Why Did Warren and Hank Invest in Goldman? 21 comments
-
Font Size:
-
Print
- TweetThis
Treasury Secretary Hank Paulson’s stated objective in driving the $700 billion bailout package was to counter systemic risk within the US financial system. But rather than employing tax-payer dollars to get on with their business after lowering leverage levels in their balance sheets, the bailout targets appear to have been granted a license to revisit the financial marketplace to seek new types of opportunities altogether.
On Wednesday, investment banking purists were shocked by reports that Goldman Sachs (GS) was considering launching an internet banking operation or buying a full-scale banking operation in an effort to establish a deposit base. The fact is that Goldman’s core business model is intact, albeit with some substantial de-leveraging. If anything, the demand for equity and bond underwriting, merger and acquisition funding, corporate finance advisory consultancy and market price-making is already gathering momentum once again. The issue for Goldman remains one of substantial revisions in asset valuations and realistic credit ratings, not of the volume of potential business itself.
This writer had previously called for Goldman shares to be priced below $30 in view of the adjustments in leverage ratios. Now, if this drive for deposits reflects a substantive change in Goldman’s business model, its shares may not be worth much more than $15. The latest market capitalization number of $27 billion (based on 395 million outstanding shares) borders on the ridiculous. From where will Goldman generate revenue and profits to support a dividend-yield forecast of even 2.5% p.a.? Remember Goldman’s debt-service commitments to government agencies and to Warren Buffett!
When committing $5 billion in preferred shares in late September, Warren Buffett declared, quite correctly, that
Goldman Sachs is an exceptional institution. It has an unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.
From this writer’s perspective, Mr. Buffett was certainly not talking of internet banking where a number of high-profile players are much more advanced, at least in technical terms, than Goldman can hope to be in the space of two or three years. Also, if Mr. Buffett was interested in a traditional deposit-to-loan banking model, there were many choices which would have qualified as better bets than Goldman Sachs.
Secretary Paulson’s assumptions governing systemic risks may well be credible. But the way to curtail, preferably eliminate, systemic risks, is not to provide government money and guarantees in order for banks, investment banks and insurers to go out and look for new business classes. The entire umbrella of systemic risk is pretty accurately defined by fair value measurement guidelines in SFAS No. 157.
More specifically, systemic risk emanates from Level 2 and Level 3 asset classes which cannot be marked to active markets. Goldman’s Level 2 and Level 3 assets were last valued at $410 billion (as per last quarter 10-Q filings). So, if Hank Paulson and Neel Kashkari were intending to attack systemic risk, a comprehensive re-statement of Level 2 and Level 3 assets should have been undertaken and, regardless of FASB dictates, a highly conservative de-leveraging methodology should have been implemented.
But rather than adjusting its elite business model consequent to revisions in its asset valuations, Goldman appears to be headed along the route almost all bailout targets are adopting: since, with time, the overwhelming proportion of Level 2 and Level 3 assets will come good (hopefully), let’s see what else we can do with tax-payer dollars in the interim.
That route poses huge risks of a systemic nature. If economic conditions worsen in 2009, as this writer thinks they will, those Level 2 and Level 3 assets will be further impaired. In that case, even $15 per share will not withstand serious scrutiny.
Disclosure: Author holds a short position in GS
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 21 comments:
Furthermore new business models will arise from Wall Street Past.
Firstly, the world's best companies are becoming more familiar in households, as it should be in a globalized economy.
Accounting will become more boilerplate, as will the legal aspects of floating all securities to any individual in the world, that has a decent connection to the internet.
The real question being why does a relatively intelligent individual that has access to the basic facts of a company need any form of broker?
Direct access technology has given the old turf of specialists and marketmakers to individuals....and anyone should be able to pay no more than 20 cents to transact 100 shares.
Anyone notice that it was largely GS who actually was causal in extremely high oil prices in that they provided the facility to both themselves and hedgefunds with excessive leverage and market means....and when the deleveraging requirements were imposed to become banks...that oil and other commodities were suddenly in a free fall ?
In short....the markets would be better off without the GS and MS's of the world. They are just a large expensive middeman there to game what could be a more honest system. The day should be over, whereby regulations and markets can be gamed...whereby insider is but is not insider information....along with employees in government....
Who needs or wants these conflicts....
Any qualified firm, should be able to walk into any qualified bank....fill out and maintain boiler plate forms.....
Furthermore all securities should be made available worldwide in the currency of choice....in denominations whereby any individual can participate....and information can be available via a Google-Wiki type model.
In short......who needs or wants the old Wall Street in the way of a better and more fair marketplace.
If GS wants to participate in management...they should list on the new exchange a management unit with a base price of $10....In fact there should be no more hedge funds or mutual funds. These "management" units should trade as shares in full view of the public....and readily liquid.
GS, MER, MS, etc are dinosauers.....and should be extinct....
In regards to banking, start up a N. American Eurocard, with N. American checks, and even N. American ATM - all in U.S. dollars for now. But if the worse case scenario unfolds, then shifting to Eurodollar accounting, for practical marketing reasons, would seem an advantage. Of course N. American would be in small print. We might end up with dual currencies, if supple and demand undermine the T-market.
King Paulson came from Goldman.
Goldman gets a free ride.
Surprised?
Not me.
Buffett's investment in Goldman is a convertible debt, so he's way better off than common shareholders.
Warren gets a $500M check from GS every year... FOREVER. As long as they are in business, it doesn't matter what that business is... he gets paid.
And if the stock price ever happens to recover... he gets to participate in that as well in the form of ADDITIONAL $5b in stock options.
This was a slam dunk of a deal and to suggest otherwise is indicative of your own ignorance, not Buffet's.
PS- I'm no Buffet apologist... but a deal is a deal and Buffet is cleaning up.
Do you truly believe world events are random?
GS created commercial paper - what does that tell you?
I take it you know more than Buffet and Paulson?
Get in the real world. If you have a problem with authority, get out of investing. Or lose your shirt.
When it quacks like a duck - it's a duck.
On Dec 07 07:47 AM Libertad wrote:
> Agreed....
>
> Furthermore new business models will arise from Wall Street Past.
>
>
> Firstly, the world's best companies are becoming more familiar in
> households, as it should be in a globalized economy.
>
> Accounting will become more boilerplate, as will the legal aspects
> of floating all securities to any individual in the world, that has
> a decent connection to the internet.
>
> The real question being why does a relatively intelligent individual
> that has access to the basic facts of a company need any form of
> broker?
>
> Direct access technology has given the old turf of specialists and
> marketmakers to individuals....and anyone should be able to pay no
> more than 20 cents to transact 100 shares.
>
> Anyone notice that it was largely GS who actually was causal in extremely
> high oil prices in that they provided the facility to both themselves
> and hedgefunds with excessive leverage and market means....and when
> the deleveraging requirements were imposed to become banks...that
> oil and other commodities were suddenly in a free fall ?
>
> In short....the markets would be better off without the GS and MS's
> of the world. They are just a large expensive middeman there to game
> what could be a more honest system. The day should be over, whereby
> regulations and markets can be gamed...whereby insider is but is
> not insider information....along with employees in government....
>
>
> Who needs or wants these conflicts....
>
> Any qualified firm, should be able to walk into any qualified bank....fill
> out and maintain boiler plate forms.....
>
> Furthermore all securities should be made available worldwide in
> the currency of choice....in denominations whereby any individual
> can participate....and information can be available via a Google-Wiki
> type model.
>
> In short......who needs or wants the old Wall Street in the way of
> a better and more fair marketplace.
>
> If GS wants to participate in management...they should list on the
> new exchange a management unit with a base price of $10....In fact
> there should be no more hedge funds or mutual funds. These "management"
> units should trade as shares in full view of the public....and readily
> liquid.
>
> GS, MER, MS, etc are dinosauers.....and should be extinct....
Systemic risk is the portion of risk that is related to the market and that can not be diversified away. Paulson was almost certainly intending to attack systemic risk. However, the concept that such risk emanates from specific categories of assets seems intuitively wrong. The author seems to be saying that because Level 2 and level 3 assets are hard to mark to market you can't reduce the risk in investing in them by diversification.
I have significant questions about the attractiveness of GS as a banking entity but it's not because of systemic risk, which they have historically been very good at covering.
On Dec 08 07:00 PM Kinabalu wrote:
> "More specifically, systemic risk emanates from Level 2 and Level
> 3 asset classes which cannot be marked to active markets.... So,
> if Hank Paulson and Neel Kashkari were intending to attack systemic
> risk, a comprehensive re-statement of Level 2 and Level 3 assets
> should have been undertaken"
>
> Systemic risk is the portion of risk that is related to the market
> and that can not be diversified away. Paulson was almost certainly
> intending to attack systemic risk. However, the concept that such
> risk emanates from specific categories of assets seems intuitively
> wrong. The author seems to be saying that because Level 2 and level
> 3 assets are hard to mark to market you can't reduce the risk in
> investing in them by diversification.
>
> I have significant questions about the attractiveness of GS as a
> banking entity but it's not because of systemic risk, which they
> have historically been very good at covering.
The other $5 billion he invested carried a coupon of 10%. That's highway robbery, but that was the price GS needed to pay Buffett to get him to stabilize what at the time looked like a catastrophic failure on Wall Street. More than likely, had he not done that, GS and Merrill would have gone the way of Lehman, and those depression crows would have been right all along. Instead, Buffett played a role which history will probably assign as the JP Morgan of our time.
> I think you mean systematic risk cannot be diversified away. Go back
> and check your Finance 101 textbooks. Systemic risk refers to the
> collapse of the whole financial system.
I know what SYSTEMATIC risk is. Your comment is a good example of the errors in Wikipedia. Fetz, your quote extracts from its definition of SYSTEMIC risk:
"In finance, systemic risk is risk associated with the possibility of a collapse of the financial system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries."
However, you don't read far enough, or don't understand systematic risk well enough, to see that the rest of the Wikipedia article, on SYSTEMIC risk, describes SYSTEMATIC risk exactly including the following:
"Risks can be reduced in four main ways: Avoidance, Reduction, Retention and Transfer. Systemic risk is a risk of security that cannot be reduced through diversification. Also sometimes called market risk or un-diversifiable risk."
The point is my comment related to the authors article. Your comment was a sophmoric attempt to prove you knew something about finance, which unfortunately you don't. You need to reread the authors article with both those definitions in mind.
If Goldman and the Treasury/Fed are expecting widespread bank failures, there may be an opportunity for a house that can quickly take over and assimilate a large number of banks.
An aggressive company with a strong information tech resources and access to federal funding like Goldman can do high volume bank takeovers. Utilizing online banking and closing of local "brick and mortor" facilities and laying off local staff.
Frankly, it would be possible to take over a large number of banks overnight with a good IT framework in place. I suspect Goldman may be building just such an a framework.
Of course, I am just guessing here and have no inside information.
1)Goldman attracts the best talent (he said it himself)
2)He knew the government wouldn't let it fail