Posted by Ray on April 16, 2010 under Main | 
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.
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Tags: AIG, burry, garbage, Goldman, Goldman Fraud Charges, Goldman Sachs, hedge funds, Mike Burry, mortgages, Paulson & co, synthetic cdo
Posted by Ray on March 11, 2010 under Main |
Over the past few days Citi (C) has been trading like the internet stocks in 1999 as it climbed from about $3.30 to a close of $4.18 today, not a bad week. The company has poor fundamentals and is not what I would call a “sound” investment it is, in my opinion, a gamble to own the company. Here is the kicker, I am a share holder of Citi, I own the common with a cost basis of $3.32 and I own January 2011 4 calls with a cost average of $.37. My common stock is up 25% and my options doubled.
Don’t get me wrong, I like making money, but even I know something is just not right with this kind of move for a company that has 28.5B shares outstanding and a market cap of just under $120B with horrible earnings. I bought the stock because I figured it was worth about $4.50 if they sell all the assets they claimed and maybe $5 if the hedge funds decided to pick it up for alpha. The problem is the company has not sold the assets yet and the rise in share price is based on rumor of some sales, a rumor the SEC is banning short selling on government owned companies (which is false), Bove and other analysts saying it is undervalued or turned the corner, Pandit claiming the bank is on its way to profitability, the $2B in TRuPs priced @ 8.5% and, the latest, is the firm could earn $20B by 2012. That was a mouthful.
However, very little of that, which is not already debunked, can be verified and much is speculation. I would say it was one mother of a short squeeze and that made momentum player, read high frequency traders, to pick it up and run with it. In short, no pun intended, I do not believe it is sustainable, but I have not sold yet, I am crazy what can I say. I think the momentum and irrational behavior of the markets along with the belief that the common shares will not be diluted, which the CFO said dilution of common shares will likely happen, will carry the stock higher in the near-term. Well, let’s say if I am wrong I will happily take 20% and 80% profit, respectively, on my positions. In other words, I will not cry if it goes down tomorrow.
What I would not do is buy it way up here until there is some confirmation of asset sales or profitability. Even if they report a profit we will not know if it is real because of the marked-to-fantasyland rules in place. In other words, I would not add speculative money to this stock to save my life right now, it is not worth it. If you own it already do whatever you are comfortable with, but do not buy more. Greed is a terrible disease that leads you to make bad decisions so be happy with whatever gains you have and look for other opportunities.
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Posted by Ray on August 30, 2009 under Main |
Frankly, I am not really surprised by this in the least. It was beyond me why the firm took such large bets in the automotive sector. For years, if not decades, most rational people knew the auto industry was a loss leader and steered clear of it. Daimler couldn’t even get Chrysler to work, so I am not sure how Cerberus thought it was going to do any better.
Regardless, this outflow of assets is a message to hedge funds that performance does matter, especially when you are paying 2 and 20% of profits. It is fair to say that the gilded age of hedge funds are just about over. As of Friday 71% of Cerberus investors want out of the fund, perhaps over the Chrysler event, or perhaps because of bad performance, but they simply want out. This is strange since Cerberus even offered lower fees in another fund as an alternative, which was rejected.
This means that roughly $5.5B will be liquidated which could have some impact on the markets, but it probably will not be noticeable to the average investor. However, is this going to be a trend since hedge funds have not been performing extremely well this year? I believe it is. Simply put, very few managers are worth 2 and 20 in fees and there are still way too many hedge funds still open, even after the significant reduction over the past 12 months.
The closures of multiple hedge funds will eventually have a significant impact on the markets as they must liquidate to fulfill its redemption requests. I suspect we will see the concentration of hedge funds will be left to only a few of the long-term successful firms. No matter what the case may be it is clear that hedge funds will continue to close down and that will lead to pressured selling, perhaps this fall. I believe that fewer hedge funds are, at the end of the day, good for the markets as there will be less leverage in the marketplace.
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