Foul Smells Wafting Around 85 Broad

Last week Goldman Sachs nearly got the knockout blow that many of their rivals have longed for. Were they nearly done in by the credit default swaps they so loved to trade? That is debatable, but it would seem the human piranhas who smelled blood in the water nearly finished off the mighty firm. However, it was a disaster averted, thanks in part to Hank Paulson and his merry men in Washington.

Tthe ramp in their stock in the closing minutes of trading yesterday might have told you something was up at 85 Broad, in the latest brow raiser:

An unusual surge in Goldman Sachs' share price in the last 10 minutes of trading on Tuesday raised eyebrows on Wall Street, as it came two hours before news of Warren Buffett's big investment in the bank.

Goldman Sachs shares rose more than $5 heading into the close of trading even as the rest of the market tumbled, leaving traders suspicious that inside information was used to make a profit Reuters

Goldman is moving quickly to bolser its capital adequacy, just days after denying, Erin Callan-style, that they would need to raise any capital. The regulators were no doubt pushing them to do a deal, and they were even able to get their stock up today in the wake of a dilutive transaction.

CEO Lloyd Blankfein has to be laughing, pretty much at everyone's expense, today.

_________________________________________________________________

Jokers in Washington
_____________________________________________________________________________

The stock traded well again today, perhaps it finally appeals to investors looking to buy financials after a recapitalization.

If you are a bond holder, you want to be ahead of a recapitalization. If you are an equity holder, you always want to come in after. When people have been pushing the financial sector, they haven’t made the distinction between what is is good for the bondholder and what is good for the equity holder.

The equity holder wanted to buy emerging markets after they recapitalized in the late 1990’s, U.S. corporates after after they recapitalized in 2002 and 2003 on the back of Enron, Worldcom, etc. The timing is critical. For the bondholder’s it’s the other way around because a recapitalization lowers risk and therefore brings in spreads. And the people who are diluted are equity holders. 1440 Wall Street

Of course, other issues come into play. But you can’t argue with the stocks performance today-will it work for Capital One in the wake of the secondary offering? Food for thought...the shorts have been frustrated with the stock’s resiliency, but maybe it won’t break after all.

Too, many traders are looking at Paulson’s plan as sort of stealth recapitalization. Stocks like Freddie Mac (FRE-NYSE) and Downey Financial (DSL-NYSE) were up strongly the last few days as they bet Paulson or the “auctions” will buy back paper above current marks, allowing them to survive the storm.

My frequent Goldman tirades over the past 24 months were partially tongue in cheek, and now Michael Lewis in on board. This is not funny, however, because it is for the most part true:

Lately, for instance, I have heard several hedge-fund managers gossiping about Treasury Secretary Hank Paulson. One of the things they say is that, in leaving Goldman for government service, Paulson made the greatest trade of his life. Not only was he required to sell his half-billion dollars in Goldman stock near the high, but also, as Treasury Secretary, he was exempt from capital-gains taxes. By getting out of Goldman while the getting was good, the guy may have doubled his net worth......

The Treasury has proposed using $700 billion of taxpayers’ money to buy the shaky investments created by the likes of Goldman Sachs and sold to customers. This is good, for many obvious reasons, and one less obvious one, too. Obviously, it has slowed the market’s desire to put Goldman out of business. It also offers Goldman a place to stuff its bad investments at prices well above market levels.

But the Treasury plan also creates this wonderful hidden opportunity for Goldman Sachs to make a killing, and thus preserve its bonus pool for a long time to come.

Think of Wall Street as a poker game and Goldman as the smartest player. It’s sad when you think about it this way that so much of the dumb money on Wall Street has been forced out of the game. There’s no one left to play with. Just as Goldman was about to rake in its winnings and head home, the U.S. government stumbles in, fat and happy and looking for some action. I imagine the best and the brightest inside Goldman are right this moment trying to figure out how it uses the Treasury not only to sell their own crappy assets dear but also to buy other people’s crappy assets cheap.

At any rate, it won’t take long for Goldman Sachs to figure out how to make that $700 billion work for Goldman Sachs. This you can trust them to do. After all, Warren Buffett just did.

Of course, Cramer is on Mad Money as I type this arguing for the bailout. Just another Goldman alumni.

Save America somehow. But Goldman can bugger off. Sorry Warren.

And please investigate those late day trades in Goldman (GS-NYSE) that went off just prior to the Buffett announcement.
_____________________________________________________

___________________________________________________________

_________________________________________________________________

__________________________________________________

Whatever is good for Goldman ...
FT

Goldman’s shares get suspicious boost pre-Buffett
Reuters

Goldman Raises $10 Billion From Buffett, Public Sale
Bloomberg

America Must Rescue the Bonuses at Goldman Sachs: Michael Lewis
Bloomberg

Goldman is Here to Help
1440 Wall Street

June 2nd
Mohamed El-Erian Knows When to Buy the Financial Stocks
1440 Wall Street
--------------------------------------------------------------------------------------------------------------------
The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

Comments:

<< Back to main