CDO’s were garbage.
Clearly, I only have public information and this is a complicated mess, but from what I have read I believe Goldman had a much larger role in creating and facilitating the problem that nearly collapsed the financial system as we know it. At first they brokered the deals and then they bet with the hedge funds that the market would collapse. However, the real issue is that Goldman and other firms, Goldman is not alone in this, knew that these managers were hand picking the worst mortgages of the group, they sent these guys a list of junk to pick from. Goldman had to then broker the deal to some other party, AIG was the biggest, obviously, so what did they tell AIG? Did they tell them that this guy picked the worst mortgages to bet against and insuring them is risky to you? I doubt it. What they did was fool the ratings agencies to give them a AAA rating and then told AIG to insure them because it is a riskless proposition.
That is the problem with Goldman, they knew what they were creating was bad, kept that information to themselves and then passed the risk on to other parties telling them whatever they wanted to tell them. Other firms will be brought in on charges as well, perhaps Morgan Stanley, Deutsche Bank and who knows who else. Obviously I have simplified what they did and added what I think they did, I have no proof other than what I have read, but it makes sense based on the info we all have. What will come out of these charges? Nothing. The SEC will offer a settlement fine and Goldman will accept it and not admit or deny responsibility. The SEC is corrupt.
Take notice of this downward revision, Goldman has a direct line to, well, the government. The last 2 employment reports that were released Goldman revised their numbers the day before and were within 5% of the actual number, go figure.
Goldman revised its 3Q09 GDP figure from 3% to 2.7%, which is in line with what I was thinking, not that my thoughts really matter, but still. This is a negative impact number on the markets and a sell sign as equities have a 3.5%+ GDP figure priced in. Take notice and take warning, buying on the dips could be considered suicidal at this stage of the game.
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